TEXT-Fitch revises Netherlands outlook to negative, affirms at 'AAA'
Feb 5 - Fitch Ratings has revised the Outlooks on the Kingdom of the Netherlands' ratings to Negative from Stable. At the same time the agency has affirmed the Long-term foreign and local currency Issuer Default Ratings (IDR) at 'AAA'. Fitch has also affirmed the Netherlands' Country Ceiling at 'AAA' and Short-term foreign currency IDR at 'F1+'. RATING RATIONALE The rating actions reflect the following key factors: The Outlook revision to Negative from Stable reflects Fitch's view that the leveraged Dutch economy has suffered a number of shocks. Firstly, house prices are declining at a rapid pace and the housing market correction is sharper than what the agency previously expected; Fitch has revised its projected peak-to-trough decline to 25% from 18%. This will continue to weigh heavily on household consumption and consumer confidence. Secondly, as highlighted by last week's nationalisation of SNS Bank N.V., some banking system problems persist, with three of the four major banks having faced severe financial difficulties and needing external support since 2008. Thirdly, the level of public debt (expected to peak at 77% of GDP) is higher than most 'AAA' peers, which reduces fiscal policy options, and the economy has performed worse than Fitch previously expected. Fitch's affirmation of the Netherlands' 'AAA' sovereign rating is underpinned by the country's flexible, diversified, high-value-added and competitive economy as well as its current account surpluses and positive net international investment position. The credit profile also benefits from strong domestic institutions, a track record of sound budgetary management and historically broad public and political consensus in support of fiscal discipline. The general elections in September 2012 were won by the centre-right VVD party and the Labour Party. Despite the different political views on economic issues, the two parties are both strongly pro-European and finalised a coalition deal on 5 November 2012. The new government's medium-term fiscal package includes a mixture of revenue-raising measures and public-spending cuts aimed at achieving budget savings of EUR16bn (2.6% of GDP) by 2017. The bulk of savings will be made through reductions in healthcare and social security spending. The government's multi-year fiscal consolidation plan is challenged by the difficult economic conditions. The economy has performed worse than Fitch previously expected. The 2013 budget deficit target of 3% of GDP is based on an assumption of 0.7% real GDP growth. Fitch expects a real GDP contraction of 0.5% in 2013 which would result in a budget deficit of 3.4% of GDP. The recent nationalisation of SNS will cause a further one-off deterioration of 0.6pp of GDP in the 2013 budget. Fitch expects the government will not adopt additional fiscal measures and it therefore expects a general government deficit of 4% of GDP in 2013. Fitch does not see the nationalisation of SNS Bank by itself as sufficient to trigger a downgrade of the Netherlands' sovereign rating. The operation will add 1.6pp of GDP to the 2013 public debt level which Fitch projects at 74.4% of GDP. The housing market correction is sharper than what the agency previously expected. As a result, in December Fitch revised downwards its house price expectations for the Netherlands. The current trend of around 5%-7% annual correction in Dutch house prices is expected to continue until mid-2014, when house prices are expected to bottom out. With household debt at 130% of GDP, one of the highest in the EU, the weaker housing market outlook is likely to put additional drag on private consumption due to negative wealth effects. Gross fixed investment (which has contracted for three consecutive quarters) will also weaken in 2013. Fitch expects net trade to remain the only driver of real GDP growth in 2013-14. Recovery in eurozone trading partners will be key to the Dutch economic growth prospects. Fitch expects GDP to contract by 0.1% in the eurozone in 2013 before a recovery of 1.2% in 2014. The recessionary environment will make reform implementation and fiscal policy more challenging. Moreover, downside risks are elevated. In the event of a weaker macroeconomic outlook relative to Fitch's baseline, the impact on public finances and bank asset quality would be more severe. RATING SENSITIVITIES The main factors that could lead to a negative rating action are: - Significant fiscal easing that resulted in government debt peaking later and higher than forecast, or adverse shocks that implied higher government borrowing and debt than projected - A material deviation from our housing market baseline which would have a negative impact on economic activity and, in turn, on the public finances. - Prolonged economic stagnation and rising unemployment - A sizeable increase in banking sector support with a knock-on effect on public debt dynamics The main factor that could lead to a stabilisation of the Outlook is: - A less severe house price correction relative to our baseline could have a positive impact on GDP growth and fiscal metrics. - Faster than expected stabilisation in public debt/GDP ratio - Improvement in the economic outlook for the eurozone KEY ASSUMPTIONS Fitch assumes that contingent liabilities arising from the SNS nationalization will have a one-off impact in 2013. Moreover, the agency is not factoring additional support to the banking sector in its debt sensitivity analysis from 2014 onwards. At the end of 2011 Dutch banks which received support in 2008 repaid a sizeable part of their loan to the sovereign (9.3pp of GDP out of total support of 14.1pp of GDP). However, the rating is sensitive to policy actions that would materially increase public debt and/or contingent liabilities arising from any contribution to eurozone bail-out funds and state intervention in the domestic economy. In its debt sensitivity analysis, Fitch assumes a trend real GDP growth rate of 1.5%, GDP deflator of 1.9% and an average primary budget deficit of 0.7% of GDP over the period 2012-21. Under these assumptions, public debt peaks at 77% of GDP in 2016 at a higher level than previously assumed (74% of GDP in 2016) and declines from its current level to 73% of GDP in 2021. Under a growth stress scenario (0.4% potential growth), public debt would peak at 82% of GDP in 2019. Under an interest-rate stress scenario, the debt/GDP ratio would peak in 2018 (two years later relative to the baseline) at a higher level (78.6% of GDP). Only a scenario with no fiscal consolidation (primary deficit of 2.5% of GDP in the medium-term) would lead to an explosive debt trajectory with the debt/GDP ratio reaching 90% by 2020. Fitch assumes there will be progress in deepening fiscal and financial integration at the eurozone level in line with commitments by eurozone policy makers. It also assumes that the risk of fragmentation of the eurozone remains low. Additional information is available on www.fitchratings.com. The ratings above were unsolicited and have been provided by Fitch as a service to investors. Applicable criteria, 'Sovereign Rating Methodology', dated August 2012, are available at www.fitchratings.com. Applicable Criteria and Related Research: Sovereign Rating Methodology