Fitch Affirms The Netherlands at 'AAA'; Outlook Negative

Tue Aug 20, 2013 12:59pm EDT

LONDON, August 20 (Fitch) Fitch Ratings has affirmed The Netherlands' Long-term foreign and local currency Issuer Default Rating (IDRs) at 'AAA'. The Outlook is Negative. At the same time, the agency has affirmed The Netherlands' Short-term foreign-currency IDR at 'F1+' and the Country Ceiling at 'AAA'. KEY RATING DRIVERS The affirmation reflects the Netherlands' strong underlying economic, institutional and credit fundamentals, including its consistent current account surpluses and positive net international investment position, as well as its strong financing flexibility. The Outlook remains Negative due to the worsening public debt dynamics, although they remain within the tolerance for a 'AAA' rating, and the persistent economic recession related to high household indebtedness and declining house prices. The affirmation of the Netherlands' 'AAA' rating reflects the following key rating drivers: - 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. However, recently such political consensus has proved more fragile. - Fitch judges financing risk to be very low reflecting an average debt maturity of seven years, low borrowing costs and strong financing flexibility underpinned by its status as a core eurozone sovereign issuer, with deep capital markets. - The banking sector has so far been resilient to the sharp housing market decline. The Dutch National Bank (DNB) estimates that around 25% of mortgages are in negative equity due to the fall in house prices. However, this has not been accompanied by significant asset quality deterioration. - The Dutch government has initiated reforms in the housing market. Although the reforms are being phased in gradually, they are a first attempt to address the imbalances in the housing market. - The government has taken substantial steps to address the area of pension reform. The long-term sustainability of the pension system has been strengthened through an increase in the retirement age from 65 years in 2012 to 67 in 2021, after which the retirement age will be linked to changes in life expectancy. According to the EC, projected pension expenditure increases will be reduced by 1.8pp of GDP up to 2060 relative to the projections of the EC's 2012 Ageing Report and will remain only slightly above the EU average (1.7pp vs 1.4pp of GDP). - The intensity of the eurozone crisis has eased over the past 12 months reflecting progress with country fiscal and reform plans and policy enhancements at the EU level, including the ECB's Outright Monetary Transactions (OMT) and gradual steps towards banking union. Nevertheless, in Fitch's view the eurozone crisis is not over and potential contingent liabilities arising from the crisis remain material. The maintenance of a Negative Outlook on The Netherlands' foreign and local currency IDRs reflects the following factors: - Public debt dynamics are worsening, although they remain within the tolerance for a 'AAA' rating. Fitch now forecasts general government gross debt (GGGD) to peak at 80% of GDP in 2018 and decline only slowly over the medium-term, remaining at 78% of GDP by 2020. This compares with Fitch's previous projections in February 2013 of GGGD peaking at 77% of GDP in 2016 (and 74% in June 2012) and declining to 74% of GDP by 2020. A debt ratio that is higher for longer reduces the fiscal space to absorb future adverse shocks. - Economic output and forecasts are weaker than when Fitch revised the Outlook to Negative in February 2013. The unemployment rate has also risen to a 17 high of 6.8% in June 2013. The weaker economic outlook is the primary factor behind increases in the budget deficit and The Netherlands remaining in the EU's Excessive Deficit Procedure for a year longer. Fitch expects the Dutch economic recovery to be slow, owing to headwinds from household deleveraging, declining house prices, and fiscal consolidation. The agency's latest forecasts are for GDP to contract by 1.3% in 2013 and to stagnate in 2014. However, a strengthening economic recovery in the eurozone represents some potential upside risk to these forecasts if momentum from improved Q213 GDP data is maintained. - The Dutch household sector's high leverage is proving to be the economy's main structural weakness. The unwinding of these large domestic imbalances is particularly challenging, limiting significantly the economy's shock absorbing capacity. Dutch households are highly leveraged, mainly reflecting the tax-deductibility of mortgage interest payments that has led to high loan-to-value ratios. Gross household debt to income is substantially higher in the Netherlands relative to the eurozone average. However, gross household debt (130% of GDP) is more than offset by gross household financial assets equal to twice the debt. - Despite the positive net household asset position, the deleveraging and uncertainty related to changes in housing policies has led to sharp house price declines since 2008, weighing heavily on economic activity, although Fitch anticipates that the majority of the correction has already occurred and that house prices will bottom in mid-2014. To date the strong net worth position of Dutch households has been unable to mitigate the negative wealth effects arising from the decline in house prices, reflecting the relatively low liquidity of individuals' financial assets. - Banks are exposed to the real estate sector and strongly reliant on wholesale funding. The interplay of household and bank balance sheets through house prices has created a negative feedback loop which is amplifying the falls in house prices and declining confidence levels. However, Fitch views the Dutch banking sector as robust and does not anticipate material asset quality problems that could lead to a requirement for additional government support for the sector. - There is significant uncertainty around the government's fiscal plans for 2014-15. As of August 2013, it is still not known whether the government will adopt a EUR6bn (1% of GDP) fiscal package as part of the 2014 budget (to be announced in the third week of September). Uncertainty around fiscal policy coupled with the decline in house prices is weighing heavily on business and consumer confidence. RATING SENSITIVITIES The Negative Outlook reflects the following risk factors that may, individually or collectively, result in a downgrade of the ratings: - Material upward revision in Fitch's forecasts for the peak in the GGGD/GDP ratio relative to the current baseline (peak of 80% of GDP in 2018) - Material weakening in macroeconomic projections, for example caused by further deterioration in the housing market - Crystallisation of substantial amounts of contingent liabilities arising from a range of potential sources, including the banking sector, the Nationale Hypotheek Garantie (NHG) mortgage guarantee scheme or eurozone bail-out packages - Continued policy uncertainty undermining confidence in fiscal and economic policy prospects. Future developments that may, individually or collectively, lead to the Outlook being revised to Stable include: - Signs of stabilisation in the housing market and a subsequent pick-up in economic activity. - Greater confidence that the GGGD/GDP ratio will stabilise and be placed on a downward path over the medium term. KEY ASSUMPTIONS Fitch forecasts the Dutch economy to contract by 1.3% in 2013, stagnate in 2014 and grow by 1% in 2015. There is uncertainty around the government's fiscal plans which complicates the economic forecast for 2014. In its forecast, Fitch has assumed that the EUR6bn (1% of GDP) package will be adopted Fitch assumes that contingent liabilities arising from the nationalization of SNS Reaal and its banking subsidiary SNS Bank 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 loans to the sovereign (9.3% of GDP out of total support of 14.1% of GDP). In its debt sensitivity analysis, Fitch assumes an average primary deficit of 0.6% over 2012-21 and potential growth of 1.2% from 2016 onwards. Our baseline in February assumed potential growth of 1.5% and an average primary deficit of 0.7%. On our baseline the Dutch government would only run a primary budget surplus in 2019. Fitch assumes that the Dutch sovereign will continue to access market funding at low interest rates. Under Fitch's Sovereign Rating Criteria and model, eurozone sovereigns are assessed to have a somewhat lower debt tolerance for a given rating than non-EMU peers with their own reserve currencies and national central banks willing and able to intervene in sovereign debt markets. Furthermore, Fitch assumes there will be progress in deepening fiscal and financial integration at the eurozone level in line with commitments by euro area policy makers. It also assumes that the risk of fragmentation of the eurozone remains low. Contact: Primary Analyst Michele Napolitano Director +44 20 3530 1536 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Gergely Kiss Director +44 20 3530 1425 Committee Chairperson Tony Stringer Managing Director +44 20 3530 1219 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email:; Christian Giesen, Frankfurt am Main, Tel: +49 69 768076 232, Email: Additional information is available on Applicable criteria, 'Sovereign Rating Criteria' dated 13 August 2012 and 'Country Ceilings' dated 09 August 2013, are available at Applicable Criteria andALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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