For the updated report accompanying this review, click here.

Rating action

Scope Ratings GmbH (Scope) has today affirmed the Kingdom of the Netherlands’ long-term local- and foreign-currency issuer and senior unsecured debt ratings at AAA. Scope has also affirmed short-term issuer ratings at S-1+ in local and foreign currency. All Outlooks are Stable.

Summary and Outlook

The Netherlands’ AAA/Stable ratings are supported by a wealthy, diversified and internationally competitive economy, favourable financing conditions alongside a resilient banking system. The Netherlands benefits furthermore from the economy’s strong external position, record of prudent fiscal policy making as well as from European Union and euro-area memberships. The significant fiscal response to this crisis in support of the national economy has meaningfully raised government debt, with a post-crisis policy framework expected to remain comparatively expansionary over forthcoming years. However, the general government debt ratio remains, nevertheless, moderate compared with that of most peers of the euro area. Structural credit weaknesses include labour-market dualities with a high share of persons on part-time employment, sensitivity of the economy to global developments as an open economy and financial stability risk attributed to high and rising housing prices as well as elevated private-sector debt.

The Stable Outlook reflects Scope’s view that a change of the ratings is currently not expected over the next 12 to 18 months.

The ratings/Outlooks could be downgraded if, individually or collectively: i) a global or regional shock resulted in a significant drop of output and/or accentuated risk to Netherlands’ financial stability; and/or ii) the fiscal outlook deteriorates significantly, including elevated fiscal deficits and increasing debt levels through the cycle.

Rating rationale

The Netherlands’ ratings are anchored by a wealthy (GDP per capita of USD 58,003 as of 2021), highly diversified and competitive economy. In 2020, the pandemic crisis resulted in a severe drop in output of 3.8%, albeit comparing favourably against that of the euro-area average (6.5%). Nevertheless, output recovery since Q3 2020 has been robust, if uneven, with GDP having reached pre-pandemic levels of output by the third quarter of this year. Partial lockdown restrictions extended near the end of 2021 in response to a record rise in Covid-19 cases are expected to temporarily impede recovery, before growth regains traction by spring 2022. Scope estimates full-year economic growth of 4.4% in 2021, with forecasts of 3.1% in 2022 and 2.3% in 2023 – normalising gradually in the direction of a moderate trend rate of growth estimated of around 1.4%. Owing to budget support, an elevated share of Dutch employment adaptable to telework and competitiveness of the Dutch economy, the expectation is for more limited longer-run economic scarring due to the Covid-19 crisis. The Bureau for Economic Policy Analysis (CPB) has estimated the GDP level to be 1.5% lower by 2025 than expected before the crisis – more favourable than a 3% haircut CPB previously had assumed.¹ The longer-run growth outlook is abetted, furthermore, by an expansionary fiscal position as well as EUR 6bn of grant allocations (0.6% of average 2021-26 GDP) via the EU Recovery and Resilience Facility and associated reform and investment priorities. Furthermore, since September 2020, the “National Growth Fund” has planned increase of public investment of EUR 20bn (2.5% of GDP) over the next five years.

The Dutch labour market has recovered stepwise from this crisis, with an unemployment rate declining to 2.7% as of November 2021, off a peak of 4.6% reached in August 2020, and reaching unemployment rates seen pre-crisis. Scope expects unemployment to average 2.8% over 2022-23. Comparative employment market resilience is partially explained by a high share of persons employed in services sectors with higher telework adaptability. Labour market rigidities persist, however, as businesses reference a lack of labour supply as a core bottleneck affecting production.

Netherlands’ AAA credit ratings are anchored by still moderate levels of public debt. Before the Covid-19 crisis, the budget balance averaged a surplus of 1.3% of GDP over 2016-2019, resulting in the debt-to-GDP ratio declining to 47.4% by end-2019 (from 68% as of end-2014).

The government response to the crisis has brought sizeable budget deficits of 4.3% of GDP in 2020 and an estimated 5.9% of GDP in 2021. After agreement around a fourth Mark Rutte government, expansionary economic priorities include the combatting of climate change, protecting the environment and enhancing sustainable energy, accelerating construction of housing, enhancing education and labour market participation, extending free childcare, tax breaks for the middle income plus a 7.5% increase of the minimum wage, representing a significant change in fiscal policy orientation. Scope anticipates budget deficits to moderate, nevertheless, to 2.8% of GDP in 2022, mainly from the gradual phasing out of support measures linked to the crisis as well as higher tax revenue aligned with rebound in economic activity. Medium run, a continuation of more elevated deficits is assumed, with the budget balance averaging around -2.4% of GDP over 2023-2026.

The general government debt-to-GDP ratio is expected to increase in 2021 to around 59.2% and edge along a comparatively flat trajectory over years thereafter, ending a forecast horizon at 58.6% in 2026, remaining more than 10pps higher than Netherlands’ debt ratio from immediately before the crisis. Above-potential economic growth over the coming years, a very low average cost of the outstanding debt portfolio (of around 0.5%), higher inflation exiting this crisis (consumer price index inflation of 5.2% YoY in November 2021) prevent a more substantive increase in the debt ratio reduction given effects of wider deficits expected over a prolonged period. Netherlands’ debt ratio of 54.2% of GDP as of the end of the second quarter of 2021 was, however, approximately in line with that of an average of AAA-rated sovereign borrowers. Scope considers the Dutch government to retain significant fiscal flexibility – such as strong market access, with benchmark 10-year yields of around -0.2% at time of writing, with the latter having eased off peaks of earlier this year just above 0%. Dutch state loans carry a long weighted average remaining life of 8.8 years, and the government issues only in euro.

Netherlands’ ratings are bolstered by a strong external position. This includes elevated and recurrent current account surpluses, averaging 9.1% of GDP over 2015-19 pre-crisis before moderation to 7% of GDP in 2020, as worsening income balances offset improvement in the trade surplus. Over the year to Q2 2021, the current account surplus had re-widened to 8.9% of GDP. Netherlands’ share of global exports rose temporarily to 3.2% in 2020, returning to levels last observed in 2010. External resilience is bolstered by standing as a strong international external creditor nation, with a net international investment position of 99.5% of GDP as of the end of June 2021 – improving from 56.3% in Q1 2017.

Finally, the soundness of the Dutch financial system is a credit strength. Dutch banks’ capital positions have not deteriorated since the pandemic, partly due to the non-performing loan ratio having moderated marginally to 1.6% of aggregate loans in Q2 2021, from 1.9% in end-2019. However, withdrawal of government support may raise the probability of default or write-downs of bank loans. System-wide tier 1 capital ratios amounted to 19.4% of risk-weighted assets as of Q2 2021, slightly above pre-crisis levels of 18.9% as of Q4 2019. The resilience of the Dutch banking system under severe scenarios was demonstrated in July 2021 European Banking Authority stress tests of European banks, with Dutch banks displaying an impact on common equity tier 1 ratios in line with that of a European average of around 5.3%.²

Despite credit strengths, Netherlands’ credit ratings see important medium-run challenges.

Aside from sizeable accrual of government debt over this Covid-19 crisis and expectation of somewhat higher debt and associated annual government gross financing requirements (of on average 8.5% of GDP a year over 2022-26) after the crisis, private sector indebtedness remains high at around 254% of GDP as of Q2 2021. Vulnerability is particularly present with respect to household debt, of a significant 103% of GDP (almost all of this in reflection of mortgage loans) – among the highest such ratios in Europe. Housing market inefficiencies, due to the underdevelopment of the private rental market, have resulted in households turning to homeownership. At the same time, low financing costs and a generous mortgage interest deductibility scheme encourage debt accrual, with elevated loan-to-value ratios for house purchase especially among first-time buyers. High levels of household debt link to macro-financial risk as economic shocks are exacerbated by households seeing income impairment during downturns. Scope notes positively, however, that the Dutch government is seeking to reduce household debt bias by gradually phasing down a mortgage interest deductibility mechanism whilst tightening macro-prudential policies. A legally binding loan-to-value ratio was reduced to 100% in 2018 from 106% in 2013 while minimum risk weights as relates to mortgages are expected to enter force by 2022. Nevertheless, further reforms tightening mortgage loan markets and raising housing supply are required, with house price growth accelerating to 18.4% YoY in October 2021, and price levels 82% higher currently compared with June 2013.

Secondly, the Netherlands, as a highly open economy, is highly integrated within regional and global export markets, increasing sensitivity to trade shocks. Exports of goods and services amounted to around 82.5% of GDP pre-crisis as of 2019, significantly higher than ratios of most peer economies. Risks from the UK’s exit from the EU single market and customs union remain relevant over the medium run. External debt is high – amounting to 431.5% of GDP in Q2 2021, having nevertheless decreased substantively over the past five years. Most external debt is held by non-monetary financial institutions (185% of GDP at end-2020), trailed by monetary financial institutions (97%) and non-financial corporations (71%). 42% of external debt is short-term. However, euro area membership raises the economy’s resilience to short-run external shocks, with the European Central Bank and European Stability Mechanism acting as lenders of last resort and the euro currency representing one of the world’s preeminent reserve currencies – reducing balance of payment risks.

Thirdly, Scope notes that while the economy is near full employment, the labour market demonstrates structural duality with many persons employed on part-time bases and self-employed, on average earning lesser salaries than full-time employees and with more limited social protection. Over 50% of the Dutch labour force is currently employed part-time, reflecting those who work under 35 hours per week. Government intentions to ensure appropriate social protection, particularly for the self-employed, are constructive, and could be complemented via continued re-alignment of incentive structures across varying types of labour contracts, also to incentivise productivity-enhancing training. Implementation of an agreed pensions reform could further help deal with modern labour market dynamics, including addressing issues of intergenerational equity and stabilising contribution rates.

Core Variable Scorecard (CVS) and Qualitative Scorecard (QS)

Scope’s Core Variable Scorecard (CVS), which is based on the relative rankings of key sovereign credit fundamentals, provides an indicative credit rating of ‘aaa’ as regards the Netherlands. The ‘aaa’ indicative rating is further supported by the methodology’s reserve currency adjustment. The ‘aaa’ indicative ratings can thereafter be adjusted by the Qualitative Scorecard (QS) by up to three notches depending on the size of relative qualitative credit strengths or weaknesses against a peer group of countries.

For the Netherlands, the following relative credit strength via the QS has been identified: i) debt sustainability. Conversely, a relative credit weakness has been identified: i) financial imbalances.

Combined relative credit strengths and weaknesses identified in the QS generate no net adjustment to ratings and indicate a sovereign credit rating of AAA for the Netherlands.

A rating committee has discussed and confirmed these results.

Factoring of Environment, Social and Governance (ESG)

Scope explicitly factors in ESG sustainability issues during its rating process via the sovereign methodology’s stand-alone ESG sovereign risk pillar, with a 20% weighting under the quantitative model (CVS) as well as in the methodology’s qualitative overlay (QS).

Under governance-related factors captured in Scope’s Core Variable Scorecard (quantitative model), the Netherlands holds strong scores on a composite index of six World Bank Worldwide Governance Indicators – although with scores having weakened as regards political stability over recent years. Furthermore, Scope’s Qualitative Scorecard evaluation on ‘institutional and political risks’ indicates Netherlands as in line with performance of ‘aaa’ indicative sovereign peers, reflecting stable political conditions. However, lengthy coalition formation talks after general elections of March 2021 impeded long-run policy making, as a caretaker government under Prime Minister Rutte has only comparatively restricted policy objectives. Record coalition negotiations concluded in December with agreement, with the incoming government’s priorities centring upon the extension of free childcare, tackling climate change and a housing shortage, nuclear energy research and road pricing. Rutte and his third cabinet resigned mid-January over a scandal in which parents were wrongly accused of fraudulently claiming child allowance. The Netherlands has been hit by the worst riots in decades over coronavirus restrictions, which currently include a night-time lockdown and restrictions on numbers of home visitors.

As regards social-risk factors, the quantitative model score is stressed especially by an ageing society, reflected in an elevated and increasing old-age dependency ratio, although in line with old-age developments of many peer economies. Income inequality – as captured by the ratio of the income share of the 20% of persons with the highest household incomes to the 20% of persons in society with the lowest household incomes – is low under an international comparison and comparable to that of Netherlands’ sovereign peer group. In addition, labour force participation of around 81% of the active labour force (aged 15-64) is above a euro-area average although in line with that of the ‘aaa’ peer group. Under the QS, assessment of ‘social risks’ is evaluated as ‘neutral’, indicating social outcomes are strong and in line with that of ‘aaa’ sovereign peers. This reflects very low risk of poverty (of 13.6% of the population under the national poverty line) and strong educational outcomes, such as indicated via high average scholastic performance of students across mathematics, reading and sciences under 2018 PISA results.³ In mid-February, the government announced a National Education Programme aimed at making up for lost years of schooling during crisis-phase school closures, implying a cumulative 1% of GDP of further spending over the next 2.5 years. The incoming government intends to make permanent spending efforts under the National Programme Education. The incoming government furthermore seeks an increase in the salary of primary school teachers, to those in secondary schools. Social challenges associate with persistent labour-market duality with a high share of persons employed part-time. Longer term, an ageing society stresses budgetary outcomes, with total ageing-related costs estimated by the European Commission’s 2021 Ageing Report to increase from an aggregate 21% of GDP in 2019 to 23.1% of GDP by 2030. Nevertheless, these projections compare favourably against those of several economies in Netherlands’ indicative peer group.

Finally, on the sovereign ESG pillar’s environmental risk sub-category, Netherlands’ performance is comparatively weaker as compared with that of indicative sovereign peers and weakest of the euro area-19. This is partially due to a low score on the natural disaster risk assessment vis-à-vis the World Risk Index, with Netherlands at elevated risk of flooding and storm surge with half the nation lying under sea level. In addition, scores for the economy’s carbon intensity (proxy for transition risk to a greener economic model) and the footprint of consumption relative to available biocapacity are under those of indicative sovereign peers. A long-standing environmental issue relates to high emissions of nitrogen – here, further corrective measures⁴ were introduced during February 2020. The government has yet to submit to the European Commission a National Recovery and Resilience Plan, which targets generally, however, around 37% of funding being directed to the green transition. The incoming government intends to significantly raise ambition on green issues, seeking 55% reductions of carbon emissions by 2030 and seeking design of a fund for combatting climate change of a cumulative 4.3% of annual GDP, with spending around sustainable electricity, hydrogen and heating networks, and on preparation to build two nuclear reactors – representing an historic shift of energy policy. Design of another investment fund of around an aggregate EUR 25bn will be used for nature preservation, and for limiting nitrogen emissions. Netherlands’ environmental policies and challenges are considered under a QS assessment of ‘environmental risks’, which is evaluated as ‘neutral’ against the sovereign peer group.

Rating Committee

The main points discussed by the rating committee were: i) government formation; ii) partial lockdown and riots; iii) fiscal policies and debt trajectory; iv) financial stability risk; v) fiscal framework; vi) environmental risks; and vii) peer developments.

Rating driver references
1. Bureau for Economic Policy Analysis, June Projections 2021 
2. European Banking Authority, EBA publishes the results of its 2021 EU-wide stress test
3. OECD, PISA 2018 results
4. Government of the Netherlands, New steps to tackle nitrogen pollution offer prospects for farmers 

Methodology
The methodology used for these Credit Ratings and/or Outlooks, (Rating Methodology: Sovereign Ratings’ 8 October 2021), is available on https://www.scoperatings.com/#!methodology/list.
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. 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 Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Credit Ratings were not requested by the Rated Entity or its Related Third Parties. The Credit Rating process was conducted:
With Rated Entity or Related Third Party participation               NO
With access to internal documents                                             NO
With access to management                                                      NO
The following substantially material sources of information were used to prepare the Credit Ratings: public domain.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Dennis Shen, Director
Person responsible for approval of the Credit Ratings: Alvise Lennkh, Executive Director
The Credit Ratings/Outlooks were first released by Scope Ratings on January 2003. The Credit Ratings/Outlooks were last updated on 12 April 2019.

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.

Conditions of use / exclusion of liability
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