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+'.
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
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.
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
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
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
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
Additional information is available on www.fitchratings.com.
The ratings above were unsolicited and have been provided by Fitch as a service
Applicable criteria, 'Sovereign Rating Methodology', dated August 2012, are
available at www.fitchratings.com.
Applicable Criteria and Related Research:
Sovereign Rating Methodology