Netherlands: Risk Assessment
Country Risk Rating
Business Climate Rating
- Port activity (Rotterdam is Europe’s number-one port)
- Establishment of home-grown international companies working with a dense network of SMEs is highly attractive for foreign investors
- Diversified and flexible exports (services have a share of 11.2% in total exports value added) and external accounts in surplus
- Strong digitalization with lot of home-office, home-schooling and online retail made possible
- High quality infrastructure and good living standards
- Exposure to the European economy, especially Germany and the UK: exports to the United Kingdom generated 3.3% of the country’s value added in 2018
- Debt of private households is very high (236% of disposable income in 2019)
- Banks dependent on wholesale financing (loans/deposits = 136%) and real estate
- Ageing population; pension system under pressure
A bumpy road to economic recovery
The conditions for reviving the economy are in place for 2021. However, the course of the COVID-19 pandemic is likely to cause punctual setbacks, as it was already the case in 2020. After the virus hit the Netherlands in the spring of 2020, the government reacted cautiously. Public life was partly shut down, but shops remained open, private gatherings were allowed and facemasks were not a part of the public scenery. However, as a result, COVID-19 cases reached very high numbers relative to the population and the Netherlands were among the top 26 countries with the highest COVID-19 death rate in autumn 2020. The economic impact of the pandemic in the Netherlands was as strong as in other Northern European countries. Not only hit by the sharp drop in private consumption and investment in the first half of 2020, the Netherlands were also strongly impacted by the lack of foreign trade, which is crucial for the Dutch economy as it is the “door” to Central Western Europe via its (air-) ports. With the resumption of global trade and the end of the first lockdown, the recovery was therefore even stronger thanks to the revival of foreign trade and, especially, of consumption, as the Dutch people stayed at home for holidays (the Netherlands have a high tourism deficit). Nevertheless, the second wave of COVID-19 in mid-autumn turned out to be almost 8 times stronger than the first wave and the government introduced another lockdown with stronger gathering limitations. Therefore, the economy went into a contraction at the end of the year, as private consumption declined again. For 2021, the outlook is cautiously positive, dependent on the pandemic’s development and the future trade relationship with the UK. Private consumption, but also private and public investments, should pick up again, as the government has extended its current programs for furlough and help for the self-employed, as well as the public credit guarantee scheme until the end of June 2021 (EUR 12.5 billion, 1.7% of GDP). Moreover, the government has decided to ease the tax system, i.e. to lower the first bracket of the income tax (for the majority of people) by 0.25 percentage points to 37.1% and an increase of the labor tax credit (by EUR 324 to max. EUR 4,205), as well as the general income tax credit (for all income sources, by EUR 82 to max. EUR 2,837). Furthermore, several investment projects are planned (on top of the EUR 2 billion into the housing market) for security projects, education and climate protection. Additional support should come from the ECB, which should extend its asset purchase programs (APP with the normal EUR 20 billion per month and PEPP by an additional volume of around EUR 680 billion) until the end of 2021, alongside another extension of its targeted long-term refinancing operations (T-LTROs).
Public balance remains in the red, external ones in the green
After a record high public deficit in 2020, the public balance should only improve lightly in 2021, as, on the one hand, corporate and income taxes will generate lower revenues than in former years and, on the other, the government’s expenditures will remain high. This will bring the public debt ratio slightly above the Maastricht-target of 60% of GDP. The Dutch current account surplus, however, should recover in 2021. It is still strongly dependent on the trade in goods surplus, which should improve in line with the main export destinations in the Eurozone, the UK and the US. Moreover, the balance of income, which registered a deficit in 2020, could turn to a surplus again thanks to the recovery in revenues from Dutch assets abroad (net foreign assets reached a record of EUR 267.1 billion in 2019).
Strong public support despite of a high mortality rate
Prime Minister Mark Rutte (VVD, conservative-liberal) is successfully leading his third government since October 2017. His conservative coalition comprises four parties and holds only 75 out of 150 seats in the House of Representatives. The government has no majority in the Senate, which is needed for the legislative process. Rutte’s VVD gained support for the handling of the COVID-19 pandemic, but also thanks to the PM’s role as the unofficial leader of the group of countries fighting for a frugal EU fiscal policy during the negotiations over the EU Recovery Fund. Despite the very high COVID-19 mortality rate, the Dutch public support for the VVD reached a two-year high in late 2020, far above the levels of other parties (15 seats ahead of the next party). Therefore, the chances for Mark Rutte and the VVD to lead the next coalition are high in the next general election in March 2021.