OREANDA-NEWS. November 18, 2015. Fitch Ratings has affirmed The Netherland's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'AAA' with Stable Outlooks. The issue ratings on the Netherland's senior unsecured foreign and local currency bonds have also been affirmed at 'AAA'. The Country Ceiling has been affirmed at 'AAA' and the Short-term foreign currency IDR at 'F1+'.

KEY RATING DRIVERS
The 'AAA' rating reflects the rich and flexible economy, large and persistent current account surpluses and the strengthening recovery reducing balance sheet and financial risks.

The recovery of the Dutch economy has continued since our last rating review in May 2015. GDP growth accelerated to 2.5% in 1Q15, the strongest growth rate since the eurozone crisis. In 2Q15 growth slowed, qoq growth was only 0.2%, mainly due to temporary factors. Household consumption growth, benefiting from improving conditions in the housing and labour markets, and a pick-up in private investment are becoming the key drivers of the recovery. The recent weakness in global trade represents a risk to the very open Dutch economy.

Fitch forecast GDP growth to reach 1.9% in 2015 and stabilise around 1.7% in 2016-2017. The 2016-17 outlook is in line with the forecast eurozone growth of 1.6 and 1.7%, and slightly below the 'AAA' median growth forecast of 2.1 and 2.2%. This growth path implies a gradual closing of the negative output gap as potential GDP growth is estimated by the government to be 0.9%-1.0% in 2015-2016. The European Commission estimates the medium-term potential growth is also around 1%.

Fitch forecasts the budget deficit to decline marginally to 2.1% in 2015 from 2.3% of GDP in 2014 due to the positive effect of the cyclical economic recovery. The fiscal consolidation measures in 2012 and 2013, during the balance sheet recession of the private sector, have permanently improved the structural position and highlighted the resilience of the very open Dutch economy to adverse shocks. According to the draft 2016 budget the government intends to loosen the fiscal stance next year by EUR5bn (0.75% of GDP) through personal income tax cuts to improve the functioning of labour markets. Fiscal easing when the economic recovery is already strengthening could lead to a pro-cyclical fiscal stance. Nevertheless, Fitch's assessment is that given the initial position, the Netherlands has some space to loosen its fiscal stance without jeopardising its declining debt trajectory and the fiscal stimulus could mitigate the risk of adverse shocks.

Gross general government debt (GGGD) will peak at around 68% of GDP in 2014-2015, significantly above the 'AAA' median of 44%. Based on its debt dynamics simulation, Fitch forecasts GGGD to gradually decline to 60% by 2024.

The risks to the sovereign from financial sector contingent liabilities have declined further in recent quarters. The banking sector benefits from the domestic demand-driven recovery and improving conditions in the housing and labour markets. The ultra-low interest rates at both short and longer maturities that have prevailed since early 2015, when the ECB announced its large scale quantitative easing programme, have a significant direct impact on the Dutch economy through the relatively large pension and insurance sector. Gross household financial wealth, including non-bank pension and life insurance assets, are close to 3x GDP. Furthermore, the forward interest rates used for discounting long-term liabilities, set by the regulatory authorities, are significantly above the current market rates, especially in the insurance sector.

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 sound fiscal policy.

The country has run consistent current account (CA) surpluses of 7%-10% of GDP since 2010, which lead to a positive net international investment position. CA surpluses are forecast to exceed 10% of GDP each year to 2017.

Fitch considers financing risk as very low, reflecting an average debt maturity of around seven years, average issuing yield of 0.4% in January-September 2015 and strong financing flexibility underpinned by The Netherlands' status as a core eurozone sovereign issuer, with deep capital markets and large domestic savings.

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:
- Fiscal easing or growth underperformance, resulting in an increasing public debt trajectory.
- Crystallisation of contingent liabilities arising from a range of potential sources, including the banking sector, the national mortgage/social housing guarantee schemes or eurozone bail-out packages.

KEY ASSUMPTIONS
The debt sustainability calculations are based on the assumption of a 1.5% medium-term growth rate, GDP deflator converging gradually to 2% and a balanced primary budget position from 2017 onwards. No additional sovereign support to the banking sector or privatisation revenues is assumed.

The European Central Bank's asset purchase programme should help underpin inflation expectations, and supports our base case that in the context of an economic recovery, the Netherlands and the eurozone will avoid prolonged deflation. Nevertheless deflation risks could re-intensify in case of adverse shocks increasing the real debt burden in the public and private sectors as well.