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Kingdom of the Netherlands Rating Report 30 June 2017 Public Finance Kingdom of the Netherlands KingdomRating of theReport Netherlands STABLE Rating Report AAA OUTLOOK Credit strengths Credit weaknesses Ratings & Outlook Wealthy & diversified economy High household debt Foreign currency Strong current account balance Susceptibility to external shocks Long-term issuer rating AAA/Stable Senior unsecured debt AAA/Stable Robust fiscal position Labour market inefficiencies Short-term issuer rating S-1+/Stable Rating rationale and Outlook: The AAA rating is supported by a wealthy, flexible and Local currency export-oriented economy, which performed strongly in 2016 following the double-dip recession. The Netherlands benefits from strong external position, prudent fiscal policy, LongL -term issuer rating AAA/Stable o moderate public debt underpinned by resilient GDP growth, and well-established fiscal Senior unsecured debt AAA/Stable framework. At the same time, high private-sector debt, susceptibility to external risks and c Short-term issuer rating S-1+/Stable labour market inefficiencies pose some concerns. The Stable Outlook reflects Scope’s a expectation of a continuation of the government’s prudent fiscal policy, with public debt l declining over the medium term. C Figure 1: Summary of sovereign rating categories u rLead Analyst rDr Ilona Dmitrieva e+44 6966773-13 n [email protected] c Team Leader y Dr Giacomo Barisone +49 69 6677389-22 [email protected] Scope Ratings AG Neue Mainzer Straße 66-68 60311 Frankfurt am Main Phone + 49 69 6677389 0 Headquarters Source: Scope Ratings AG Lennéstraße 5 10785 Berlin Positive rating-change drivers Negative-rating change drivers Phone +49 30 27891 0 Not applicable Sharp GDP downturn Fax +49 30 27891 100 Reversal of fiscal consolidation [email protected] www.scoperatings.com Bloomberg: SCOP 30 June 2017 1/13 Kingdom of the Netherlands Rating Report Domestic economic risk Dutch GDP performed strongly in 2016 with a growth rate of 2.2%, marking the second year of a strong rebound following a double-dip recession in 2009 and 2012-2013. This solid performance was underpinned by strong consumption and investment, reflecting improving confidence and rising house prices, which outweighed a slowdown in net exports due to weak external demand and export performance. Solid economic recovery is likely According to the newest CPB forecast, the Netherlands will continue to enjoy strong to continue growth of 2.4% in 2017 followed by a slight slowdown to 2.0% in 2018 as domestic demand and investment continue to be the main growth drivers. Recent policy measures, in particular a reduction in pension contributions in 2015 and a broad package of tax cuts aimed at reducing the tax wedge in 2016, contributed to the rise in private consumption. Furthermore, should a planned overhaul of the second pension pillar lead to lower pension contributions, a further boost to domestic demand could be expected. Scope notes that uncertainty surrounding Brexit may negatively affect the Dutch economy, given its relatively large share of exports to the UK (9.43% in 2016) coupled with its strong financial ties to the country. However, the possibility of a post-Brexit move by some banking operations from London to Amsterdam could mitigate the negatives. Figure 2: Components of nominal GDP growth Private consumption Investment Government expenditures Net exports Inventories GDP growth 15% 40% 30% 10% 20% 5% 10% T 0% h 0% e -5% -10% Table of Contents Domestic economic risk ...................... 2 -10% -20% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Public finance risk ............................... 4 External economic risk ........................ 6 Source: IMF, Calculations Scope Ratings AG Financial stability risk .......................... 7 Netherlands The country benefits from a diversified, high value-adding and flexible Institutional and political risk ............... 8 economic structure. It is an open economy whose level of openness exceeds most other I. Appendix: CVS and QS Results.... 9 EU economies. Its trade openness-to-GDP ratio stands at 150.35% compared to 84.4% for Germany and 100.6% for Austria, exposing it to the economic outlook of its major II. Appendix: CVS and QS Results.. 10 trading partners, the most important of which are Germany, Belgium, the United III. Appendix: Peer comparison ........ 11 Kingdom, France and Italy. The openness of the Dutch economy also exposes it to IV. Appendix: Statistical tables ......... 12 geopolitical risks and trends in global trade. V. Regulatory disclosures ............... 13 30 June 2017 2/13 Kingdom of the Netherlands Rating Report The Dutch economy is operating Having enjoyed a good recovery, the Dutch economy is currently operating close to its close to its potential potential, being constrained primarily by a number of structural weaknesses. Among them are one of the highest private-debt levels in the EU, a high level of tax/non-tax burdens on labour, a fragmented labour market, and a big gap between savings and investment in the domestic economy (manifested as the largest current-account surplus in the EU). Figure 3: Private debt Figure 4: Savings vs investment (% of GDP) Households debt-to-NDI Nonfinancial corporate debt-to-GDP Investment (% GDP) Savings (% GDP) 35% 300% 250% 30% 200% 25% 150% 20% 100% 50% 15% 0% 10% Italy Spain 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Austria Germany Netherlands Source: National governments, European Commission, Source: European Commission Calculations Scope Ratings AG Despite some deleveraging, private sector indebtedness remains high at about 250% of GDP in 2016. This high level is linked to both non-financial corporate sector debt (131% of GDP) and household debt (119% of GDP). Corporate debt largely stems from big multinationals with headquarters in the Netherlands and is offset by sufficiently large equity. Gross household debt is mostly linked to mortgages, and household assets cannot be used to reduce their outstanding debt. Dutch households’ main asset is significant pension wealth accumulated over their working life due to relatively high compulsory pension contributions. The Netherlands has the highest Household debt is very high at almost twice the EU average in 2016. Scope notes that private-sector indebtedness in the consistently high level of mortgage debt requires further deleveraging in future, as it the EU could put a brake on the expansion of domestic demand, currently the main contributor to GDP growth. Two of the main reasons for persistently high household debt are the country’s regulatory framework and taxation incentives, which encourage the Dutch to own rather than rent despite recent measures aimed at tightening mortgages. The labour market in the Netherlands is strong and improving: The unemployment rate declined from 7.3% in 2013 to 6% in 2016, making it the second-lowest in the euro area. However, the labour market exhibits signs of segmentation attributable to large differences in employment protection legislation between permanent and temporary contracts, as well as a large wage gap between employees with permanent and temporary contracts. The recent rise in employment was largely associated with temporary employment1 – hence, what was already one of the highest levels of temporary contracts in the EU climbed even higher. The Netherlands has high tax burdens on labour in the EU, a result of high compulsory pension payments and obligatory health insurance contributions. High taxes and labour market segmentation contribute to the fact that domestic private-sector savings are channeled and invested abroad to a large extent, limiting the domestic investment base and lowering the country’s potential growth. 1 Country report, the Netherlands, 2017, EC, p.30 30 June 2017 3/13 Kingdom of the Netherlands Rating Report Figure 5: Tax wedges 2016 2000 60 50 40 30 20 10 0 Italy Spain Austria France Belgium Germany Source: OECD Public finance risk Since 2010, the Netherlands has managed to achieve an impressive correction in its budget deficit. Between 2010 and 2016, the headline balance improved from -3.8% to 0.4% of GDP and the structural balance improved from -4.5% to 0.5% of GDP. It is the first time the Dutch government achieved a budget surplus since 2008. Although GDP growth played a part in this improvement (except during 2012-2013), the biggest factor was the country’s well-established fiscal framework, which is based on a strict fiscal rule. The rule implies that annual expenditure ceilings for the main budgetary areas on the revenue side be allowed to fluctuate within certain limits. Compliance with the numerical fiscal rule is monitored by the Advisory Division of the Council of State2. The country’s budget balance Following the improvements in the budget balance, public debt, which peaked at around turned positive in 2016 after 68% of GDP in 2014, started to decline and stood at about 62% at the end of 2016. eight years of deficits Proceeds from the re-privatisation of ABN Amro, Propertise and ASR helped lower this ratio in 2016. 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. It is expected that the general government debt ratio will fall below the 60% Maastricht threshold by the end of 2017. Scope expects the Netherlands to keep its budget balance in the black as a result of economic expansion, a continued low interest
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