For the updated report accompanying this review, click here.

Rating action

Scope Ratings GmbH (Scope) has today affirmed the State 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 underpinned by a wealthy, diversified and internationally-competitive economy, still-moderate financing conditions alongside a resilient banking system. The Netherlands benefits furthermore from the economy’s strong external position, longer-run record of prudent fiscal policy making as well as from European Union and euro-area memberships. The significant fiscal response to the energy crisis is weighing on fiscal metrics and fiscal policy is expected to remain comparatively expansionary over forthcoming years, in line with the government coalition agreement. However, the general government debt ratio is projected to remain, 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 employed part-time, sensitivity of the economy to global developments as a highly-open economy and financial-stability risk associated with elevated housing prices as well as high private-sector debt.

The Stable Outlook reflects Scope’s view that a downgrade of the ratings is not currently foreseen 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 sustained elevated budget deficits and increasing debt levels through the cycle.

Rating rationale

The Netherlands’ ratings are anchored by a wealthy (GDP per capita of USD 56,298 as of 2022), highly-diversified and competitive economy. In 2020, the pandemic crisis resulted in a significant drop in output of 3.9%, albeit comparing favourably against that of the euro-area average (6.3%). Nevertheless, the Dutch economy recovered well from the crisis, edging above pre-pandemic output levels by a second quarter of 2021 and displaying robust growth of 4.9% for the year as an entirety. After demonstrating stronger than anticipated growth in the first half of this year, with quarter-on-quarter growth of 0.3% and 2.4% in Q1 and Q2 2022, primarily supported by investment and export-sector growth, economic momentum slowed markedly since the third quarter of this year. Real growth was negative, at -0.2% QoQ in Q3, reflecting declining gross capital formation and muted growth contributions from consumption and net exports, and Scope expects Netherlands to enter technical recession in the fourth quarter of the year. Elevated inflation, tighter funding conditions and elevated economic uncertainty this winter affect private demand, while a tepid external environment and high energy and commodity prices weaken the trade balance. Scope estimates full-year growth of 4.2% in 2022, followed by 0.7% in 2023 and 1.1% for 2024.

The Dutch labour market recovered well from the pandemic crisis, with an unemployment rate declining to 3.2% by April 2022, before rising somewhat over recent months to 3.7% by October 2022 – remaining nevertheless well below pre-Covid crisis averages. Scope estimates the unemployment rate to average 3.5% in 2022, before 3.8% in 2023 and 3.9% in 2024. Total employment has continued to grow over recent months despite a weakening economy, bringing the employment rate (for the population aged 15 to 74) to 72.2% in Q2 2022 – the highest level among economies of AAA-rated sovereigns and more than 11pps above the euro-area average. At the same time, job vacancies fell from Q2 record highs in Q3, to 121 vacancies per 100 employed. Still-tight labour markets reflect persistent labour-market rigidities, resulting in labour shortages and constituting key bottlenecks affecting productive capacity.

Netherlands’ AAA credit ratings are anchored by still moderate levels of government debt. Before the Covid-19 crisis, the budget balance averaged a surplus of 1.2% of GDP over 2016-2019, resulting in the debt-to-GDP ratio declining to 48.6% by end-2019 (from 68% as of end-2014).

The general government balance narrowed to a better-than-anticipated 2.6% of GDP in 2021, from 3.7% during 2020 crisis peaks, due to robust recovery in government revenue. The agreement between current government coalition partners set an objective of boosting spending around certain priority areas such as the green transition, accelerating construction of housing, and enhancing education and labour-market participation – representing a marked shift in fiscal-policy orientation since their ascension to office in January of 2022. Following the full-scale Russia-Ukraine war since February 2022, and spike of energy prices, the government has rolled out a series of polices aimed at alleviation of the impact of the economic crisis for households and corporates. Monies allocated to this amounted to around EUR 45.3bn (4.8% of GDP) between September 2021 and October 2022¹.

Scope anticipates the headline budget deficit to moderate further this year, to 0.5% of GDP, thanks to still-solid revenue growth, declining Covid-19 related expenditure as well as higher income from Dutch gas fields. The deficit is seen, however, rising to around 2.7% of GDP next year from combined impact of temporary and structural policies implemented under context of the energy crisis. Temporary measures include implementation of a price ceiling for energy prices over year 2023, with an estimated price tag of EUR 23.5bn (around 2.4% of GDP), to be only partially funded by a solidarity contribution from the fossil-fuel sector, from which proceeds of EUR 3.2bn are anticipated. The 2023 budget also incorporates structural adjustments, which durably affect the budget balance – including lowered taxes for labour and a 10% revaluation of the minimum wage, with a commensurate impact on pension and welfare benefit payments. Medium run, Scope assumes continuation of comparatively more elevated deficits, with the headline general government deficit averaging around 2.8% of GDP over 2024-2027.

After declining to 52.5% in 2021 (-2.2pps from a previous year’s cyclical peaks), the general government debt-to-GDP ratio is expected to drop further this year, to 48.4% – roughly equalling its 2019 lows. It is then expected to edge along a gradual upside trajectory over years thereafter, ending a forecast horizon at around 51.5% by 2027. Comparatively robust nominal growth over coming years – supported by high inflation – and a very low average cost of the outstanding debt portfolio (of around 0.8% next year) stem a more substantive increase of public debt despite wider deficits expected over a prolonged phase. Netherlands’ debt ratio is approximately in line with that of an average for AAA-rated sovereign borrowers. Scope considers the Dutch government to retain substantive fiscal flexibility, including strong market access despite the marked rise in funding costs this year. Benchmark 10-year yields declined to 2.2% this month, from 2.8% at October 2022 peaks, but remain well above the -0.3% averaged for last year), reflecting higher inflation expectations and tighter global funding conditions. Dutch state securities carry a long weighted-average term to maturity of 8.5 years, which ought to allow for only a gradual feed-through of higher market rates to interest payment costs. The government issues only in euro.

Netherlands’ ratings are supported by a strong external position. This reflects elevated and recurrent current-account surpluses, averaging 7.5% of GDP over 2015-19 before moderation to 5.1% of GDP in 2020, due to weaker primary and secondary income balances. Following recovery over 2021, to 7.2% of GDP, the quarterly current-account surplus declined in Q2 this year to 3.2%, primarily a result of a weaker primary income balance alongside a weaker trade in goods balance. Looking ahead, the IMF expects the current-account balance to average 7.5% over 2023-27 – near pre-pandemic averages. External resilience is further bolstered by standing as a strong net external creditor nation, with a net international investment position of 87% of annualised GDP as of Q2 2022, a decline from peaks of 111% in 2020 but improving markedly from around 51% during 2015.

Finally, the soundness of the Dutch financial system reflects a credit strength. Dutch banks have proven resilient since the Covid-19 crisis, retaining strong capital positions, liquidity and asset quality, in part a result of government support. Despite gradual withdrawal of such state support, the non-performing loan ratio has recently been on a declining trajectory, at 1.6% of aggregate loans in Q2 2022 (from 2.0% at Q2-2021 peaks) – even though this ratio remains somewhat higher than that in banking systems of AAA peer sovereigns. System-wide tier 1 capital amounted to 17.8% of risk-weighted assets, having fallen off peaks of above 19% during 2020-21 but still comfortably above regulatory minimums. Profitability, as measured by aggregate return on equity, is adequate and in line with that of banking systems of AAA-rated peer sovereigns, at 7.5% as of Q2 2022. Looking ahead, weakening of the economic outlook ought to exert pressure on asset quality, translating to higher credit losses. At the same time, Dutch banks’ direct exposures to energy-intensive sectors are limited, of around 10-15% of outstanding loans. Moving ahead, banking-sector profitability will be supported by the rise in rates, as nearly 75% of Dutch banks’ operating incomes stem from interest income. In its Autumn 2022 Financial Stability Report, the Nederlandsche Bank estimated that the four largest Dutch banks would remain resilient under even a severe stressed scenario – including a sharp contraction of economic output and of real-estate prices – with average common equity tier 1 ratios remaining above a required minimum.²

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

Aside from sizeable accrual of government debt since the Covid-19 crisis and expectation for somewhat higher debt and annual government gross financing requirements (the latter of an average of 5.0% of GDP a year over 2023-27) during coming years, private-sector indebtedness remains elevated at around 243% of GDP as of Q1 2022. Vulnerability is especially acute with respect to household debt, of a significant 100% of GDP (almost all of this reflecting mortgage loans) – among the highest such ratios of Europe. However, a steep rise of housing prices over recent years and voluntary repayments of mortgage debt have resulted in sharp declines in loan-to-value ratios. As such, households have a more substantive buffer than before the 2008-09 crisis, although younger homeowners are comparatively more exposed. A central-bank scenario analysis² observes a 20% decline in prices could result in 8% of homeowners to fall into negative equity.

Housing-market inefficiencies, due to 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 have encouraged debt accrual. High levels of household debt link to macro-financial risks as economic crises are exacerbated by households seeing income impairment during economic downturns. Scope observes positively, however, that the Dutch government has implemented a series of measures aimed at reducing household debt bias and curbing mortgage debt growth, including a gradual phasing down of a mortgage interest deductibility mechanism and introduction of a floor for risk weights of mortgage loans. Nevertheless, further reforms tightening mortgage loan markets and raising housing supply are required. Housing price growth had cooled to 7.8% YoY by October, from elevated peaks of 21.1% this January.

Secondly, the Netherlands, as a highly open economy, is integrated within regional and global markets, raising sensitivity to economic and financial-market crises. Exports of goods and services amounted to 84% of GDP as of 2021, significantly above ratios of most AAA-rated peers’ economies. While direct exposure to the Russia-Ukraine war is moderate, the war is nevertheless having a substantive impact on the Dutch economy, primarily from rise in energy and raw-materials prices as well as weakening of the growth outlook for trading partners’ economies. External debt is elevated – 357.4% of GDP as of Q2 2022, having nevertheless decreased substantively over the recent years, from 2015-16 highs of above 510%. Most external debt is held by non-monetary financial institutions (153% of GDP), trailed by monetary financial institutions (103%) and non-financial corporations (72%). 45% of external debt is short-term. However, euro-area membership raises the economy’s resilience to external crises, with the European Central Bank and European Stability Mechanism acting as lenders of last resort and the euro representing one of the world’s preeminent reserve currencies.

Finally, Scope observes that while the economy is near full employment, the Dutch labour market displays structural dualities with many persons employed on part-time bases or self-employed, on average earning lesser salaries than full-time employees and with more limited social protections. Above 40% of the Dutch workforce (of ages 15-64 years) is currently employed part-time – the highest such share of the EU and more than twice the euro-area average. As a result of this, the average number of hours worked per employee in the Netherlands is the lowest of the EU: 32.1 hours per week. The government has introduced a series of measures aimed at tackling issues related to dualities of the labour market, such as a reduction in the tax deduction for self-employment and introducing disability insurance for the self-employed. Government intentions to ensure appropriate social protections, particularly for the self-employed, are constructive, and could be complemented via continued re-alignment of incentive structures across varying types of labour contracts, furthermore to incentivise productivity-enhancing training schemes.

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 receives no further adjustment from 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, no relative credit strengths via the QS were identified. One 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 ratings process via the sovereign methodology’s standalone ESG sovereign risk pillar, with a significant 25% weighting under the quantitative model (CVS).

With respect to the sovereign ESG pillar’s environmental risk sub-category, Netherlands’ performance is comparatively weaker as compared with that of indicative sovereign peers and the weakest of the EU-27. This is partly a result of a weak score on a natural disaster risk assessment from the World Risk Index, with Netherlands at elevated risk of flooding and storm surge with half the nation lying beneath sea level. Similar to most highly-rated sovereign peers, Netherlands furthermore displays a very low mark on greenhouse gas (GHG) emissions per capita. In addition, scores for its ecological footprint of consumption behaviour relative to available biocapacity are beneath those for ‘aaa’-indicative sovereign peers. A long-standing environmental issue ties to high emissions of nitrogen – here, further corrective measures³ were introduced in February 2020. The Dutch government has committed to cutting GHG emissions by 49% relative to 1990 levels, as well as increasing the share of renewables in its aggregate energy mix to 27% (from 14.7% in 2020), by 2030. The government has agreed to set up a climate transition fund of EUR 35bn with spending on sustainable-electricity, green-hydrogen and heating networks, and preparation to construct two nuclear reactors – representing an historic shift in energy policies. Design of another investment fund of around an aggregate EUR 25bn will be used for nature preservation, and for limiting nitrogen emissions. Beyond the CVS, Netherlands’ environmental policies and challenges are considered under a QS assessment for ‘environmental risks’, which is evaluated as ‘neutral’ against the sovereign peer group.

As regards social-risk factors, the quantitative model score is enervated especially by Netherlands’ ageing society, reflected in an elevated and increasing old-age dependency ratio, although in line with ageing developments of many western peer economies. Income inequality – as captured by the CVS by the ratio of the income share of 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 with that of Netherlands’ sovereign peer group. Furthermore, labour-force participation of around 71.4% of the active labour force (aged 15-74) is well above a euro-area average. Under the complementary QS, assessment of ‘social risks’ is evaluated as ‘neutral’, indicating social outcomes are in line with that of ‘aaa’ indicative peers. This reflects a low share (14.4% in 2021) of the population under the national poverty line and strong educational outcomes, such as strong scholastic performance of students across mathematics, reading and sciences according to 2018 PISA results⁴. Social challenges associate with labour-market duality with a high share of persons employed part-time. Longer run, an ageing society stresses budgetary outcomes, with aggregate ageing-associated costs estimated by the European Commission’s 2021 Ageing Report⁵ to rise from an aggregate 21% of GDP in 2019 to 23.1% of GDP by 2030.

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 for ‘institutional and political risks’ indicates Netherlands’ performance as being in line with that of ‘aaa’ indicative sovereign peers, reflecting comparatively stable political conditions. Record coalition negotiations concluded in December 2021 with agreement allowing for formation of the present government, with priorities centring around extension of free childcare, tackling of climate change and housing shortages, nuclear energy research and road pricing. The high level of fragmentation of the political landscape represents a challenge for effective policy making.

Rating Committee
The main points discussed by the rating committee were: i) domestic economic risk; ii) public finance risks, including fiscal framework and debt dynamics; iii) financial-stability risks, including housing market and private-sector debt; iv) ESG considerations; and v) peer developments.

Rating driver references
1. Bruegel, National fiscal policy responses to the energy crisis 
2. De Nederlandsche Bank, Financial Stability Report – Autumn 2022 
3. Government of the Netherlands, New steps to tackle nitrogen pollution offer prospects for farmers 
4. OECD, PISA 2018 results 
5. European Commission – The 2021 Ageing Report 

Methodology
The methodology used for these Credit Ratings and/or Outlooks, (Sovereign Rating Methodology, 27 September 2022), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. 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-governance/definitions-and-scales. 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://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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: Giacomo Barisone, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings in January 2003. The Credit Ratings/Outlooks were last updated on 17 December 2021.

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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