(The following statement was released by the rating agency)
Jan 15 -
Summary analysis -- Netherlands (The) (State of) (Unsolicited ----- 15-Jan-2013
CREDIT RATING: AAA/Negative/A-1+ Country: Netherlands
Primary SIC: Sovereign
Credit Rating History:
Local currency Foreign currency
27-Jul-1992 AAA/A-1+ AAA/A-1+
01-Oct-1988 --/-- AAA/A-1+
The ratings reflect Standard & Poor's Ratings Services' view of The Netherlands' prosperous, diversified, and competitive economy, visible in its strong net external position and high per capita GDP. The ratings also reflect our view of its long track record of prudent and flexible macroeconomic policy.
We consider the Dutch economy to be highly competitive and productive, with GDP per capita of $47,000 (EUR36,900) in 2012, and, despite rising layoffs since 2011, one of the lowest unemployment levels in the EU, at 5.6%. The Dutch economy is also an open one, with exports of goods and services accounting for 85% of GDP in 2012. Competitiveness of the Dutch economy is supported by a highly productive workforce and well-developed physical infrastructure. Driven by healthy trade surpluses, we expect the Dutch current account surplus to average just under 9% of GDP between 2012-2015. Strong current account surpluses have led to the accumulation of significant external assets in the private sector (in particular, in the form of assets of pension funds and insurance companies). We estimate that The Netherlands' net internal investment position will reach a positive 40% of GDP in 2012. We expect general government net debt to continue to rise gradually to reach 66% of GDP, from 62% in 2012, as fiscal deficits remain close to 3% and economic growth remains sluggish at an average of less than 1% per year in 2013-2015, in our view.
As a result of the general elections on Sept. 12, 2012, the centre-right VVD party of Prime Minister Mark Rutte emerged as the strongest party, closely followed by the Labor Party. On November 5, the two parties formed a majority coalition. The government's multiyear fiscal package is targeting budget savings of EUR16 billion (2.6% of GDP) by 2017, mainly by reducing healthcare spending, which should lower the fiscal deficit to 3% of GDP in 2013 from 3.7% in 2012.
We believe the risks of fiscal slippage could rise substantially should this year's economic growth fall significantly below our current assumption of 0.3%. Despite significant pension and insurance savings, in gross terms Dutch households are highly indebted, which in our view makes them vulnerable to valuation and liquidity risk. The continuing decline in house prices and the uncertain external environment are pushing up precautionary savings, hence weighing on domestic consumer demand. As in much of the European Economic and Monetary Union (EMU or eurozone), net exports continue to be the sole positive contributor to GDP performance. In our view, the final fiscal outcome will be contingent on overall growth in the highly open Dutch economy, which is highly exposed to its eurozone partners via trade and financial channels and is therefore vulnerable to potentially sizable exogenous shocks (see "The Eurozone Enters An Uncertain 2013 As The New Recession Drags On," published on Dec. 13, 2012). Furthermore, in our opinion the political response to fiscal slippages may be complicated by a significant decline in government popularity among the population since the elections, as suggested by recent opinion polls.
We estimate external debt, net of liquid external assets (narrow net external debt), at 150% of current account receipts (CARs) in 2012, which primarily reflects the relatively high level of external leverage in the banking sector. The amount of bank debt maturing over the next year remains large, with about 50% of total banking system external debt classified as short term. At the same time, however, the Dutch central bank's Target 2 surplus with the European Central Bank, while down from its peak in summer 2012, remains high at EUR119 billion (19% of GDP) at end-November 2012, suggesting domestic banks have repatriated funds to bolster their liquidity. Compared with most of their eurozone peers, we consider that Dutch banks appear to have maintained better access to external funding during the crisis. That said, we see increasing domestic risks for the banking sector, as reflected in our revision of the Banking Industry Country Risk Assessment (BICRA) for The Netherlands on Nov. 16, 2012, to group '3' from group '2' (see "Banking Industry Country Risk Assessment: The Netherlands"). We expect ongoing pressure on the private sector as a result of the continued price correction in the Dutch property market, dampening consumer confidence, the recessionary conditions in the eurozone, and measures to reduce the budget deficit. However, the overall impact should, in our view, be relatively limited.
The negative outlook reflects our view that there could be a more negative macroeconomic scenario, connected to possible pressures on the Dutch financial sector and the broader Dutch economy caused by the potential for a sharper than currently projected decline in domestic demand and a weakening external environment.
We could lower the ratings if we see that public finances deviate significantly from the consolidation path over 2013-2015. This could occur if there is a prolonged and more severe decline in economic activity than we currently envisage, or if political commitment to a gradual stabilization of public debt levels were to weaken. A need for the government to provide material capital support to banks or any other crystallization of contingent liabilities exceeding 10% of GDP could place pressure on the ratings.
Alternatively, if we see a significant worsening of Dutch banks' external position or difficulties in their refinancing maturing debt, we could lower The Netherlands' external score, which might also lead to lowered ratings.
Conversely, the ratings could stabilize at this level if we see that sustained external pressures within the eurozone and the domestic housing price correction do not significantly depress growth and fiscal performance in The Netherlands, enabling it to continue to consolidate public finances and preserve its traditionally strong external position.
Related Criteria And Research
-- Sovereign Government Rating Methodology And Assumptions, June 30, 2011
-- Criteria For Determining Transfer And Convertibility Assessments, May 19, 2009
-- Economic Research: Economic Outlook For The Netherlands: The Housing Market Slump Is Dampening Consumer Demand, May 21, 2012
-- No Pain, No Gain: How The Housing Market Correction Is Affecting Dutch Banks, June 27, 2012
-- Banking Industry Country Risk Assessment: Netherlands, Nov, 16, 2012
-- The Eurozone Enters An Uncertain 2013 As The New Recession Drags On, Dec. 13, 2012
-- The Eurozone Debt Crisis: 2013 Could Be A Watershed Year, Jan. 10, 2013
-- The Netherlands 'AAA/A-1+' Ratings Affirmed; Outlook Negative, Jan. 14, 2013