OREANDA-NEWS. Fitch Ratings has affirmed the Netherlands' Long-Term foreign and local currency Issuer Default Ratings (IDRs) at 'AAA' with a Stable Outlook. The issue ratings on the Netherlands' senior unsecured foreign and local currency bonds are also affirmed at 'AAA'. The Country Ceiling is affirmed at 'AAA' and the Short-Term foreign currency IDR at 'F1+'.

KEY RATING DRIVERS
The 'AAA' ratings reflect the Netherlands' high value-added, flexible, open and diversified economy. The net international investment position is strong, supported by current account surpluses above 9% of GDP since 2011. Improving economic conditions are helping to reduce balance sheet and financial risks. General government debt, at 65.1% of GDP, is significantly higher than the 'AAA' median of 43.3% but is forecast by Fitch to fall gradually.

The 'AAA' IDRs also reflect the following key rating drivers:

The Dutch economy continues to recover, with domestic demand driving GDP growth of 2.0% in 2015, up from 1.0% in 2014. Investment, which fell sharply during the recession, rose 7.2% last year, including housing investment growth of 27%. Private consumption increased 1.6%, benefitting from improving conditions in the housing and labour markets, with a positive feedback loop taking hold. Net exports made a small negative contribution to growth, and further weakness in global trade represents a key downside risk to the export-dependent Dutch economy.

Fitch forecasts GDP growth of 1.8% in both 2016 and 2017, with robust domestic demand offsetting a lower trade balance and a 0.2% of GDP drag from lower natural gas production. Private consumption will be further supported by income tax cuts taking effect this year, rising real contract wages, and employment growth. Fitch forecasts that the fall in unemployment will continue to be fairly gradual, with the unemployment rate averaging 6.2% in 2017, down from the peak of 7.9% in February 2014 but still well above the pre-crisis rate of near 4%. This is partly due to a substantial increase in the labour participation rate resulting from tax and benefits reform and the higher retirement age. Longer-term, Fitch forecasts that GDP will converge to a trend rate of around 1.4% as the current negative output gap closes.

The 2015 general government deficit was within target at 1.8% of GDP, down from 2.4% in 2014 as lower spending more than offset the fall in natural gas revenues. Expenditure reduced to 44.9% of GDP in 2015 from 46.2% in 2014, with lower health, social security, public administration and debt interest outlays. General government debt fell by more than expected to 65.1% of GDP in 2015, from 68.2% in 2014 due to stock-flow adjustments totalling 3.5% of GDP, including the unwinding of swaps and sale of a 20% stake in ABN Amro.

The 2016 budget targets a small reduction in the deficit to 1.7% of GDP, with a further fall in expenditure to 43.8% of GDP accommodating income tax cuts of 0.7% of GDP. In structural terms, the 2016 budget is more expansionary; based on European Commission methodology the deficit widens to 1.5% of GDP in 2016 from 0.9% in 2015, moving away from the 0.5% Medium-Term Objective of the Stability and Growth Pact.
Given earlier structural fiscal consolidation, Fitch considers the Netherlands has sufficient space to accommodate the planned moderate fiscal loosening in 2016 without jeopardising its declining debt trajectory. Fitch forecasts a narrowing in the general government deficit to 1.6% of GDP in 2016 and 1.4% in 2017, due to a combination of expenditure restraint and the positive effects of above-trend economic growth. According to Fitch's long-term debt sustainability analysis, general government debt will gradually fall, reaching the 60% Maastricht threshold in 2021.

The Netherlands has strong financing flexibility, underpinned by its status as a core eurozone sovereign issuer with deep capital markets and large domestic savings, and benefits from historically broad public and political consensus in support of sound fiscal policy.

Dutch exports are holding up well in the face of soft external demand, and grew in nominal terms by 2.2% in 2015. The trade surplus narrowed to an estimated 11.5% of GDP in 2015 from 12.0% in 2014 which, together with a fall in factor income, contributed to the current account surplus narrowing to 9.1% of GDP in 2015 from 10.6% in 2014. Fitch forecasts a trade-driven moderation in the current account surplus to 8.3% in 2017, which still compares favourably with the 'AAA' median of 6.4%. Net external debt is close to 15% of GDP, down from 41% in 2013 but above the rating peer median of -1% of GDP.

Contingent liability risks to the sovereign have declined in line with wider economic improvements. House prices have risen by close to 3% over the last year and 8% since mid-2013, having fallen 22% in the previous five years. The recovery in the housing market looks set to continue over the next two years, reducing expected liabilities from the National Mortgage Guarantee Scheme. The recovering economy also reduces risks from the banking sector, which overall has a good capital and funding position, and non-performing loans broadly in line with rating peers. The key challenge for the banking sector, on which Fitch has a stable outlook, is the pressure on profitability from low interest rate margins. More generally, a protracted period of ultra-low rates could lead to fairly large side-effects for the Dutch economy, given that household financial wealth is close to 3x GDP.

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 negative rating action include:
- Weak economic growth or further fiscal easing that reverses the forecast downward trajectory in public debt.
- Crystallisation of sizeable contingent liabilities, for example from the banking sector, the national mortgage/social housing guarantee schemes, or eurozone bail-out packages.

KEY ASSUMPTIONS
-Fitch's long-term debt sustainability analysis assumes trend real GDP growth of 1.4%, a primary fiscal surplus averaging 0.1% of GDP, a steady increase in marginal interest rates from 2016, and a GDP deflator converging to 1.8%.
-Future asset sales of state-owned bank holdings are likely, but their timing and size are unclear. Fitch does not assume any such debt-reducing transactions or any additional sovereign support to the banking sector in its projections for government debt.