Dagong Global Credit Rating Co., Ltd.
June 4, 2018
Dagong Global Credit Rating Co., Ltd. (hereafter referred to as “Dagong”) has decided today to maintain the local and foreign currency sovereign credit ratings of the Kingdom of the Netherlands (hereafter referred to as “the Netherlands”) at AA+, each with a stable outlook. The Netherlands faces eased political pressure at home with promising economic prospects. Structural adjustment to government finances has yielded some initial results, helping consolidate the basis of repayment sources and render government debt more secure. Hence, government solvency is stable.
The key reasons for maintaining the sovereign credit ratings of the Netherlands are below:
First, the Netherlands sees continuity of regime held by conventional parties, assuring a sound political ecology. The Dutch coalition government, as led by the country’s largest political party, the People's Party for Freedom and Democracy, has reached a consensus following prolonged negotiations over cabinet formation, thus the country’s political situation restores stability. However, the narrow majority underscores the fact that the governing coalition only exercises weak control over the parliament, and government might encounter obstruction when carrying out policies concerning finance-tax balance, and labor reform, among others. Moreover, the European Central Bank has adopted a quantitative easing policy and continues providing credit support for the Netherlands, rendering its banking system sound across the board. Nonetheless, there remain liquidity risks from mismatch between asset and liability maturities, while the long-standing low-rate environment brings banks’ profit structure under pressure as those banks feature traditional credit businesses.
Second, domestic demand will shore up moderate growth in the near term, while in the medium and long term, the Netherlands has certain growth potential. In the short term, adjusting income tax brackets, raising the minimum wage, as well as a consistently improved labor market will all help increase households’ disposable income, thus individual consumption remains strong. Although cutting corporate tax and abolishing dividend tax encourage private and foreign investment, yet property investment will be constrained by the fact that both housing property tax and deductions for mortgage interest relief suppress prices. Therefore, overall investment slightly slows down. Frequent earthquakes cause gas production in Groningen to decline year by year, which will ultimately dampen energy exports. Meanwhile, some uncertainty exists over external demand considering trade protectionism, thus providing less impetus for net export. It is forecasted that in 2018 and 2019, the Netherlands will register a growth rate of 3.2% and 2.4%, respectively. In the long term, the Netherlands’ industrial base and its obvious competitive advantage can somewhat offset the negative impact upon growth potential exerted by structural problems - including the limited growth of productivity, heavy corporate tax, as well as a rigid labor market, among others. It is projected that the Netherlands’ growth rate will average around 2.0% in the medium and long term.
Third, the country’s steady reduction in spending stabilizes financial surplus while repayment sources are secure at a high level. In the near term, direct cuts in tax rates render fiscal revenues limited, yet gradual improvements in social welfare bring about a steady reduction in fixed expenditures upon unemployment, education, and social assistance. It is expected that in 2018 and 2019, the Dutch general government fiscal surplus will expand to 1.4% and 1.5%, while the ratios of general government financing needs to fiscal revenues over the same period reach 12.3% and 8.9%, respectively. Moreover, the Netherlands’ financial assets cause the government’s net debt burden to amount to 36.1%. This trend, coupled with relatively low financing costs, and a comparatively great financing capacity internationally, renders government repayment sources sufficient and highly secure.
Fourth, government debt falls, thus solvency is stable. Owing to continuing fiscal surplus and extremely low financing costs, 2017 witnessed the general government debt burden fall below 60% following the outbreak of the euro debt crisis, and this falling tendency will remain in the near term. It is projected that in 2018 and 2019, general government debt will drop to 54.8% and 53.1%, while the ratios of the aforementioned debt to fiscal revenues are 125.2% and 121.4%, respectively. Besides, this debt is mainly long-term euro-denominated debt, thus government solvency is stable.
In the short term, the Netherlands’ political situation will tend towards stability. The country’s strong domestic demand stimulates steady growth, while fiscal surplus expands progressively, and repayment sources are sufficient. Additionally, considering the Netherlands’ relatively low financing needs, a continuing surplus in current account, and the position of a net creditor, government solvency is stable. Therefore, Dagong assigns a stable local and foreign currency sovereign credit rating outlook for the Netherlands for the following one to two years.