Fitch Affirms The Netherlands at ‘AAA’ status
Fitch Ratings has affirmed The Netherlands’ Long-Term foreign and local currency Issuer Default Ratings (IDRs) at ‘AAA’. The Rating Outlooks on both Long-term ratings is Stable. Fitch has simultaneously affirmed The Netherlands’ country ceiling at ‘AAA’ and its Short-term foreign currency IDR at ‘F1+’.
The Netherlands’ sovereign ratings are underpinned by its flexible, diversified, high-valued and competitive economy as well as 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.
Despite the fall of the government in April and pending general elections, the minority coalition and three-opposition parties were able to secure agreement on a deficit-reduction plan in line with the Netherlands’ commitments under the Stability and Growth Pact. This has eased concerns that there would be a prolonged period without a credible plan to ensure that the budget deficit is brought below 3% of GDP consistent with stabilising the government debt to GDP ratio.
The Stable Rating Outlook reflects Fitch’s assessment that the Netherlands ‘AAA’ status remains resilient to the eurozone crisis despite the recent increase in policy risks, a weaker fiscal adjustment and the additional government debt incurred by the Dutch government’s contribution to eurozone rescue funds and ‘bail-out’ programmes in 2011.
Nonetheless, a dramatic worsening of the eurozone crisis could have a severe adverse impact on the Netherlands’ small and open economy and potentially bring downward pressure on the rating.
Furthermore, there is significant uncertainty around the medium-term fiscal outlook. Policy risk has increased following the collapse of the ruling coalition in April 2012. In the context of the eurozone crisis, the increase in policy risk this year is a negative development.
The Dutch economy is already slowing markedly. It has contracted for three consecutive quarters and Fitch expects it to contract by 0.7% for the whole of 2012, on the back of a weakening of both domestic and external demand. The return to recession will have an adverse effect on government spending and receipts.
While this year’s deficit will be in excess of the 3% Maastricht reference value, it is not inconsistent with the Netherlands’ current ‘AAA’ rating. In Fitch’s view, the deterioration in public finances remains more than offset by the solid economic fundamentals. Moreover, Fitch expects that the additional consolidation measures agreed under the five-party agreement (the “budget agreement”) following the fall of the government will help reducing the deficit below 3% by 2013.
Fitch’s projections assume full implementation of the measures agreed under the budget agreement in April 2012. Fitch’s baseline is that the election outcome will not disrupt the medium-term objective of fiscal policy, which is to realise a balanced central government budget and stabilise the public debt ratio. Should post-election fiscal policy significantly deviate from this baseline, this could have negative rating implications.
The Netherlands’ fiscal credibility is an important rating factor. The government collapse back in April 2012 did increase uncertainty around the fiscal outlook. Fitch has taken the view that the budget agreement has signalled that a broad political consensus around fiscal policy still exists. Nevertheless, a key challenge facing a new government following elections in September will be to set out a credible multi-year fiscal consolidation programme that incorporates the impact of aging and what is likely to be period of prolonged low economic growth.
The banking sector is overall sound and has limited exposures to troubled eurozone economies limiting the macro-financial risks arising from the crisis. Nevertheless, weak domestic economic activity is constraining banks’ profitability. The banks’ heavy reliance on confidence-sensitive wholesale funding implies that risks remain, particularly at a time of heightened financial volatility.
Over the medium-term, the Dutch economy faces a number of challenges as the housing market adjustment constrains private consumption and an ageing population puts pressure on the public finances. Past pension reforms, such as disincentives to early retirement and changing the basis of pension payments from final to average salaries, have already had an impact. However, further measures (a rise in retirement age) are also part of the budget agreement and appear necessary to ease the pressure on pension funds’ coverage ratios.
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