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Fitch Affirms the Netherlands at 'AAA'; Outlook Stable
October 27, 2017 / 8:04 PM / 22 days ago

Fitch Affirms the Netherlands at 'AAA'; Outlook Stable

(The following statement was released by the rating agency) LONDON, October 27 (Fitch) Fitch Ratings has affirmed the Netherlands' Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'AAA' with a Stable Outlook. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS The Netherlands' 'AAA' rating is supported by a high value-added, flexible and diversified economy, and effective institutions as reflected in World Bank governance indicators in line with the peer group median. A large current account surplus, averaging 9.4% of GDP between 2012-16, supports 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 61.8% of GDP at end-2016, is above the 'AAA' median of 41.4% but on a firmly downward path. Fitch forecasts a slightly above-target cyclical improvement in the 2017 general government surplus to 0.8% of GDP, from 0.4% last year, driven by higher-than-budgeted tax revenues on the back of buoyant GDP growth, alongside a further 0.1pp fall in debt interest costs. This follows an improvement in the 2016 general government balance of 2.5% of GDP (or 1.7% on a structural basis, using European Commission methodology), helped by a surge in corporate tax receipts. As expected, the new government has announced a moderately expansionary, pro-cyclical fiscal plan. This comprises a EUR7.9 billion expenditure increase and a EUR6.6 billion tax cut mainly on labour and income, phased in over 2018-2021. The direct impact of the new measures has been estimated by the Netherlands Bureau for Economic Policy Analysis at -0.6pp of GDP in 2018, with a further -0.2pp in 2019 and -0.7pp in 2020. Fitch forecasts a small reduction in the 2018 general government surplus to 0.6% of GDP, followed by 0.7% of GDP surplus in 2019. Economic recovery, the return to fiscal surplus, and large negative stock-flow adjustments (totalling 5.0% of GDP between 2014-16) have seen general government debt fall from a peak of 67.9% of GDP in 2014 to a forecast 57.9% at end-2017. Under our debt sensitivity projections, which assume a gradual narrowing of the primary surplus from 1.7% of GDP this year to 0.5% in 2026, public debt falls to 49.4% of GDP in 2021 and to 43.7% in 2026. Stronger fiscal outturns over the last 18 months give us greater confidence in the sustainability of moderate primary surpluses. GDP growth accelerated sharply in 1H17, and Fitch forecasts a full-year rise of 3.2%, up from 2.2% in 2016. Growth is broad-based, with private consumption helped by a fall in unemployment to 4.7% in August from 5.7% a year earlier, higher investment on the back of strong confidence and corporate profits, and net exports making a more positive contribution. Fitch forecasts a moderation in GDP growth to 2.4% in 2018 and 1.8% in 2019 (in line with the 'AAA' median of 2.1% over 2018-19) as economic slack is absorbed, investment growth cools, and external demand softens somewhat, more than offsetting the fiscal stimulus. We assess trend growth at close to 1.4%. HICP inflation was 1.4% in August with core inflation somewhat more muted at 1.0%, and only gradual upward pressure on wages. The recovery in house prices continues, up 7.3% in the year to September (but with large regional variations), strengthening the positive feedback loop with domestic demand growth. In aggregate, house prices are still around 5% below their pre-crisis peak, and further increases are expected partly due to supply constraints and lower effective mortgage rates. Credit risks to the sovereign from the National Mortgage Guarantee Scheme have also reduced in line with the housing market recovery. We forecast another large current account surplus in 2017, of 9.1% of GDP, from 9.0% in 2016, underpinned by strong trade competitiveness, reflected in the Netherlands' growing export market share. Despite a 3.3% appreciation in the real effective exchange rate over the last six months, the 1H17 trade balance improved, as did factor income. The structural surplus is also supported by a high savings rate partly due to large corporate retained earnings, and to a drop in the investment rate following the financial crisis. We forecast a moderation in the current account surplus, to 8.6% of GDP in 2019, due to a reduction in natural gas production and further high import growth, but still above the peer group median of 5.2% of GDP. The Dutch banking sector, on which we have a stable outlook, continues to benefit from the supportive economic conditions. The sector has sound funding and capital, with CET1 further increasing to 16.1% of risk-weighted assets at end-2Q17, from 15.7% six months earlier, while the non-performing loan ratio has remained broadly flat at 2.4%. Profitability remains the key challenge but we expect that the focus on costs and non-interest income sources, as well as cyclically very low loan impairment charges, will partly offset further pressures on interest margins. More generally, sustained ultra-low interest rates could have a significant negative impact on the Dutch economy given large net household savings. The newly-formed government comprises a broad, four-party coalition, again headed by Prime Minister Mark Rutte's centre-right VVD, with a majority of just one. The Netherlands has a long history of coalition government, but the current degree of fragmentation is unusually high, and there is a risk of a weaker or more unstable government that does not see out a full term. As expected, the coalition negotiations were protracted, taking almost seven months to conclude. Early policy announcements support our view that there will be broad continuity in overall macroeconomic policy, alongside the moderate fiscal loosening. 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 and/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 1.0% of GDP from 2017-2026, a steady increase in marginal interest rates, trend real GDP growth of 1.4%, 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 0.9% of GDP in 2017, of which 0.5pp is for sale of financial assets (in line with the Draft Budgetary Plan). Beyond this, we do not assume any debt-reducing financial transactions or any additional sovereign support to the banking sector in our projections for government debt. The full list of rating actions is as follows: Long-Term Foreign-Currency IDR affirmed at 'AAA'; Outlook Stable Long-Term Local-Currency IDR affirmed at 'AAA'; Outlook Stable Short-Term Foreign-Currency IDR affirmed at 'F1+' Short-Term Local-Currency IDR affirmed at 'F1+' Country Ceiling affirmed at 'AAA' Issue ratings on long-term senior-unsecured local-currency bonds affirmed at 'AAA' 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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