Fitch Revises Outlook on The Netherlands to Stable; Affirms at 'AAA'

Fri Jul 11, 2014 4:12pm EDT

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Netherlands - Rating Action Report here LONDON, July 11 (Fitch) Fitch Ratings has revised the Outlook on The Netherlands' Long-term foreign and local currency Issuer Default Ratings (IDRs) to Stable from Negative and affirmed the IDRs at 'AAA'. The issue ratings on The Netherlands' senior unsecured foreign and local currency bonds have also been affirmed at 'AAA'. The agency has also affirmed The Netherlands' Short-term foreign-currency IDR at 'F1+' and the Country Ceiling at 'AAA'. KEY RATING DRIVERS The revision of the Outlook reflects the following key rating drivers and their relative weights: High The outlook for public finances has improved markedly since Fitch's previous review due to lower fiscal deficit forecasts and improved growth projections. Fitch estimates that gross general government debt will peak at 75% of GDP in 2014. This is earlier and at a lower level relative to our previous rating review in January 2014, which forecast a peak at 80% of GDP in 2018-19. In Fitch's view, public debt dynamics are within the tolerance of a 'AAA' rating. We consider 80%-90% (ie, within this range, not at 90%) is normally the upper limit of (projected) public debt/GDP compatible with retaining a 'AAA' rating, provided the ratio is then placed on a firm downward path and other fundamentals are of the highest credit quality. Medium The Netherlands' fiscal performance in 2013 exceeded Fitch's expectations. The general government deficit stood at 2.5% of GDP, below Fitch's estimate at the time of the last rating review (3.3% of GDP). Fitch expects the deficit to decline to 2% of GDP by 2015. Deficit reduction will be underpinned by a better outlook for private consumption feeding into stronger VAT-revenue growth, a decline in unemployment benefits expenditure and savings in the healthcare sector, mainly through the decentralisation of long-term care to local authorities. The Dutch economy is gradually recovering. Although real GDP declined by 0.6% qoq in 1Q14 (0% on an annual basis), the figures were distorted by one-off factors. GDP components and subsequent high-frequency indicators point to a broad-based gradual recovery. Fitch has revised upwards its forecasts for real GDP growth to 0.7% in 2014 and 1.4% in 2015 (from 0% and 1%). The revision for 2014 reflects stronger investment growth than previously expected, a smaller drag from fiscal policy in 2015-16 relative to the previous rating review, a more benign housing market outlook and a gradual pick-up in real disposable income. House prices bottomed out in 2H13, earlier than Fitch's previous baseline (mid-2014). Household consumption in the Netherlands was exceptionally weak in 2011-13 as high levels of mortgage debt, coupled with high loan-to-value ratios, made Dutch households particularly sensitive to swings in house prices. The negative wealth effect is now easing. The recent turnaround in the housing market has been mirrored by a pick-up in consumer confidence and a gradual improvement in private consumption growth. Fitch expects this trend to continue. There is reduced risk from contingent liabilities. In recent years Dutch banks have gradually improved their funding and capital positions. The risks from the eurozone crisis management mechanism, including the EFSF and ESM, have also eased owing to the actions of the ECB and the on-going economic recovery of the single currency area. The Netherlands' 'AAA' ratings also reflect the following key rating drivers: The flexible, diversified, high value-added and competitive economy benefits from strong domestic institutions, a track record of sound budgetary management and historically broad public and political consensus in support of fiscal discipline. Building this consensus has been more challenging of late, but political parties still achieved an agreement on the 2014 budget. The country has run consistent current account surpluses of 7%-10% of GDP and has a positive net international investment position. Fitch considers financing risk is low, reflecting an average debt maturity of seven years, low borrowing costs and strong financing flexibility underpinned by The Netherlands' status as a core eurozone sovereign issuer, with deep capital markets. The banking sector has been resilient to the prolonged housing market decline and Fitch expects it should remain so. The main problems for Dutch banks' asset quality are commercial real estate exposures and the SME segment. The former has been a concern, particularly following the nationalisation of SNS Bank in February 2013, and the latter has been hit by the extended period of weak economic conditions. However, Fitch does not expect these issues to be large enough to result in additional sovereign bail-outs. 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 a downgrade include: - Significant fiscal easing or growth underperformance, leading to the public debt ratio peaking higher and later. - Crystallisation of substantial contingent liabilities arising from a range of potential sources, including the banking sector (for example as a result of the ECB Comprehensive Assessment), the Nationale Hypotheek Garantie (NHG) mortgage guarantee scheme or eurozone bail-out packages. - Policy uncertainty, which could undermine confidence in fiscal and economic prospects. KEY ASSUMPTIONS Fitch assumes that the nationalisation of SNS REAAL and its banking subsidiary, SNS Bank, will have had a one-off fiscal impact in 2013. Moreover, the agency is not factoring additional sovereign support to the banking sector in its debt sensitivity analysis from 2014 onwards. Fitch assumes there will not be additional liabilities related to banks' recapitalisations as a result of the ECB's Comprehensive Assessment. Even in the event of additional capital requirements for Dutch banks, Fitch believes these will be manageable for the banks and will not result in material sovereign interventions. 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. There will be some changes in the fiscal figures from the shift to the new ESA2010 methodology. The public debt ratio in 2013 will decline to 68.6% of GDP from 73.5%. The budget deficit for 2013 will fall by 0.2ppt to 2.3% of GDP. Fitch will base its forecast on the new methodology from September when it is introduced across all countries in the EU. Fitch assumes the eurozone will avoid long-lasting deflation, such as that experienced by Japan from the 1990s. An extended period of deflation, resulting in no growth in nominal incomes, would slow down balance-sheet adjustment in the Dutch household sector and increase the risk of debt deflation. Fitch assumes the gradual progress in deepening fiscal and financial integration at the eurozone level will continue; key macroeconomic imbalances within the currency union will be slowly unwound; and eurozone governments will tighten fiscal policy over the medium term. 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 Richard Fox Senior Director +44 20 3530 1444 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, 'Sovereign Rating Criteria' dated 13 August 2012 and 'Country Ceilings' dated 09 August 2013, are available at www.fitchratings.com. Applicable Criteria and Related Research: Sovereign Rating Criteria here Country Ceilings here Additional Disclosure Solicitation Status here ALL 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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