DBRS Confirms the Kingdom of the Netherlands at AAA, Stable Trend

DBRS Ratings Limited (DBRS) confirmed the Kingdom of the Netherlands’ Long-Term Foreign and Local Currency – Issuer Ratings at AAA. At the same time, DBRS confirmed the Kingdom of the Netherlands’ its Short-Term Foreign and Local Currency – Issuer Ratings at R-1 (high). The trend on all ratings remains Stable.

KEY RATING CONSIDERATIONS

The confirmation of the Stable trend reflects the Netherlands’ solid credit fundamentals amid sound economic performance. While growth of the Dutch economy has decelerated in 2019 and growth forecasts have been revised downwards, growth is still expected to be close to 2%, above the euro area average. Labour market conditions remain strong, with the unemployment rate at historically low levels. At the same time, the government debt-to-GDP ratio continues to decline and is projected at below 50% in 2019. Moreover, vulnerabilities stemming from the private sector, related to high household debt relative to income and high house prices, seem contained. The authorities have adopted measures over the past few years to improve the resilience of households and banks.

The ratings are supported by the Netherlands’ advanced, wealthy, and productive economy, its strong external position and its robust institutional framework. These credit strengths counterbalance the challenges associated with high household indebtedness and the economy’s exposure to external shocks given its high degree of trade openness.

RATING DRIVERS

In light of the Netherlands’ credit strengths and solid economic performance, downward pressure on the ratings seems unlikely. Nevertheless, a severe deterioration in growth prospects or public finances, damaging the Netherlands’ resilience to shocks, could lead to a Negative rating action in the long term.

RATING RATIONALE

The Dutch Economy Is Growing Faster Than The Euro Area and The External Sector Remains Robust

The economy continues to perform solidly despite decelerating. After peaking at 2.9% in 2017, real GDP grew by 2.6% in 2018. In its latest forecast, the Netherlands Bureau for Economic Policy Analysis (CPB) is forecasting the Dutch economy to grow by 1.7% in 2019, compared to 2.2% in its December forecast. Growth has moved to its potential of around 1.7% sooner than anticipated. For 2020, the CPB is forecasting 1.5% growth. The revision in growth forecasts mainly reflects weaker external demand. Private consumption has also slowed, although wage growth and employment growth are supportive. In contrast, stimulative fiscal measures, particularly higher public investment, are providing substantial support to economic activity.

Downside risks to the economic outlook are largely related to a more severe slowdown in global trade or the economies of key trading partners, including Germany and the United Kingdom (UK). On global trade, De Nederlandsche Bank (DNB) has estimated that under an escalating trade conflict scenario, Dutch economic growth could be 0.5 percentage point lower in 2020. The Netherlands is exposed to the UK’s departure from the European Union, as the UK is the Netherlands’ third-largest export destination in terms of value. The CPB has estimated that the GDP loss in the long-term could be 1.2% under a WTO scenario and 0.9% under a free-trade agreement scenario for Brexit. Domestically, public expenditure could turn out lower than planned, resulting in lower real GDP growth.

Still favourable economic conditions have led to very low unemployment, but also to shortages in the labour market. At 3.4% in H1 2019, the unemployment rate is below the 5.0% long-term average. Tightness in the labour market is pushing wages up. Rising wages, together with the increase in the low VAT rate and higher energy taxes, are fuelling inflation. The inflation rate is projected to rise to 2.6% in 2019 as a whole from 1.6% in 2018. Tightness in the labour market is also contributing to a more rapid growth in permanent employment contracts than in flexible contracts. This is a positive development given the relatively high share of flexible contracts that has raised concerns over labour market segmentation and its potential effect on labour productivity. Measures to tackle this dualism have also been adopted.

The Netherlands’ economy continues to benefit from high levels of employment, productivity, and education. GDP per capita is one of the highest in Europe, almost 20% above the Euro area average. The level of private sector savings is also sizeable. Households’ pension savings and insurance products account for just over 50% of total household assets – among the highest of OECD countries. Aggregate high incomes and savings provide the Dutch economy with an important degree of resilience.

The Netherlands’ external position is also very strong, largely reflecting its trade competitiveness. A robust trade performance and high net savings in the private sector have helped maintain the current account in surplus since the early 1980s. The surplus has averaged 9% of GDP over the past five years, in part supporting the Netherlands’ large net external creditor position, on average at 57% of GDP since 2014. The strong external position provides the country with a significant buffer to absorb external shocks.

Risks to Financial Stability Are Contained

Dutch household debt relative to income, while falling, remains one of the highest of OECD countries. High household debt was 217% of disposable income in 2018. At the same time, the aggregate net worth of Dutch households is the highest among OECD countries at almost 700% of net disposable income. Nevertheless, high household debt could exacerbate an economic downturn in case of negative shocks. In particular, households with low incomes and many first-time homebuyers are exposed to income shocks and declines in house prices. Vulnerability to increases in interest rates seems limited, as residential mortgages are largely fixed-rate. Debt partly reflects tax incentives and is largely in the form of mortgages (for further details, please see DBRS commentary entitled “Danish and Dutch Households: Indebted, Wealthy, and Vulnerable to Rising Interest Rates?”, available at www.dbrs.com).

At the same time, Dutch house prices continue to rise, although less strongly. Since the 2013 trough, house prices nationwide have risen by 35%, strengthening household balance sheets. Real estate assets account for about 20% of Dutch household assets. Prices are now above the 2008 peak levels and have risen at a stronger pace in the main Dutch cities. Housing investment has not kept up with housing demand. Nevertheless, after accelerating in the first three quarters of 2018, house price growth has eased somewhat in the last two quarters, posting 7.9% YoY in Q1 2019. DNB is projecting prices to ease further this year. But, if persistent, strong growth in house prices could increase the risk of a correction. A house price correction and an economic downturn could reinforce each other (for further details, please see DBRS commentary entitled “The Dutch Housing Market: Booming Amid Modest Mortgage Lending – Risks to Financial Stability Contained”, available at www.dbrs.com).

Given the risks to financial stability and the economy posed by high household debt and rising house prices, and as part of the government’s tax reform, the Dutch authorities will accelerate the reduction in mortgage interest deductibility from 2020. Debt amortisation is also a requirement since 2013 to benefit from tax deductibility on interest expenses. This requirement has contributed to the decline in interest-only mortgages, which now account for close to 50% of total mortgages. The limit on the loan-to-value ratio was also reduced in recent years, although to a still high 100% in 2018. Mortgage lending remains moderate and the banking sector is in a healthy position. Dutch banks are profitable and well-capitalised. The large insurance sector, however, is facing challenges because of low interest rates and declining premium income.

The Government’s Expansionary Fiscal Policy is Underway

The Netherlands benefits from effective public institutions and consensus-driven policies, which more than offset a somewhat fragmented political landscape. No single political party won a majority in the March 2017 elections. A new government took office in October 2017, after four parties (VVD, CDA, D66 and the Christian Union) presented their Coalition Agreement following months of negotiations. The centre-right coalition agreed to reform the tax system with the aim of reducing the overall tax burden on households and firms, and to increase investment in education, defence, and infrastructure. On the other hand, energy taxes and the lower VAT rate have been increased. Overall, the fiscal expansion is equivalent to 2% of GDP between 2018 and 2022.

DBRS expects the government to maintain a sound fiscal position, despite the mildly expansionary fiscal stance. The fiscal surplus is projected to decline to 1.3% of GDP in 2019 and 0.6% in 2020, compared to 1.5% in 2018. While the headline budget position is set to deteriorate over the next few years, the structural balance is projected to remain within the -0.5% medium-term objective. Moreover, the fiscal cost from the planned reduction of natural gas extraction is expected to be offset by additional measures.

The government debt-to-GDP ratio is also moderate and declining rapidly. In 2019, the debt ratio is projected at 49.1%, almost 20 percentage points lower than the 2014 peak. Nominal GDP growth, privatisation proceeds, improving primary balances, and lower funding costs have contributed to the reduction of debt since 2015. Moreover, the Dutch Treasury continues to extend debt maturities. A favourable debt profile and a lower debt ratio support the shock absorption capacity of public finances. In May 2019, the Dutch Treasury issued the Netherlands’ first sovereign green bond, attracting strong demand from investors.

The long-term sustainability of public finances looks secure. Over the past decade, the Netherlands raised the minimum retirement age, adjusted pension entitlements, and restrained healthcare spending. These measures have helped lessen ageing-related spending pressures. The government has also agreed to progress with additional reforms to the pension system. The country’s effective public institutions, together with a robust fiscal framework, support the sustainability of public finances.

RATING COMMITTEE SUMMARY

The DBRS Sovereign Scorecard generates a result in the AAA – AA (high) range. The main points discussed during the Rating Committee include economic performance, risks to the economic outlook, the housing market, the household sector, the banking sector and the political environment.

KEY INDICATORS

Fiscal Balance (% GDP): 1.5 (2018); 1.3 (2019F); 0.6 (2020F)
Gross Debt (% GDP): 52.4 (2018); 49.1 (2019F); 47.0 (2020F)
Nominal GDP (EUR billions): 773.4 (2018); 804.5 (2019F); 830.9 (2020F)
GDP per Capita (EUR): 44,880 (2018); 46,422 (2019F); 47,707 (2020F)
Real GDP growth (%): 2.6 (2018); 1.7 (2019F); 1.5 (2020F)
Consumer Price Inflation (%): 1.6 (2018); 2.6 (2019F); 1.4 (2020F)
Domestic Credit (% GDP): 281.1 (2018); 277.3 (Mar-2019)
Current Account (% GDP): 10.9 (2018); 10.2 (2019F); 9.6 (2020F)
International Investment Position (% GDP): 70.7 (2018); 76.3 (Mar-2019)
Gross External Debt (% GDP): 483.9 (2018); 484.8 (Mar-2019)
Governance Indicator (percentile rank): 96.6 (2016); 96.6 (2017)
Human Development Index: 0.93 (2016); 0.93 (2017)

EURO AREA RISK CATEGORY: LOW

Notes:

All figures are in EUR unless otherwise noted. Public finance statistics reported on a general government basis unless specified. Fiscal balance (CBS/CPB Forecast June 2019), Gross debt (CBS/CPB Forecast June 2019), Nominal GDP (CBS/EC), GDP per Capita (CBS/EC), Real GDP Growth (CBS/CPB Forecast June 2019), Inflation (CBS/CPB Forecast June 2019), Domestic Credit (CBS), Current Account (DNB/CBS/CPB Forecast June 2019), International Investment Position (DNB/CBS), Gross External Debt (DNB/CBS). Governance indicator represents an average percentile rank (0-100) from Rule of Law, Voice and Accountability and Government Effectiveness indicators (all World Bank). Human Development Index (UNDP) ranges from 0-1, with 1 representing a very high level of human development.
The principal applicable methodology is Rating Sovereign Governments, which can be found on the DBRS website www.dbrs.com at http://www.dbrs.com/about/methodologies. The principal applicable rating policies are Commercial Paper and Short-Term Debt, and Short-Term and Long-Term Rating Relationships, which can be found on our website at http://www.dbrs.com/ratingPolicies/list/name/rating+scales.

The sources of information used for this rating the Government of the Netherlands, Ministry of Finance (Ministerie van Financiën), Dutch State Treasury Agency (DSTA), Netherlands Central Bank (De Nederlandsche Bank DNB), Netherlands Bureau for Economic Policy Analysis (Centraal Planbureau CPB), Dutch National Statistical Office (Centraal Bureau voor de Statistiek CBS), European Commission (EC), European Central Bank (ECB), Eurostat, Organisation for Economic Co-operation and Development (OECD), IMF, World Bank, UNDP, Haver Analytics. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

This is an unsolicited rating. This credit rating was not initiated at the request of the issuer.

This rating included participation by the rated entity or any related third party. DBRS had no access to relevant internal documents for the rated entity or a related third party.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance.

For further information on DBRS historical default rates published by the European Securities and Markets Authority (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU and US regulations only.

Lead Analyst: Adriana Alvarado, Vice President, Global Sovereign Ratings
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer, Global Financial Institutions Group and Sovereign Ratings
Initial Rating Date: May 12, 2011
Last Rating Date: January 25, 2019

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