Country Risk Rating

A1
The political and economic situation is very good. A quality business environment has a positive influence on corporate payment behavior. Corporate default probability is very low on average. - Source: Coface

Business Climate Rating

A1
The business environment is very good. Corporate financial information is available and reliable. Debt collection is efficient. Institutional quality is very good. Intercompany transactions run smoothly in environments rated A1.

Strengths

  • 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% of total value added) and external accounts in surplus
  • High quality infrastructure and good living standards
  • Port activity (Rotterdam is Europe’s number-one port)
  • Dense network of SMEs working with large groups
  • Diversified exports and external accounts in surplus
  • Attractive: high quality infrastructure and good living standards

Weaknesses

  • 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 (239% of disposable income in 2018)
  • Banks dependent on wholesale financing (loans/deposits = 136%) and the real estate sector
  • Aging population; pension system under pressure (pension funds with a coverage ratio lower than 90% are facing pension cuts in 2020)

Current Trends

Growth driven by consumption and expansionary fiscal policy

Growth will be down only slightly in 2020 and will continue on the 2019 growth pattern with private consumption (44% of GDP) being its main contributor. Several factors are supporting private households’ consumption: the unemployment rate is, with 3.5% in the autumn of 2019, at one of the lowest levels since the beginning of the statistic in 2003. While employment growth is decreasing slowly since mid-2019, wages react with a time lag on the labor market development and are set to increase more dynamically. Inflation should slow, as the base effect from an increase in the low-VAT rate, as well was higher energy taxes for households in 2019, runs out in January 2020. However, the main factor that helps the purchasing power of private households is a tax reform. From January 2020 onwards there will be a two-bracket tax system (instead of four brackets). The earning threshold will be €68,507 with rates of 37.35% under and 49.5% above it. This means an increase in disposable income for everybody earning more than €40,000 a year compared to 2019. In addition, tax credits (on work and the general one) will increase in 2020, more families will be entitled to child budget and the energy tax will be reduced. Some few pension funds are facing pension cuts in 2020, however the majority of pensioners are not affected. Public consumption (24% of GDP) will be supporting growth too, with higher expected spending. The health, education, infrastructure, immigration and defense sectors will be the main beneficiaries. Investment (21% of GDP) will lose its dynamic. Companies, although still benefiting from favorable financial conditions and facing high capacity utilization rates, are feeling less confident. With a weakening of the German industry (the main trading partner), new orders declined. Additionally, gas production in the province of Groningen will be scaled back faster than planned originally (end in 2022 vs. 2030 before), so that investments in this field come down stronger. Residential investments should keep on, but at a slower pace, as prices have moderated and capacity constraints increased due to fewer permits on new construction.

Government balance and current account in surplus

With trade in goods and services accounting for more than 150% of GDP, the Dutch economy is very open. It mainly supplies agri-food products, chemicals, medical products and refined petroleum. Services, including transport, make up one third of exports in value added terms. Due to decreasing global trade activity, Dutch exports are hit heavily, especially as re-exporting, linked to the country’s role as Western Europe’s maritime gateway, accounts for a major part of Dutch trade activity. The turn from a net-gas-exporter to a net-importer will weigh on trade too. Nevertheless, the Dutch economy is not that affected by the decrease of Chinese demand, as China is “only” N°9 in the Netherlands’ export partners. In addition, services exports are increasing, especially towards the UK, as multinational companies need help in dealing with the Brexit. The services balance is in surplus, and will therefore balance out main parts of the decrease in the trade surplus. However, in 2020 the drag from decreasing goods trade will become more imminent. The income balance will weigh on the current account surplus, as the deficit in the balance of transfers has increased over the year 2019. In total, the current account balance will still be very high in 2020, but again will not reach the record surplus of 2018. Despite the country’s accommodative fiscal policy, a small overall fiscal surplus will continue, thanks to higher tax revenues from companies. This will help to reduce public debt further.

A four-party center-right coalition with a narrow majority is actually working

Prime Minister Mark Rutte (VVD, conservative-liberal) is successfully leading his third government since October 2017. His conservative coalition is comprised of four different parties holding only a minimum seat share of 50% (75 out of 150 seats) in the House of Representatives. The coalition gained stability with successfully implementing income and corporate tax cuts but also a major labor reform. However, in the election in May 2019, the government parties lost their majority in the Dutch Senate (now 32 out of 75 seats), which has to approve the new laws coming from the House of Representatives. With this, the work for Rutte’s cabinet gets more complicated until the official end of its term in March 2021.

Source:

Coface (02/2020)
Netherlands