Overview

• The COVID-19 pandemic will take a toll on the Dutch economy and public finances in 2020, but the Netherlands has fiscal headroom to withstand this unprecedented shock.
• The government has implemented a comprehensive package of emergency measures to shield businesses and employees from a temporary-but-severe liquidity shock.
• The Netherlands' wealthy and diversified economy, strong labor market, net external creditor position, and sizable fiscal space will help prevent longer-lasting damage to the economy.
• We are therefore affirming our unsolicited 'AAA/A-1+' sovereign credit ratings on the Netherlands and maintaining a stable outlook.

Rating Action

On May 15, 2020, S&P Global Ratings affirmed its unsolicited 'AAA/A-1+' long- and short-term foreign and local currency sovereign credit ratings on the Netherlands. The outlook is stable.

Outlook

The stable outlook reflects our view that the Netherlands will contain the adverse effects of the COVID-19 pandemic on its economy and budgets without lasting and structural damage to credit metrics.

Downside scenario

We could consider lowering the ratings if the fiscal consolidation starting in 2021 proves to be significantly slower than we anticipate. This could happen, for instance, if the economic downturn lasts longer than expected, making economic recovery more challenging.

Rationale

The COVID-19 pandemic will take a toll on the Dutch economy and public finances in 2020. However, we think public finances are well-positioned to facilitate a strong policy response without deteriorating sovereign creditworthiness. Fiscal support will likely help prevent longer-lasting damage to the economy and manage the impact on public finances.

The 'AAA' rating incorporates our assessment of the Netherlands' wealthy, diversified, open, and competitive economic structure. This is shown by its high per capita income, the economy's overall sizable net external asset position, recurrent and very high current account surpluses, and a comparatively strong fiscal performance. It also reflects Dutch policymakers' long track record of prudent, flexible, and predictable macroeconomic policies, which we believe have bolstered economic resilience.

Institutional and economic profile: Sizable countercyclical policy measures will counter a COVID-19-induced recession

• The COVID-19 pandemic and its implications for Dutch economic activity will lead to a sharp downturn this year, with real GDP contracting by 6.7%.
• The government has put in place a package of emergency measures to prevent widespread job losses and business closures.
• We believe Dutch policymakers' long track record of prudent macroeconomic policies, which have bolstered economic resilience, will support economic recovery in 2021.

We expect real GDP will contract by 6.7% in the Netherlands due to the adverse effects of the COVID-19 pandemic. Our economic projections are highly uncertain however, since they depend on how the pandemic evolves.

The Dutch economy's openness and sizable current account surplus--the highest in Europe--make the Netherlands particularly sensitive to global developments, including this year's synchronized global recession. It is the seventh most open economy in the eurozone, with exports totaling 82.5% of GDP (a large share represents re-exports, with domestically produced exports accounting for about 30% of GDP). The Netherlands is, nevertheless, wealthy and well diversified across industries and services, limiting economic volatility.

Although the Netherlands has not imposed a lockdown as strict as in other European countries, the series of measures taken since March to limit the spread of the virus will significantly constrain consumer spending and investment. These measures include the closure of schools and venues such as restaurants, bars, museums and theatres, and advising the population to avoid social contact and work from home to the extent possible. The authorities plan to gradually ease some restrictions, re-opening primary schools from May 11, for example.

To counter the adverse economic effects of the pandemic, and shield viable businesses and employees from a temporary-but-severe liquidity shock, the government has announced a sizable fiscal package. This includes spending measures of about €20 billion (2.6% of 2020 GDP) mainly covering three schemes:

• "NOW" scheme--compensation of up to 90% of labor costs for employers who expect a decline in revenue of at least 20%. The scheme also applies to flexible workers, who represent one quarter of the Dutch labor market.
• "TOZO" scheme--temporary support for entrepreneurs and the self-employed.
• "TOGS" scheme--a €4,000 tax exempt reimbursement granted to entrepreneurs in a number of specific sectors, such as hospitality and tourism, hit most by the lockdown measures.

In addition, the Dutch authorities have allowed companies to defer tax payments without penalties, and calculate provisional taxes on the basis of expected reduced activity levels. The government expects tax revenue will be approximately €36 billion (4.7% of 2020 GDP) less than initially anticipated. It assumes that delayed taxes will only be paid from 2021. The authorities have also increased the ceiling of the Enterprise Finance Guarantee (GO scheme) to €10 billion from €400 million.

In the absence of such a comprehensive fiscal response, we think the Dutch GDP would fall considerably further, unemployment would surge faster, and solvent businesses would be forced to liquidate, eroding the economy's productive base, perhaps permanently. We believe that if disruption to the real economy can be minimized now, the faster a rebound will take hold.

In our view, Dutch policymakers' long track record of prudent, flexible, and predictable macroeconomic policies have bolstered economic resilience. That's why, as restrictions are loosened, we project that growth will rebound in 2021. The timing and shape of that recovery remains uncertain, however.

Although declining over the past years, the Dutch private sector's debt burden remains among the highest in the EU (about 231% of GDP in 2019, compared with 267% in 2014). Corporate debt (about 132% of GDP in 2019) is largely linked to intragroup borrowing by multinationals and poses limited macroeconomic risk. Nevertheless, high household debt makes households vulnerable to shocks with macroeconomic repercussions. The recourse to interest-only, non-amortizing mortgages that are historically contracted to maximize the tax benefit of interest deductibility, has contributed to elevated debt. Dutch authorities have introduced regulatory changes in recent years to rein in mortgage debt growth. The maximum loan-to-value ratio for mortgages was lowered to 100%, and the interest deductibility on mortgages is being gradually reduced, with the government also deciding to accelerate the pace at which it is cut (to 37% by 2023 from the current 49%). Furthermore, since 2013, newly originated mortgages need to amortize to benefit from tax deductibility, and, finally, banks have been encouraging households to amortize interest-only mortgages contracted previously. While household mortgage debt has continued to increase in nominal terms in recent years, the increase was limited to about 1% per year on average in 2015-2018, despite strong house price increases. On the back of robust real GDP growth, this has resulted in deleveraging, with household debt declining from 111% of GDP in 2015 to a still substantial 99% of GDP in 2019. Household savings are substantial (about 320% of GDP), but they are largely invested in pension assets and residential real estate.

Housing prices have been increasing rapidly and consistently since bottoming out in 2013 following the 2008 financial crisis, and they have now surpassed pre-crisis levels in the big cities. Nominal house price growth slowed to about 6% in 2019 from 9% in 2018, suggesting gradually moderating dynamics. The market cooled most notably in major cities, where recovery in prices has been particularly steep. While the market was characterized by high levels of over-supply during the global financial crisis, we believe that the rise in housing prices, rather than being credit-fueled, has been mostly driven by supply shortages and pent-up demand over the past years.

Flexibility and performance profile: The government is using its fiscal space to withstand the unprecedented shock

• Direct fiscal measures and automatic stabilizers will widen the general government deficit to 11.1% of GDP in 2020, but we expect a surplus from 2023.
• General government debt to GDP will remain well below the European average, ending 2020 at 61% of GDP, before declining thereafter.
• The Netherland's current account surplus will remain high by international standards.

We expect the Netherlands' fiscal deficit will widen to about 11.1% of GDP in 2020, close to the government's latest estimate (Spring 2020 Budget Memorandum). Our projection incorporates the announced direct fiscal measures (about 7.3% of 2020 GDP) and the operation of automatic stabilizers (about 3.8% of 2020 GDP). In line with our view that the government will gradually lift social restrictions and the economy will rebound next year, we project the government deficit will narrow to 3.4% of GDP in 2021, and anticipate small surpluses from 2023. Dutch public finances have improved in recent years. The Netherlands registered a better-than-expected and record high fiscal surplus in 2019 (1.7% of GDP) for the fourth consecutive year. Ultimately, the overall cost of the pandemic will depend on the pace of the economic recovery, whether and to what extent measures to prevent the loss of productive capacity have been effective, and the take-up of schemes to protect jobs and incomes.

The reduction of general government debt to 47% of GDP in 2019, well below the Stability and Growth Pact benchmark, from 66% in 2014, gives the Netherlands ample fiscal headroom to withstand the unprecedented shock stemming from the COVID-19 pandemic. We expect general government debt to GDP of 61% of GDP at end-2020 due to the expected large fiscal deficit, before declining thereafter. In addition, the government's debt interest expenditure to revenue is only 2%. Record low interest rates will contain the government interest burden, despite an increase in debt in 2020.

We project the Netherlands will continue to run large current account surpluses, which is partially a reflection of corporate profitability and household savings invested abroad. We believe a decline in external demand will cause the current account surplus to narrow, and forecast it at about 9% of GDP in 2020-2023, a level that remains high by international standards. The Netherlands' large direct investment flows partially reflect significant intracompany tax arrangements. We expect continued scrutiny of the Dutch corporate taxation system by the Organisation for Economic Co-operation and Development (through the implementation of base erosion and profit shifting rules), along with the EU (through the Anti-Tax Avoidance Directive), focusing on multinationals that are seeking tax optimization or avoidance. The overall effect of these tighter tax rules on economic growth, government revenue, and external accounts is uncertain--partially due to a lack of clarity and data on the contribution of tax optimization strategies. Still, we do not expect these factors will materially alter our view of the Netherlands' creditworthiness over the forecast horizon to 2023.

We view the Netherlands' eurozone membership as a strength, although we acknowledge that it entails a compromise on monetary flexibility. In our view, the European Central Bank's (ECB's) monetary policy remains credible, reflecting its longer-term inflation track record, its responses to date in addressing dislocations from private-sector financial flows within the eurozone, and the depth of the eurozone capital market. In support of the eurozone's forceful fiscal response to COVID-19, the ECB has pushed back against rate divergence within the monetary union by launching the Pandemic Emergency Purchase Programme (PEPP). Under the PEPP, the ECB is committed to purchasing €750 billion (6.5% of eurozone GDP) in government and corporate bonds this year, over and above the €360 billion (3.1% of GDP) in the existing asset purchase programs. Eligible maturity ranges for PEPP purchases have also been broadened to include maturities as low as 70 days, and the ECB has clearly stated that it is prepared to scale up PEPP beyond its current envelope. Although the ECB noted that government bond purchases would be linked to the capital key of the national central banks, it promised that it would take a flexible approach toward purchases, and that there would be fluctuations away from the capital key in some jurisdictions depending upon market conditions. In the context of the increase in government borrowing needs, we believe that the planned expansion of the ECB's balance sheet is appropriately oriented toward absorbing them at relatively low borrowing costs.

Key Statistics

Table 1

The Netherlands Selected Indicators
	2014	2015	2016	2017	2018	2019	2020	2021	2022	2023
Economic indicators (%)
Nominal GDP (bil. LC)	672	690	708	738	774	812	764	823	870	901
Nominal GDP (bil. $)	892	766	784	834	914	909	835	936	980	1,000
GDP per capita (000s $)	53.0	45.3	46.2	48.8	53.2	52.6	48.0	53.5	55.7	56.5
Real GDP growth	1.4	2.0	2.2	2.9	2.6	1.8	(6.7)	6.2	4.0	1.7
Real GDP per capita growth	1.1	1.5	1.7	2.3	2.0	1.2	(7.2)	5.6	3.4	1.1
Real investment growth	(2.4)	29.0	(7.3)	4.2	3.2	5.3	(6.3)	4.9	3.3	2.2
Investment/GDP	17.9	22.5	20.5	20.6	20.7	21.2	20.4	20.3	20.2	20.3
Savings/GDP	26.1	28.8	28.5	31.4	31.5	31.4	28.5	29.3	29.6	29.6
Exports/GDP	80.6	82.7	79.5	83.4	84.3	82.5	78.5	78.7	78.7	78.3
Real exports growth	4.5	7.4	1.7	6.5	3.7	2.4	(8.8)	6.9	5.7	3.0
Unemployment rate	7.4	6.9	6.0	4.9	3.8	3.4	3.8	3.9	3.7	3.6
External indicators (%)
Current account balance/GDP	8.2	6.3	8.1	10.8	10.9	10.2	8.1	9.1	9.4	9.3
Current account balance/CARs	6.8	5.1	6.8	9.0	8.9	8.4	6.7	7.8	8.2	8.1
CARs/GDP	120.9	122.5	118.2	120.9	122.7	121.1	120.2	116.5	115.5	114.9
Trade balance/GDP	11.3	9.5	9.3	9.7	9.6	8.5	8.1	8.5	8.4	8.0
Net FDI/GDP	0.2	(8.8)	(1.3)	(5.9)	(1.2)	(5.5)	(5.5)	(5.5)	(5.5)	(5.5)
Net portfolio equity inflow/GDP	(6.4)	5.2	(9.5)	(5.1)	(7.8)	(6.5)	(6.5)	(6.5)	(6.5)	(6.5)
Gross external financing needs/CARs plus usable reserves	256.0	299.1	276.9	259.0	248.9	245.7	266.9	253.6	248.2	246.0
Narrow net external debt/CARs	218.4	216.9	208.5	203.7	176.2	181.5	203.2	189.6	182.7	179.8
Narrow net external debt/CAPs	234.3	228.7	223.7	223.7	193.4	198.2	218.0	205.6	198.9	195.6
Net external liabilities/CARs	(33.3)	(39.0)	(49.2)	(51.8)	(55.6)	(73.9)	(87.8)	(88.5)	(93.4)	(100.0)
Net external liabilities/CAPs	(35.7)	(41.1)	(52.8)	(56.9)	(61.0)	(80.7)	(94.1)	(96.0)	(101.7)	(108.8)
Short-term external debt by remaining maturity/CARs	173.7	217.9	195.2	177.2	166.3	162.8	185.2	171.4	165.8	163.3
Usable reserves/CAPs (months)	0.6	0.6	0.5	0.5	0.5	0.5	0.6	0.5	0.5	0.5
Usable reserves (mil. $)	42,921	38,235	35,937	38,546	38,448	43,207	43,192	43,192	43,192	43,192
Fiscal indicators (general government; %)
Balance/GDP	(2.2)	(2.0)	0.0	1.3	1.4	1.7	(11.1)	(3.4)	0.0	1.0
Change in net debt/GDP	3.1	(1.0)	(0.9)	(2.7)	(2.0)	(1.3)	11.1	3.4	0.0	(1.0)
Primary balance/GDP	(0.7)	(0.7)	1.2	2.3	2.3	2.5	(10.3)	(2.5)	0.9	1.9
Revenue/GDP	43.6	42.6	43.6	43.7	43.6	43.6	37.2	41.5	43.1	43.6
Expenditures/GDP	45.7	44.6	43.6	42.4	42.2	41.9	48.3	44.9	43.1	42.6
Interest/revenues	3.4	3.1	2.6	2.3	2.0	1.8	2.1	2.2	2.1	2.0
Debt/GDP	66.1	63.0	60.3	55.2	50.8	47.1	61.2	60.2	57.0	54.0
Debt/revenues	151.6	147.9	138.3	126.4	116.5	107.9	164.5	145.1	132.2	123.9
Net debt/GDP	61.4	58.8	56.3	51.3	46.9	43.4	57.3	56.6	53.6	50.7
Liquid assets/GDP	4.7	4.2	4.0	3.9	3.9	3.7	3.9	3.6	3.4	3.3
Monetary indicators (%)
CPI growth	0.3	0.2	0.1	1.3	1.6	2.7	0.5	1.2	1.3	1.5
GDP deflator growth	0.3	0.8	0.5	1.3	2.2	3.0	0.8	1.5	1.6	1.8
Exchange rate, year-end (LC/$)	0.82	0.92	0.95	0.83	0.87	0.89	0.91	0.88	0.89	0.91
Banks' claims on resident non-gov't sector growth	4.1	(1.4)	5.4	1.2	(0.5)	0.2	(0.9)	(0.6)	1.5	1.5
Banks' claims on resident non-gov't sector/GDP	115.9	111.2	114.2	110.9	105.2	100.5	105.8	97.6	93.7	91.8
Foreign currency share of claims by banks on residents	N/A	N/A	N/A	N/A	N/A	N/A	N/A	N/A	N/A	N/A
Foreign currency share of residents' bank deposits	N/A	N/A	N/A	N/A	N/A	N/A	N/A	N/A	N/A	N/A
Real effective exchange rate growth	0.9	(12.5)	1.0	(2.7)	(1.8)	(3.7)	N/A	N/A	N/A	N/A
Sources: Eurostat (Economic/Fiscal/Debt indicators), Central Bank of Netherlands, International Monetary Fund (Monetary/External indicators).
Adjustments: We adjust government debt by excluding guarantees on debt issued by the European Financial Stability Facility.
Definitions: Savings is defined as investment plus the current account surplus (deficit). Investment is defined as expenditure on capital goods, including plant, equipment, and housing, plus the change in inventories. Banks are other depository corporations other than the central bank, whose liabilities are included in the national definition of broad money. Gross external financing needs are defined as current account payments plus short-term external debt at the end of the prior year plus nonresident deposits at the end of the prior year plus long-term external debt maturing within the year. Narrow net external debt is defined as the stock of foreign and local currency public- and private- sector borrowings from nonresidents minus official reserves minus public-sector liquid assets held by nonresidents minus financial-sector loans to, deposits with, or investments in nonresident entities. A negative number indicates net external lending. N/A--Not applicable. LC--Local currency. CARs--Current account receipts. FDI--Foreign direct investment. CAPs--Current account payments. e--Estimate. f--Forecast. The data and ratios above result from S&P Global Ratings' own calculations, drawing on national as well as international sources, reflecting S&P Global Ratings' independent view on the timeliness, coverage, accuracy, credibility, and usability of available information.

Ratings Score Snapshot

Table 2

The Netherlands Ratings Score Snapshot
Key rating factors	Score	Explanation
Institutional assessment	2	Generally strong track record of policies that deliver sustainable public finances and balanced economic growth. Unbiaised enforcement of contracts and respect for rule of law. Generally effective checks and balances between institutions. Free flow of information throughout society, with open debate of policy decisions. Timely and reliable data and statistical information. However, coordination requirements at the level of the Economic and Monetary Union may hinder timely policy responsiveness.
Economic assessment	1	Based on GDP per capita ($) as per Selected Indicators in Table 1.
External assessment	3	Based on narrow net external debt as per Selected Indicators in Table 1. In the context of our external assessment for the Netherlands and given its membership of the Economic and Monetary Union, we consider the euro as an actively traded currency.
		We expect the Netherlands will continue to run current account surpluses as per Selected Indicators in Table 1.
		The Netherlands' external short term debt by remaining maturity represents more than 100% of current account receipts as per Selected Indicators in Table 1.
		The Netherlands' net international investment position is more favourable than the economy's narrow net external debt position by over 100% of current account receipts owing predominantly to its large stock of external assets, including direct investment, as per Selected Indicators in Table 1.
Fiscal assessment: flexibility and performance	2	Based on the change in net general government debt (% of GDP) as per Selected Indicators in Table 1, excluding the exceptional deviation stemming from the fiscal package of emergency measures in 2020.
Fiscal assessment: debt burden	2	Based on net general government debt (% of GDP) and general government interest expenditure (% of general government revenues) as per Selected Indicators in Table 1.
Monetary assessment	2	In the context of our monetary assessment, we consider the euro to be a reserve currency. The European Central Bank has an established track record in monetary authority independence with clear objectives and a wide array of policy instruments, including nonconventional tools. The CPI is low and in line with that of its trading partners.
		The Netherlands is a member of the Economic and Monetary Union.
Indicative rating	aa+	As per Table 1 of "Sovereign Rating Methodology."
Notches of supplemental adjustments and flexibility	1	The significantly adverse effects of the COVID-19 pandemic will take a toll on the Dutch economy and public finances in 2020. However, we think public finances are well-positioned to facilitate a strong policy response, preserving the economy's productive capacity ahead of the upcoming economic recovery, without significantly impacting the public finance sustainability and sovereign creditworthiness.
Final rating
Foreign currency	AAA
Notches of uplift		We do not believe that default risks apply differently to foreign- and local-currency debt.
Local currency	AAA
S&P Global Ratings' analysis of sovereign creditworthiness rests on its assessment and scoring of five key rating factors: (i) institutional assessment; (ii) economic assessment; (iii) external assessment; (iv) the average of fiscal flexibility and performance, and debt burden; and (v) monetary assessment. Each of the factors is assessed on a continuum spanning from 1 (strongest) to 6 (weakest). S&P Global Ratings' "Sovereign Rating Methodology," published on Dec. 18, 2017, details how we derive and combine the scores and then derive the sovereign foreign currency rating. In accordance with S&P Global Ratings' sovereign ratings methodology, a change in score does not in all cases lead to a change in the rating, nor is a change in the rating necessarily predicated on changes in one or more of the scores. In determining the final rating the committee can make use of the flexibility afforded by §15 and §§126-128 of the rating methodology.

Related Criteria

• Criteria | Governments | Sovereigns: Sovereign Rating Methodology, Dec. 18, 2017
• General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017
• General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009
• General Criteria: Methodology: Criteria For Determining Transfer And Convertibility Assessments, May 18, 2009

Related Research

• Sovereign Ratings List, April 7, 2020
• Sovereign Ratings History, April 7, 2020
• Sovereign Ratings Score Snapshot, March 3, 2020
• Sovereign Risk Indicators. An interactive version is available at http://www.spratings.com/sri
• Default, Transition, and Recovery: 2018 Annual International Public Finance Default And Rating
• Transition Study, Aug. 19, 2019

In accordance with our relevant policies and procedures, the Rating Committee was composed of analysts that are qualified to vote in the committee, with sufficient experience to convey the appropriate level of knowledge and understanding of the methodology applicable (see 'Related Criteria And Research'). At the onset of the committee, the chair confirmed that the information provided to the Rating Committee by the primary analyst had been distributed in a timely manner and was sufficient for Committee members to make an informed decision.

After the primary analyst gave opening remarks and explained the recommendation, the Committee discussed key rating factors and critical issues in accordance with the relevant criteria. Qualitative and quantitative risk factors were considered and discussed, looking at track-record and forecasts.

The committee's assessment of the key rating factors is reflected in the Ratings Score Snapshot above.

The chair ensured every voting member was given the opportunity to articulate his/her opinion. The chair or designee reviewed the draft report to ensure consistency with the Committee decision. The views and the decision of the rating committee are summarized in the above rationale and outlook. The weighting of all rating factors is described in the methodology used in this rating action (see 'Related Criteria And Research').

Ratings List

Ratings Affirmed
Netherlands
Sovereign Credit Rating |U^	AAA/Stable/A-1+
Transfer & Convertibility Assessment	AAA
|U^ Unsolicited ratings with issuer participation, access to internal documents and access to management.

Primary Credit Analyst:	Remy Carasse, Paris (33) 1-4420-6741; remy.carasse@spglobal.com
Secondary Contact:	Marko Mrsnik, Madrid (34) 91-389-6953; marko.mrsnik@spglobal.com
Research Contributor:	Himani Joshi, Mumbai; himani.joshi@spglobal.com