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Fitch Affirms the Netherlands at 'AAA'; Outlook Stable
April 28, 2017 / 8:05 PM / 7 months ago

Fitch Affirms the Netherlands at 'AAA'; Outlook Stable

(The following statement was released by the rating agency) LONDON, April 28 (Fitch) Fitch Ratings has affirmed the Netherlands' Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'AAA' with Stable Outlooks. The issue ratings on the Netherlands' senior unsecured local currency bonds have been affirmed at 'AAA'. Fitch has also affirmed the Short-Term Foreign- and Local-Currency IDRs at 'F1+' and Country Ceiling at 'AAA'. KEY RATING DRIVERS The 'AAA' ratings reflect the Netherlands' diversified, high value-added and flexible economy. The current account surplus has averaged more than 9% of GDP since 2011, supporting a strong net international investment position. The Netherlands has a high degree of financing flexibility, underpinned by its status as a core eurozone sovereign issuer with deep capital markets. General government debt, at 62% of GDP at end-2016, is above the 'AAA' median of 42% but on a firm downward path. Economic recovery drove a large fiscal outperformance in 2016. The general government balance moved from a deficit of 2.1% of GDP in 2015 to a surplus of 0.4% last year, exceeding the target by 1.5pp. Tax and social security revenues/GDP increased by 1.4pp, half of which was due to a jump in corporate tax receipts on the back of higher profits, depletion of deferred tax assets and greater pre-payments. Expenditure fell to 43.6% of GDP from 45.3% in 2015 helped by lower unemployment and debt interest costs, as well as a temporary reduction in EU payments. Fitch forecasts a moderate increase in the general government surplus to 0.8% of GDP in 2017, and 0.5% in 2018. This balances a boost from further positive labour market dynamics and lower debt interest costs, with expectations of a moderate fiscal loosening by the incoming administration. General government debt fell to 62.3% of GDP in 2016, from 65.2% in 2015, 0.6pp of which was a stock-flow adjustment reflecting sale of financial assets. We forecast a further fall in government debt to 59.1% of GDP this year. Stronger fiscal outturns over the last year give us greater confidence in the sustainability of moderate primary surpluses. According to our long-term sustainability analysis, debt falls below 50% of GDP in 2022. Strengthening domestic demand and a resilient export performance drove GDP growth of 2.2% in 2016, from 2.0% in 2015. Unemployment has fallen faster than expected, to 5.1% in March 2017 from 6.4% a year earlier. Fitch forecasts GDP growth of 2.2% in 2017, moderating to 1.8% in 2018 partly due to the impact of higher inflation on spending. Weaker external demand represents a key downside risk to the export-dependent Dutch economy, including from any Brexit-related slowdown given its direct trade and investment links with the UK. Longer term, we expect GDP growth to converge to a trend rate of around 1.4%. The recovery in house prices continues, reinforcing a positive feedback loop with private consumption and reducing contingent liability risks. Prices rose 7.3% in March 2017 from a year earlier, although still 8.6% below their pre-recession peak and with some large geographical variations. The share of homeowners in negative equity has fallen to around 20% from a high of close to 35%. Credit risks from the National Mortgage Guarantee scheme have also reduced, and total payouts from the scheme fell by 36% in 2016. Average mortgage rates have continued to fall, helping to support affordability, and conditions look set for further house price rises. The current account surplus moderated to 8.4% of GDP in 2016, from 8.7% in 2015, due to a 0.8% of GDP deterioration in the primary income balance. The surpluses reflect sustained export competitiveness, a high savings rate further supported by some precautionary household deleveraging and greater pension contributions, large corporate retained earnings, and a marked fall in investment after the financial crisis. Fitch forecasts lower surpluses of 8.2% of GDP in 2017 and 7.8% in 2018 due to lower natural gas production and strengthening domestic demand, which still compares favourably with the 'AAA' median of 6.4%. The banking sector is similarly benefiting from the strengthening economy. Tier 1 capital rose to 17.8% of risk-weighted assets at end-2016 from 16.2% a year earlier, and the non-performing loan ratio edged down to 2.5% in 4Q16 from 2.7% in 4Q15. Net interest margins declined somewhat in 2016 and Fitch expects further pressure on profitability, which is the key challenge for the sector. More broadly, sustained ultra-low interest rates could have significant impacts on the Dutch economy given large net household savings, and parts of the insurance and pension sectors have been under somewhat greater strain. The wider dispersion of parliamentary seats after March's election makes formation of an effective coalition more challenging. A four-party coalition headed by Prime Minister Mark Rutte's centre-right VVD looks the most likely outcome. A number of different tie-ups remain possible, although there appears little chance that the right-wing, Eurosceptic PVV will form part of the government. Negotiations could be protracted, and there is a risk of a weaker or more unstable government that does not see out a full term. However, we do not expect a marked shift in the direction of economic and fiscal policy. More generally, the Netherlands' ratings benefit from the country's strong institutions, reflected in World Bank governance indicator scores in line with the 'AAA' median. SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns the Netherlands a score equivalent to a rating of 'AAA' on the Long-Term Foreign-Currency IDR scale. Fitch's sovereign rating committee did not adjust the output from the SRM to arrive at the final Long-Term Foreign-Currency IDR. Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a Long-Term Foreign-Currency IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable or not fully reflected in the SRM. RATING SENSITIVITIES The Outlook is Stable. Consequently, Fitch's sensitivity analysis does not currently anticipate developments with a high likelihood of leading to a rating change. However, future developments that could, individually or collectively, result in negative rating action include: -Weak economic growth or fiscal easing that reverses the downward trajectory in public debt. -Crystallisation of sizeable contingent liabilities, for example from the national mortgage/social housing guarantee schemes, or eurozone bail-out packages. KEY ASSUMPTIONS -Fitch's long-term debt sustainability analysis assumes a primary fiscal surplus averaging 0.9% of GDP from 2017-2026, trend real GDP growth of 1.4%, a steady increase in marginal interest rates, and a GDP deflator converging to 1.8%. -Future asset sales of state-owned bank holdings are likely, but their timing and size are unclear. Fitch has incorporated a debt reducing adjustment of 0.3% of GDP in 2017 (half the 2016 amount) partly reflecting financial asset sales already executed in 2017. Beyond this, we do not assume any debt-reducing transactions or any additional sovereign support to the banking sector in our projections for government debt. Contact: Primary Analyst Douglas Winslow Director +44 20 3530 1721 Fitch Rating Limited 30 North Colonnade London E14 5GN Secondary Analyst Eugene Chiam Director +44 20 3530 1512 Committee Chairperson Paul Gamble Senior Director +44 20 3530 1623 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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