Scope Ratings AG today confirms the Netherlands’ long-term local-currency issuer rating at AAA, following the release of its revised sovereign rating methodology, and converts its status from subscription to public. The agency also assigns a long-term foreign-currency issuer rating of AAA, along with a short-term issuer rating of S-1+ in both local and foreign currency. The sovereign’s senior unsecured long term debt in both local and foreign currency was also rated at AAA. All Outlooks are Stable.

Rating drivers

The AAA ratings are underpinned by the Netherlands’ wealthy, flexible and export-oriented economy. Dutch GDP performed well in 2016: growth rate stood at 2.2%, another strong year following the double-dip recession (2009 and 2012-2013). Strong domestic consumption and investment are the main drivers of growth reflecting improved confidence and rising house prices, which offset the slowdown in net exports. Scope expects the strong growth to continue in 2017 at 2.4%, with a slight slowdown in 2018 to 2.0%.

The Netherlands’ external position is very strong, having run a current-account surplus for the last 30 years. In 2016, the current account stood at around 8% of GDP, the highest in the euro area that year, while net international investment position was more than 70% of GDP. Such metrics underscore the country’s resilience to external shocks. The most important components of the country’s current account – trade balance from lower gas production and robust domestic demand – are expected to decline, yet Scope believes the country’s external position will remain solid.

Since 2010 the Netherlands has managed to implement a steady fiscal consolidation. Headline government balance increased from -3.8% of GDP in 2010 to 0.4% in 2016; structural government balance from -4.5 % to 0.5%. The Dutch government achieved positive budget balance for the first time since 2008. While GDP growth (except during 2012-2013) was instrumental in this, the country’s well-established fiscal framework, based on strict fiscal rules, should not be undervalued.

Following the improvement of budget balances, public debt, which peaked in 2014 at around 68% of GDP, started to decline, ending 2016 at about 62%. According to the 2017 stability program, it is expected that budget surpluses will be maintained, in order to reduce public-sector debt to around 50% at the end of 2020. In addition, general government debt is expected to fall below the 60% Maastricht threshold by the end of 2017. Economic expansion, the continuation of low interest rates, and the government’s ability to optimize expenditure should, in Scope’s view, keep budget balances positive, even with the growing portion of age-related spending.

Since the March general elections, attempts to form a multi-party coalition have failed. Even so this is still far from the record set in 1997, when it took 208 days to form a government. Given the wide dispersion of seats across the parties, a four- or even a five-party coalition is required to form a majority in the 150-seat parliament. This is likely to make forming a new government challenging and protracted. Nevertheless, Scope expects the new government to maintain continuity of economic and fiscal policies further underpinning the countries’ strong credit fundamentals.

Despite strong fundamentals some challenges weigh on the ratings. Private-sector indebtedness, despite a recent decline, remains high at around 250% of GDP in 2016 This high level of debt is linked to non-financial corporate debt (131% of GDP) and household debt (119%), the latter being almost twice the EU average. Corporate debt stems mostly from large Dutch-based multinationals, which is offset by a sufficiently large equity balance. Gross household debt comprises mostly mortgages; though households´ assets are sizeable they cannot be used to reduce outstanding debt. Dutch households’ main asset is pensions accumulated over their working lives due to relatively high compulsory pension contributions. In Scope’s view, the still-high level of mortgage debt will require further deleveraging, which could impair the domestic demand expansion, currently the main contributor to GDP growth.

Despite falling unemployment to 6% in 2016 from 7.3% in 2013, the second-lowest in the euro area – the Dutch labour market displays inefficiencies, mostly due to the high proportion of temporary labour contracts. In this regard the Netherlands already has one of the highest levels in the EU, and such levels contribute to labour market segmentation and undermines job security.

The Dutch open economy is more prone than EU peers’ to risks associated with Brexit and world trade. The UK’s share in country´s total exports is high, at around 9% in 2016, and strong financial links exist between the two. At the same time the potential move of some banking operations from London to Amsterdam following Brexit could mitigate this. Should protectionism in world trade intensify, the Dutch economy could suffer given its high level of openness.

Sovereign rating scorecard (CVS) and qualitative scorecard (QS)

Scope’s Core Variable Scorecard (CVS), which is based on the relative rankings of key sovereign credit fundamentals, signals an indicative (aaa) rating range on the long-term foreign-currency issuer rating scale for the Netherlands. This indicative rating range can be adjusted by the Qualitative Scorecard (QS) by up to three notches depending on the size of relative credit strengths or weaknesses versus peers based on analysts’ qualitative analysis.

For the Netherlands, the following relative credit strengths were identified for the following analytical categories: economic policy framework, debt sustainability, market access and funding sources, current account, external debt sustainability, vulnerability to short-term external risks and perceived willingness to pay. Relative credit weakness is signalled for the macroeconomic stability and imbalances.

Combined CVS and QS analysis generate no adjustment and signals a AAA sovereign rating for the Netherlands.

A rating committee discussed and confirmed these results.

For further details, please see the Appendix 2 of the rating report.

Outlook and rating-change drivers

The Stable Outlook reflects Scope’s expectation that the government will continue its prudent fiscal policy, with public debt declining over the medium term.

High private-sector indebtedness and the economy’s susceptibility to developments in world trade will continue to weigh on the sovereign’s ratings. The ratings could come under downward pressure if growth prospects deteriorated sharply, against current expectations, leading to a materially higher public-debt ratio.

For the detailed research report please click HERE.

Rating committee

The main points discussed during the rating committee were: (1) Netherlands’ economic outlook, (2) external position, (3) fiscal performance, (4) private sector indebtedness, (5) impact of Brexit on Netherlands current account, (6) electoral outcome and political developments, (7) peers consideration.

Methodology

The methodology applicable for this rating and/or rating outlook “Public Finance Sovereign Ratings” is available on www.scoperatings.com.

Historical default rates of Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/governance-and-policies/regulatory/esma-registration. Please also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s definition of default, definitions of rating notations can be found in Scope’s public Credit Rating methodologies on www.scoperatings.com.

The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months. A rating change is, however, not automatically ensured.

Regulatory disclosures

This credit rating and/or rating outlook is issued by Scope Ratings AG.
Rating prepared by
Dr Ilona Dmitrieva, Lead Analyst
Person responsible for approval of the rating
Dr Stefan Bund, Chief Analytical Officer
The ratings /outlook was first assigned by Scope as subscription rating on January 2003. The subscription ratings/outlooks were last updated on 05.05.2017.
The senior unsecured debt ratings as well as the short term issuer ratings were assigned by Scope for the first time.
As a "sovereign rating" (as defined in EU CRA Regulation 1060/2009 "EU CRA Regulation"), the ratings on the Kingdom of Netherlands are subject to certain publication restrictions set out in Art 8a of the EU CRA Regulation, including publication in accordance with a pre-established calendar (see "Sovereign Ratings Calendar of 2017" published on 30.06.2017 on www.scoperatings .com). Under the EU CRA Regulation, deviations from the announced calendar are allowed only in limited circumstances and must be accompanied by a detailed explanation of the reasons for the deviation. In this case the deviation was due to the recent revision of Scope’s Sovereign Rating Methodology and the subsequent putting the ratings under review, in order to conclude the review and disclose these ratings in a timely manner, as required by the Article 10(1) of the CRA Regulation¹.

¹ Editor's note: The above paragraph was corrected on 17 July 2017 following the publication of the credit rating action on 30 June 2017. The original wording was: Deviation of the publication of sovereign ratings or related rating outlooks from the calendar shall only be possible where necessary for the credit rating agency to comply with its obligations under Article 8(2), Article 10(1) and Article 11(1) and shall be accompanied by a detailed explanation of the reasons for the deviation from the announced calendar. It was replaced with the following: As a "sovereign rating" (as defined in EU CRA Regulation 1060/2009 "EU CRA Regulation"), the ratings on the Kingdom of Netherlands are subject to certain publication restrictions set out in Art 8a of the EU CRA Regulation, including publication in accordance with a pre-established calendar (see "Sovereign Ratings Calendar of 2017" published on 30.06.2017 on www.scoperatings .com). Under the EU CRA Regulation, deviations from the announced calendar are allowed only in limited circumstances and must be accompanied by a detailed explanation of the reasons for the deviation. In this case the deviation was due to the recent revision of Scope’s Sovereign Rating Methodology and the subsequent putting the ratings under review, in order to conclude the review and disclose these ratings in a timely manner, as required by the Article 10(1) of the CRA Regulation.

Solicitation, key sources and quality of information
The rating was initiated by Scope and was not requested by the rated entity or its agents. The rated entity and/or its agents did not participate in the ratings process. Scope had no access to accounts, management and/or other relevant internal documents for the rated entity or related third party.
The following material sources of information were used to prepare the credit rating: public domain and third parties. Key sources of information for the rating include: the Ministry of Finance, the Dutch State Treasury Agency, Nederlandsche Bank, Statistics Netherlands, the Netherlands Bureau for Economic Policy Analysis, the IMF, the OECD, the European Commission, the European Central Bank and Haver Analytics.
Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.
Prior to publication, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds upon which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.

Conditions of use / exclusion of liability
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