London, 07 March 2014
Moody’s Investors Service has today changed the outlook on the Netherlands’ Aaa government bond ratings to stable from negative. Concurrently, Moody’s has affirmed the Netherlands Aaa and Prime-1 debt ratings.
The key drivers for today’s outlook change are:
- Declining risks that the Netherlands’ government balance sheet will be affected by further collective support to other euro area countries, in particular to Italy (Baa2 stable) or Spain (Baa2 positive), along with reduced contagion risks within the wider euro area.
- Signs that the Netherlands’ own domestic vulnerabilities — specifically the weak growth outlook, high household indebtedness, and falling house prices — have peaked and are likely to evolve in a positive direction.
- The stabilisation of the Netherlands’ fiscal strength, as reflected in a debt-to-GDP ratio that Moody’s expects will peak in 2015.
At the same time, Moody’s has affirmed the Netherlands’ Aaa rating. Credit positive rating factors that support the affirmation include: (1) the Netherlands’ advanced, highly competitive and diversified economy, which underpins the country’s economic resiliency; and (2) a very high debt affordability and a strong track-record of debt reduction.
RATIONALE FOR OUTLOOK CHANGE
–FIRST DRIVER: DECLINING RISKS FROM EURO AREA DEBT CRISIS
The first driver of Moody’s decision to change the outlook on the Netherlands’ Aaa rating to stable is the reduced risk that the government balance sheet will be affected by the need to contribute to further collective support for other euro area countries, and in particular to Italy or Spain, along with reduced contagion risks within the wider euro area.
These improvements in conditions reflect country-by-country progress in consolidating public finances and correcting macroeconomic imbalances. All peripheral countries share the same improving trend, though the extent of the progress achieved and the challenges that remain vary across countries. This has been reflected in recent outlook changes and rating upgrades, including the recent upgrade of Spain’s rating to Baa2 (positive) from Baa3 (stable) and Ireland’s rating to Baa3 (positive) from Ba1 (stable), the change in the outlooks on Italy’s Baa2 rating and Portugal’s Ba3 rating to stable from negative, and the upgrade of Greece’s rating to Caa3 stable from C.
Improvements in the euro area institutional framework have also contributed to the reduction in contagion risks. These include the introduction of Outright Monetary Transactions (OMT) by the European Central Bank (ECB), the set-up of back-stop facilities like the European Stability Mechanism (ESM), and progress towards a ‘Banking Union’. Ultimately, these changes imply (1) that the likelihood of further support efforts being needed has decreased; and (2) that the magnitude of any such support, should it be needed, will also have diminished because of the improvement in peripheral countries’ public finances. Fundamental improvements and institutional progress have mitigated liquidity concerns, thereby dampening market volatility and improving funding conditions within the euro area.
–SECOND DRIVER: DOMESTIC VULNERABILITIES HAVE LIKELY PEAKED
The second driver of Moody’s decision to change the outlook on the Netherlands’ Aaa rating to stable is the likelihood that the country’s domestic vulnerabilities have peaked. The Netherlands has been slow to emerge from recession, with its growth performance lagging behind peers. In fact, the rating agency estimates the Dutch economy to have contracted by 0.8% in 2013, following a contraction of 1.3% in 2012. However, Moody’s expects growth to turn positive in 2014, with the economy expanding by 1.0% in real terms. Although domestic demand dynamics remain quite subdued, the improving economic outlook for the European Union translates into stronger expectations for export growth.
There are also early signs that adverse developments in the household sector, particularly with regard to the housing market, are abating. Housing transactions have started to pick up and price levels are starting to stabilise, albeit at lower levels. While it is true that Dutch household debt, at around 140% of GDP, is one of the highest levels in Europe, the large net asset position of Dutch households (second only to Switzerland in Europe) is an important buffer. Although pension funds and insurance products comprise the majority of this buffer, household liquid assets are still in excess of 100% of GDP. Moreover, the Dutch regulatory authorities have been proactive in addressing the vulnerabilities associated with high household debt levels, and problem loan levels remain low.
–THIRD DRIVER: STABILISATION OF THE NETHERLANDS’ FISCAL STRENGTH
The third driver underpinning the outlook change is the stabilisation of the country’s fiscal strength. In Moody’s central scenario, debt will peak at below 76% of GDP in 2015, and slowly decline from that point onwards. Although the politics of negotiating fiscal consolidation have recently been somewhat more challenging in the Netherlands, this has not prevented the country from implementing significant fiscal consolidation. Between 2011 and 2017, the Netherlands will have implemented fiscal consolidation efforts that equate to almost 9% of GDP. Moreover, between 2009 and 2013, the Netherlands has reduced the structural fiscal deficit by more than 2 percentage points.
These fiscal efforts have been taken against a backdrop of a debt burden that is currently lower than a number of other Aaa-rated sovereigns, including the US, Canada, Germany, and Austria (all Aaa stable). Moody’s expects that its debt trajectory will decline at a slower rate than those of Germany or Austria, for example, but the Netherlands’ long-standing track record of proactive fiscal policymaking — even in difficult periods such as those of the last few years — reinforces Moody’s view that the authorities’ commitment to fiscal consolidation will persist over the coming years.
RATIONALE FOR AFFIRMING THE NETHERLANDS’ Aaa RATING
The Netherlands’ Aaa rating is underpinned by the country’s advanced and diversified economy and a history of stability-oriented macroeconomic policies. The Aaa rating is also supported by the country’s strong institutions as well as its credible and effective policies, which the Netherlands shares with other advanced economies. The country’s large current account surplus supports the resiliency of the economy. Moreover, the Netherlands enjoys high levels of investor confidence, which are reflected in very low debt funding costs, leading to very high debt affordability.
WHAT COULD MOVE THE RATING DOWN
The Netherlands’ Aaa rating could be downgraded if Moody’s were to conclude that debt metrics are unlikely to stabilise within the next 2-3 years, with the deficit, the overall debt burden, and/or debt-financing costs on a rising trend. This could happen in a scenario where a combination of persistent economic weakness and reduced political commitment to fiscal discipline means that debt metrics fail to stabilise and decline. Such a scenario would likely prompt a sharp rise in debt-refinancing costs and a loss of safe-haven status.
GDP per capita (PPP basis, US$): 41,447 (2013 Actual) (also known as Per Capita Income)
Real GDP growth (% change): -0.8% (2013 Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 1.6% (2013 Actual)
Gen. Gov. Financial Balance/GDP: -4.1% (2012 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: 9.4% (2012 Actual) (also known as External Balance)
External debt/GDP: [not available]
Level of economic development: Very High level of economic resilience
Default history: No default events (on bonds or loans) have been recorded since 1983.
On 03 March 2014, a rating committee was called to discuss the rating of the Netherlands, Government of. The main points raised during the discussion were: The issuer’s economic fundamentals, including its economic strength, have improved. The issuer has become less susceptible to event risks.
The principal methodology used in this rating was Sovereign Bond Ratings published in September 2013. Please see the Credit Policy page on http://www.moodys.com for a copy of this methodology.