OREANDA-NEWS. Fitch Ratings has affirmed The Netherlands' Long-term foreign and local currency Issuer Default Rating (IDRs) at 'AAA'. The Outlooks are Stable. The issue ratings on The Netherlands' unsecured foreign and local currency bonds have also been affirmed at 'AAA'. The agency has also affirmed The Netherlands' Short-term foreign-currency IDR at 'F1+' and the Country Ceiling at 'AAA'.

The affirmation and the Stable Outlook reflect the following rating drivers:

The Dutch economy is recovering. Fitch estimates real GDP growth of 0.7% in 2014 (unchanged from the previous review) and 1.2% in 2015 (from 1.4%) following two years of contraction. The 2015 revision reflects weaker export growth and stems from the agency's downward revision of its eurozone growth projections. A smaller fiscal drag in 2015-2016, a more benign housing market outlook and a gradual pick-up in real disposable income will support the growth outlook.

Asset prices have bottomed out and are now gradually recovering. The turnaround in the housing market has been mirrored by a pick-up in consumer confidence and a gradual improvement in private consumption growth. Although Fitch expects this trend to continue, the macroeconomic outlook is dependent on the pace of household deleveraging. In the agency's view, saving rates are likely to remain high and this will constrain domestic demand. High leverage implies that households remain vulnerable to swings in asset prices.

The Outlook for the public finances is positive. The general government deficit is on a declining path. Fitch expects the general government deficit at 2.1% and 1.8% of GDP in 2015 and 2016, respectively, down from 2.8% in 2014. GDP growth will support deficit reduction. In 2015 EUR6bn (0.9% of GDP) of fiscal consolidation measures will be implemented, well below the EUR16bn (2.5%) and EUR13bn (2%) implemented in 2013 and 2014, respectively.

The 2015 budget mainly consists of implementation of measures included in previous budget agreements. The fact that no new measures have been announced should support consumer confidence. Moreover, pressure from Brussels has eased as the European Commission has judged the 2015 draft budget to be compliant with the Stability and Growth pact.

Fitch estimates that gross general government debt will peak at 70% of GDP in 2015. The Netherlands was the main beneficiary of the shift to the new ESA2010 methodology, introduced across EU countries in September 2014. As a result, the peak in public debt is markedly lower than in the previous review (70% versus 75% of GDP). In Fitch's view, public debt dynamics are within the tolerance of a 'AAA' rating, given its other credit strengths.

The Netherlands faces reduced risk from contingent liabilities. All the seven Dutch banks directly subjected to the ECB's Comprehensive Assessment passed the review. The adjustments required as a result of the Asset Quality Review were limited (0.44% of the Common Equity Tier 1 ratio) and no capital shortfall under the baseline or the adverse scenario of the stress tests was found. Dutch banks have in recent years gradually improved their funding and capital positions in response to more stringent regulatory requirements and market participants' expectations.

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 fiscal discipline.

The country has run consistent current account surpluses of 7%-10% of GDP and has a positive net international investment position.

Fitch considers financing risk as low, reflecting an average debt maturity of seven years, low borrowing costs and strong financing flexibility underpinned by The Netherlands' status as a core eurozone sovereign issuer, with deep capital markets.

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 a negative rating action include:
- Fiscal easing or growth underperformance, leading to the public debt ratio peaking higher and later
- Crystallisation of contingent liabilities arising from a range of potential sources, including the banking sector, the Nationale Hypotheek Garantie mortgage guarantee scheme or eurozone bail-out packages
- Policy uncertainty, which could undermine confidence in fiscal and economic prospects.