Rating action

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

The Netherlands’ AAA ratings are underpinned by the following credit strengths: i) the country’s wealthy, diversified and competitive economy; ii) sound public finances and moderate levels of public debt; and iii) a solid external position, driven by consistent current-account surpluses. These factors increase the country’s resilience to economic shocks, such as the Covid-19 pandemic as well as the strong inflationary pressures and subsequent rise in interest rates following the escalation of the Russia-Ukraine war. Challenges relate to: i) vulnerabilities in the Dutch financial system, associated with elevated housing prices and high levels of household debt; ii) sensitivity of the economy to global developments as a highly open economy; and iii) labour-market dualities with a high share of persons employed part-time.

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Key rating drivers

A wealthy and competitive economy. The Netherlands’ ratings are anchored by a wealthy, highly diversified and competitive economy. Real GDP growth rebounded after the pandemic by 6.3% in 2021 and 5.0% in 2022. Growth slowed to 0.1% in 2023 as high inflation caused disposable income and domestic private consumption to decline. Over the coming years, Scope expects economic growth to be supported by lower inflation, stronger private demand and a recovery in global trade. Real GDP is expected to increase by 0.6% this year and 1.5% in 2025, before converging to the 1.4% medium-term growth potential by 2027.

Declining energy prices helped lower HICP inflation from 11.6% in 2022 to 4.3% in 2023. After having reached a record-low of negative 1% in October 2023, headline inflation increased to 3.3% in September 2024. This was mostly due to persistently high food prices and solid nominal wage growth leading to a recovery in household consumption. Similarly, core inflation increased from 2.8% in February to 3.7% in September 2024, above the euro area average of 2.7%. Scope expects headline inflation to decline slower than in most euro area countries, falling to 3.4% in 2024 and 3% in 2025.

The Dutch labour market has remained tight despite a contraction in output since H1 2023. Many employers have retained workers in recent years, resulting in a decline in labour productivity, but a record-high employment rate at 73.4% in Q2 2024, well above the EU-27 average of 61.8%. While the job vacancy rate stood at 4.6% as of Q2 2024, almost double the EU average, vacancies still fell over the past year, signalling some moderation in labour market tightness. Scope projects the unemployment rate to remain low at 3.7% in 2024 and 3.8% in 2025 as economic growth accelerates.

Sound public finances and excellent market access. Netherlands’ AAA credit ratings are further anchored by still moderate government debt. The budget balance averaged a surplus of 1.2% of GDP over 2016-2019, resulting in the debt-to-GDP ratio declining to 48.5% by end-2019 (from 68% in 2014).

The fiscal deficit peaked at 3.6% of GDP in 2020 but improved materially in the post-pandemic years, falling to 0.1% in 2022 and 0.4% in 2023. Scope expects the headline fiscal deficit to rise this year to 1.8% of GDP and to 2.4% in 2025, reaching 3% by 2029. The rise is driven by higher spending pressure over the medium term on gradually rising financing costs, increased spending on healthcare and social security amid an ageing population, as well as higher investment needs in defence and infrastructure.

The 2025 Budget presented by the new government in September includes tax cuts for middle income households with the aim of raising household purchasing power and focuses on addressing immediate economic and social issues¹. Over the medium-term, the government plans to increase the housing supply via the construction of 100,000 houses per year and raise annual defence spending to 2% of GDP. To help fund higher spending needs, the government plans select tax rises, a reduction in subsidies, cuts to the number of civil servants and lower spending on development aid. An additional negative contribution to the long-term debt trajectory will come from a EUR 19bn private loan (EUR 2bn in 2025 and EUR 17bn in 2026) from the Dutch government to the State-owned grid operator Tennet.

General government debt declined steadily from 53.3% of GDP in 2020 to 45.1% in 2023, due to low budget deficits and the strong inflation effect on nominal GDP. Scope expects rising public expenditure pressures to raise the debt-to-GDP ratio slightly to 45.3% in 2024 and to 46.1% in 2025, reaching 51.1% in 2029. Despite the steady increasing trajectory, debt levels remain moderate in an international comparison and below the 60% threshold under European fiscal rules. Moreover, Scope considers the Dutch government to retain fiscal flexibility, including strong market access despite the marked rise in funding costs. Benchmark 10-year yields averaged 2.7% over the first nine months of 2024 – near 2011 highs, reflecting tighter global funding conditions. Dutch state securities carry a long weighted-average term to maturity of 9 years, allowing for only gradual feed-through of higher market rates to interest payment costs. The government issues only in euro.

Solid external position. The current account surplus stood at 9.8% of GDP in 2023, up from 6.6% in 2022 when the surplus fell due to a decline in industry production, stagnating growth in international trade and high energy prices. Goods and services exports are the biggest contributors to the positive current account balance, compensating the negative contribution from primary and secondary income. In 2023 the Netherlands was the third largest exporter of goods and services among EU countries, after Germany and France. This was reflected in a volume of goods and services exports of EUR 945bn, with good exports accounting for almost 72% of total exports. External resilience is furthermore bolstered by the country’s net external creditor position, reflected in a NIIP of 42% of GDP as of Q2 2024, although declining from peaks of 86% of GDP at the end of 2020.

Rating challenges: high household debt, high sensitivity of the economy to global developments and labour market duality.

Private-sector indebtedness has declined steadily over the past four years, from 254% of GDP in 2020 to 209% in 2023, remaining well below the 2014 peak of 274%. High inflation and low net credit growth contributed to this decline, although private debt in the Netherlands remains one of the highest in Europe.

Vulnerability is particularly acute for households whose debt amounted to 95% of GDP as of Q1 2024 – almost entirely composed of mortgage loans – well above the euro area average of 53% of GDP. However, the ratio has remained on a continued downward trajectory since 2021, on the back of a steep rise in house prices and voluntary repayments of mortgage debt resulting in lower loan-to-value ratios. Tighter lending conditions and the consequent decline in mortgage volumes led to a sharp deceleration in housing market activity over the past years, further impacted by rising prices for construction materials. Residential real estate prices declined by 2.8% on average in 2023 but are recovering, reaching an annual growth of 11.2% in August on the back of rising income levels, sustained demand and tight supply.

Low financing costs over the previous decade, a generous tax deductibility of mortgage interest, as well as the possibility of 100% mortgages have encouraged debt accrual. Still, risks of debt distress for households in a high-interest rate environment are mitigated by the high share of mortgages with interest rates fixed for more than 10 years, which increased from 33% to 53% between 2017 and 2022. As a result, only 9% of the interest rate rise has passed through to Dutch mortgage interest rates and only 14% of outstanding mortgage debt will be subject to interest rate review or refinancing in 2024-2025. This limits the risk of increasing non-performing loans for banks, although upside pressures coming from corporate debt remains given the shorter maturity (2.5 years on average) and the 55% of outstanding debt subject to interest rate review over 2024-2025². Nevertheless, the Dutch banking system is well-positioned, retaining a strong capital position (Tier 1 ratio at 17.9% as of Q2 2024), good asset quality (overall NPL ratio stable at 1.6%) and adequate liquidity. Profitability also improved markedly in 2023, with the return on equity reaching a record high 12.6% in December due to higher net interest margins.

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 almost 90% of GDP in 2023, significantly above ratios of most AAA-rated peers’ economies. External debt is elevated – 345.3% of GDP as of Q1 2024, having nevertheless decreased substantially over recent years, from 2015-16 highs of above 510%. Most external debt is owed by non-monetary financial institutions (45.6% of total), followed by monetary financial institutions (28.6%) and non-financial corporations (18.6%). 42% of external debt is short-term. However, euro-area membership enhances 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, the average number of hours worked per employee in the Netherlands is the lowest of the EU: 30.9 hours a week (2023). The authorities have 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. 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, to further incentivise productivity-enhancing training schemes.

Outlook and rating sensitivities

The Stable Outlook represents Scope’s view that risks to the ratings over the next 12 to 18 months are balanced.

Downside scenarios for the rating and Outlooks are (individually or collectively):

1. Significant deterioration in the fiscal outlook, including via a sustained elevated budget deficits and increasing debt levels through the cycle.
    
2. A global or regional shock causes a significant drop in output and/or accentuated risk to Netherlands’ financial stability.

Sovereign Quantitative Model (SQM) and Qualitative Scorecard (QS)

Scope’s SQM, which assesses core sovereign credit fundamentals, signals a first indicative credit rating of ‘aaa’ for the Netherlands, which was approved by the rating committee. Under Scope’s methodology, the indicative rating receives 1) one-notch positive adjustment from the methodological reserve-currency adjustment; and 2) no negative adjustment from the methodological political-risk quantitative adjustment. On this basis, a final SQM quantitative rating of ‘aaa’ is reviewed by the Qualitative Scorecard (QS) and can be changed by up to three notches depending on the size of the Netherlands’ qualitative credit strengths or weaknesses compared against a peer group of sovereign states.

Scope identified no QS relative credit strengths or weaknesses for the Netherlands. On aggregate, the QS therefore generates no adjustment for the Netherlands, resulting in final AAA long-term ratings.

A rating committee has discussed and confirmed these results.

Environment, social and governance (ESG) factors

Scope explicitly factors in ESG issues in its ratings process vis-à-vis the sovereign-rating methodology’s stand-alone ESG sovereign-risk pillar, which holds a significant 25% weighting under the quantitative model (SQM) and 20% weight under the methodology’s qualitative overlay (QS).

For environmental factors, the Netherlands receives high scores in SQM indicators measuring carbon emission per unit of GDP and exposure and vulnerability to natural disaster risks, but lower scores for greenhouse gas (GHG) emissions per capita and ecological footprint of consumption behaviour to available biocapacity. The Netherlands is at elevated risk of flooding and storm surge with half the nation lying below sea level. A long-standing environmental problem ties to high emission of nitrogen – here, further corrective measures were introduced. The Dutch government has committed to cutting GHG emissions by 55% relative to 1990 levels by 2030. However, policies to reach this goal would need to be swiftly implemented and external factors need to be favourable. With the new government in place, some of the measures proposed by the previous cabinet have been declared controversial or reversed. Combined with some delays in policy developments, these factors could increase the challenges for the new cabinet to reach the environmental targets. Beyond the SQM, Netherlands’ environmental policies and challenges are considered by a QS assessment for the ‘environmental factors’ category, evaluated at ‘neutral’ against the sovereign peer group.

For social factors captured under the SQM, the Netherlands show an elevated and increasing old-age dependency ratio, although in line with the ageing developments of many western peer economies. Income inequality – as captured in the SQM 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 82.4% of the active labour force (aged 15-64) is well above the euro-area average. Under the complementary QS assessment, the ‘social factors’ category is evaluated at ‘neutral’, indicating social outcomes in line with those of ‘aaa’ sovereign peers. This reflects a low share (16.5% in 2022) 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 2022 PISA results³. Social challenges include labour-market duality with a high share of part-time workers. Longer run, an ageing population stresses budgetary outcomes, with aggregate ageing-associated costs estimated by the European Commission’s 2024 Ageing Report to rise from 21% of GDP in 2022 to 23.1% by 2040⁴.

Under governance-related factors captured in the SQM, the Netherlands scores well on a composite index of five World Bank Worldwide Governance Indicators, in line with the performance of the other AAA-rated sovereign peers, although scoring for a sixth indicator of political stability has moderately weakened over recent years. After several months of uncertainty following the November 2023 general elections, in July the new government took office. The new coalition led by Dick Schoof, the former head of the Dutch intelligence service, includes Wilder’s far-right PVV as the largest party, conservative-liberal VVD, the Farmers’ Citizen Movement and the new-to-government centrist New Social Contract. Some of the policies proposed in the government’s plans, such as rolling back on some environmental policies and reducing future contributions to the EU, could potentially put the new coalition on confrontation course with the EU.

Rating committee
The main points discussed by the rating committee were: i) Netherlands’ economic performance and outlook; ii) fiscal policy, the budget deficit and government debt levels; iii) external risks; iv) financial stability risks; v) ESG considerations; and vi) peer developments.

Rating driver references
1. CPB Netherlands Bureau for Economic Policy Analysis – Concept Macro Economic Outlook 2025, August 2024
2. De Nederlandsche Bank – Financial Stability Report, Spring 2024
3. OECD – PISA 2022 Results (Volume I and II) Country Notes: Netherlands, December 2023
4. European Commission – 2024 Ageing Report, Economic & Budgetary projections for the EU Member States, April 2024

Methodology
The methodology used for these Credit Ratings and/or Outlooks, (Sovereign Rating Methodology, 29 January 2024), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for these Credit Ratings and/or Outlooks is (Sovereign Quantitative Model Version 4.0), 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      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 and/or Outlooks 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: Alessandra Poli, Analyst
Person responsible for approval of the Credit Ratings: Eiko Sievert, Senior Director
The Credit Ratings/Outlooks were first released by Scope Ratings in January 2003. The Credit Ratings/Outlooks were last updated on 3 November 2023.

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, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use / exclusion of liability
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