For the updated rating review annex 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 furthermore affirmed the short-term issuer ratings at S-1+ in local and foreign currency. All Outlooks remain Stable.

Summary and Outlook

The Netherlands’ AAA ratings are underpinned by a wealthy, diversified and internationally-competitive economy, and 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 its European-Union and euro-area memberships. The significant fiscal response to the energy crisis is weighing on fiscal metrics although public debt remains moderate.

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 causes a significant drop in output and/or accentuated risk to Netherlands’ financial stability; and/or ii) the fiscal outlook were to deteriorate significantly, including via sustained elevated budget deficits and increasing debt levels through the cycle.

Rating rationale

The Netherlands’ ratings are anchored by a wealthy, 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 (6.1%). The Dutch economy recovered well from this crisis, edging above pre-pandemic output by the second quarter of 2021 and displaying robust, above euro-area average, growth rates of 6.2% and 4.4% in 2021 and 2022, respectively. Economic momentum decelerated markedly in the first half of 2023, however, with negative quarter-on-quarter growth of 0.4% and 0.2% in Q1 and Q2 2023. Soaring nominal imports and weakening external demand weighed on net exports, while household consumption slowed amid high inflation and rising borrowing costs.

Headline inflation has decelerated significantly over the past year, from a 17.1% (harmonised index of consumer prices, year-on-year) peak in September 2022 to about negative 1.0% by October 2023, amid lower energy prices and more favourable base effects. At the same time, despite having edged under the euro-area average, core inflation has stayed more elevated, at 5.1% in September, pointing to persistent underlying price-rise dynamics within a context of higher nominal wage growth (of 6.4% year-on-year as of October). The ECB has tightened its policy stance, hiking the deposit rate to 4.0%, its highest ever. Restrictive monetary-policy conditions, alongside sluggish economic growth, should support further easing of core inflation medium run.

The Dutch labour market has remained resilient despite a contraction in output since H1 2023. The unemployment rate remains very low – forecast at 3.6% in 2023 before 3.9% in 2024, while the employment rate stands at historic highs of 73.1% as of Q2 2023, the highest among economies of AAA-rated sovereigns. Job vacancies were down 7.9% year-on-year in Q2 2023, reflecting some moderation in labour-market tightness, although the job-vacancy rate remains the most elevated of the EU, at 4.7%. Still-tight labour markets reflect persistent labour-market rigidities, resulting in shortages of supply and constituting key bottlenecks affecting productive capacity.

After slowing to an estimated 0.3% in 2023, real growth is expected at 0.4% next year, supported by a gradual recovery in household real wages amid decelerating price pressure and a potentially more favourable external environment. The medium-run growth outlook will furthermore be anchored by increased government investment in the green transition and defence policy (further EUR 5bn committed on defence for the coming years).

Netherlands’ AAA credit ratings are further anchored by still moderate government debt. Before the Covid-19 economic crisis, the budget balance averaged a surplus of 1.2% of GDP over 2016-2019, resulting in the debt-to-GDP ratio dropping to 48.5% by end-2019 (from 68% as of end-2014).

The fiscal deficit improved materially last year, sliding to 0.1% of GDP, from 2.3% the previous year, driven by strong recovery in government revenue. The fiscal deficit is seen re-widening to 1.2% of GDP this year, from the effects of temporary and structural policies rolled out since the energy crisis, including a ceiling for energy prices (cost initially estimated at EUR 23.5bn or 2.4% of GDP). Other measures, such as lowered taxes for labour and a 10% revaluation of the minimum wage and its commensurate effects on pension and welfare benefit payments, will durably affect the budget balance.

Such structural adjustments, alongside growing ageing-related spending pressure and progressively rising debt-servicing costs, should weigh on the fiscal balance over coming years. Scope expects gradually-rising fiscal deficits over the medium run, with the general government deficit forecast to average 2.3% of GDP over 2024-28.

The 2024 budget, introduced by the present caretaker government ahead of general elections later this month, included minimal policy adjustments. Main measures centre around poverty reduction (higher child-care and rental allowances, a decrease in the labour income tax for low-income households), with policies aggregating to EUR 2.3bn (0.2% of GDP), which ought largely to be financed via partial non-indexation of the highest income tax bracket.

Fiscal policy beyond 2024 is unclear given composition of the House of Representatives potentially changing significantly following forthcoming elections, after rise of new political groupings such as the centrist New Social Contract and far-right farmers’ group BBB.

After declining to 50.1% by 2022 (from the previous year’s cyclical peak at 54.7%), the general government debt-to-GDP ratio is expected to drop further this year, reaching 47.2% – falling under its 2019 pre-crisis lows. Scope expects the debt trajectory to rise modestly thereafter, concluding a forecast horizon around 49.2% by 2028. Comparatively robust nominal growth over the coming years – supported by high inflation – and a very low average cost of the outstanding debt portfolio (of around 1.3% this year) hold the debt ratio at a moderate level. Netherlands’ debt ratio is about in line with that of an average for AAA-rated sovereign borrowers. Scope considers the Dutch government to retain fiscal flexibility, including strong market access despite the marked rise in funding costs. Benchmark 10-year yields have risen above 3% – near its highest since 2011, reflecting tighter global funding conditions. Dutch state securities carry a long weighted-average term to maturity of 9 years, which ought to allow for only gradual feed-through of higher market rates to interest payment costs. The government issues only in euro.

Netherlands’ AAA ratings are supported by a strong external position. This reflects a track record of elevated and recurrent current-account surpluses. The current-account surplus moderated to a still high 9.3% of GDP last year, primarily the result of a weaker primary-income balance alongside a weaker trade in goods surplus. External resilience is furthermore bolstered by Netherlands’ standing as a strong net external creditor nation, with a net international investment position of 67% of annualised GDP as of Q2 2023, although declining from peaks of 111% in 2020.

Finally, the soundness of the Dutch financial system represents a credit strength. Dutch banks have proven resilient to recent economic shocks, retaining strong capital positions, liquidity and asset quality, in part the result of continuing government support.

Despite gradual withdrawal of State support and a sharp deceleration of economic momentum, the non-performing loan ratio remains modest and stable at 1.6% of aggregate loans as of Q2 2023, even though this ratio remains somewhat higher than that of banking systems of AAA-peer sovereigns. System-wide tier 1 capital amounted to 18.5% of risk-weighted assets, comfortably above the regulatory minimum. Profitability, as measured by aggregate return on equity, is in line with that of banking systems of AAA-rated sovereigns, at 12.6% as of Q2 2023, having risen over the recent months amid rising interest rates and lending margins.

Looking ahead, weakening of the economic outlook and tightening of funding conditions ought to exert pressure on asset quality, translating to higher credit losses. Exposure to the commercial real estate market, which has come under significant pressure, reflects a concern for Dutch financial institutions, with commercial real estate loans amounting to 7% of Dutch banks’ assets. Associated risks are, nevertheless, mitigated by a moderate share of non-performing real estate loans (3.3% as of Q2 2023, below its historical average) and by a strong capital and liquidity position of the banking system.¹ In its Spring 2023 Financial Stability Report, De Nederlandsche Bank estimated that the four largest Dutch banks would stay resilient even under a severe stressed scenario – including a contraction of economic output, a sharp correction of real-estate prices and rapid outflow of deposits – with average common equity tier 1 ratios staying above their required minimum.²

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

Aside from sizeable accrual of government debt since the Covid-19 crisis and an expectation of somewhat higher net interest payments (rising to 2.4% of general government revenue by 2028) and annual government gross financing requirements (averaging 5.6% of GDP a year between 2023-28) during coming years, private-sector indebtedness remains elevated around 227% of GDP as of Q2 2023.

Vulnerability is particularly acute with respect to household debt, amounting to a significant 90% of GDP (nearly all of this reflecting mortgage loans) – among the highest such ratios of Europe. However, a steep rise in housing prices over recent years and voluntary repayments of mortgage debt have resulted in sharp declines in loan-to-value ratios. Thus, households have a more substantive buffer than before the 2008-09 financial crisis, although younger homeowners are comparatively more vulnerable to residential real estate prices. The tightening in lending conditions and resulting decline in mortgage volumes has brought a sharp deceleration in housing market activity over the past year. Residential real estate prices were down 3.5% year-on-year as of September 2023, representing nevertheless a moderate improvement from the -5.6% year-on-year as of May.

High household indebtedness amid rising lending rates may result in upside pressure on banks’ non-performing loans. At the same time, the feedthrough of higher rates to the outstanding housing loan portfolio ought to be progressive, in view of the favourable refinancing profile of household debt, with only 13% of mortgage debt due to mature or be subject to an interest-rate review within the following two years (as of October 2023).¹

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 of the previous decade 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 adopted measures aimed at curtailing 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 on mortgage loans. Nevertheless, further reforms tightening mortgage-loan markets and boosting housing supply are required.

Secondly, the Netherlands, as a highly open economy, is integrated within regional and global markets, raising its sensitivity to economic and financial-market crises. Exports of goods and services represented a record-high 94% of GDP by 2022, significantly above ratios of most AAA-rated peers’ economies. External debt is elevated – 332% of GDP as of Q2 2023, having nevertheless decreased substantially over the recent years, from 2015-16 highs of above 510%. Most external debt is owed by non-monetary financial institutions (141% of GDP), followed by monetary financial institutions (101%) and non-financial corporations (65%). 44% 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 lower salaries than full-time employees and having more limited social protections. Above 40% of the Dutch workforce (aged 15-64 years) is currently employed part-time – the highest such share of the EU and 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: 32.4 hours a week (2022). The government has introduced measures aimed at tackling issues related to dualities of the labour market, such as reduction in the tax deduction for self-employment and introducing disability insurance for self-employed. Government intentions to ensure appropriate social protection, particularly for the self-employed, are constructive, and could be complemented by a 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 a first indicative credit rating of ‘aa+’ on the Netherlands. This ‘aa+’ indicative rating receives a further one-notch positive adjustment under the methodology’s reserve-currency adjustment, reflecting the euro. The resulting ‘aaa’ final indicative rating can next be adjusted by the Qualitative Scorecard (QS) by up to three notches by the lead analyst depending on the size of relative qualitative credit strengths or weaknesses evaluated against a peer group of countries.

For the Netherlands, no relative credit strengths or weaknesses via the QS were identified.

Combined relative credit strengths and weaknesses identified in the QS generate no net adjustment to the ratings, indicating a final 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 average as compared with that of indicative sovereign peers and among the weakest of the EU-27. Similar to most highly-rated sovereign peers, Netherlands displays a very low mark on its greenhouse gas (GHG) emissions per capita. In addition, scores for its ecological footprint of consumption behaviour relative to available biocapacity are beneath those of ‘aaa’-indicative sovereign peers. Netherlands is at elevated risk of flooding and storm surge with half the nation lying beneath sea level. A long-standing environmental problem ties to high emission of nitrogen – here, further corrective measures³ were introduced. The Dutch government has committed to cutting GHG emissions by 55% relative to 1990 levels by 2030, and is expending EUR 28bn to guarantee 2030 goals – building large offshore solar power fields and lifting taxes on polluting industries. As of last year, emissions were 30% under 1990 levels. Beyond the CVS, Netherlands’ environmental policies and challenges are considered by a QS assessment for the ‘environmental factors’ category, evaluated at ‘neutral’ against the sovereign peer group.

As regards social-risk factors, the quantitative model score is low reflecting the ageing society, reflected in an elevated and increasing old-age dependency ratio, although in line with the ageing developments of many western peer economies. Income inequality – as captured by the CVS by the ratio of the income share of the poorest 50% of persons – is low under an international comparison and comparable with that of Netherlands’ sovereign peer group. Furthermore, labour-force participation of around 82.3% of the active labour force (aged 15-64) is well above the euro-area average. Under the complementary QS, assessment of the ‘social factors’ category is evaluated at ‘neutral’, indicating social outcomes in line with those of ‘aaa’ sovereign peers. This reflects a low share (14.5% 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 dimensions according to 2018 PISA results⁴. Social challenges include 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% by 2030.

Under governance-related factors captured by Scope’s Core Variable Scorecard (the quantitative model), the Netherlands holds strong scores on a composite index of six World Bank Worldwide Governance Indicators – although with scoring having weakened for political stability over the recent years. Furthermore, Scope’s Qualitative Scorecard evaluation for ‘governance factors’ indicates Netherlands’ performance being in line with that of ‘aaa’ sovereign peers. Dutch general elections are forthcoming on 22 November 2023 to elect members of the House of Representatives. The high degree 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) recent political crisis; ii) forthcoming elections; iii) Budget 2024; iv) the budget deficit and government debt; v) financial stability; vi) macro-economic stability; and vii) sovereign peers’ developments.

Rating driver references
1. De Nederlandsche Bank – Financial Stability Report, Autumn 2023
2. De Nederlandsche Bank – Financial Stability Report, Spring 2023
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 Outlooks, (Sovereign Rating Methodology, 27 September 2023), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for these Credit Ratings and Outlooks is (Core Variable Scorecard Model Version 2.1), available in Scope Ratings’ list of models, published under 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    YES
With access to internal documents                                  NO
With access to management                                          YES
The following substantially material sources of information were used to prepare the Credit Ratings: public domain and the Rated Entity.
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 Outlooks and the principal grounds on which the Credit Ratings and Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and Outlooks are UK-endorsed.
Lead analyst: Dennis Shen, Senior Director
Person responsible for approval of the Credit Ratings: Alvise Lennkh-Yunus, Executive Director
The Credit Ratings/Outlooks were first released by Scope Ratings in January 2003. The Credit Ratings/Outlooks were last updated on 25 November 2022.

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

Conditions of use / exclusion of liability
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