DBRS assigns AAA Ratings to Denmark, Trend Stable

DBRS Ratings Limited (DBRS) has assigned issuer ratings of AAA to the Kingdom of Denmark’s long-term foreign and local currency debt. The trend on both ratings is Stable. The ratings reflect Denmark’s wealthy and diversified economy, strong political institutions and sound macroeconomic policy management. In addition, the ratings are underpinned by Denmark’s strong fiscal position with a moderate debt burden and a robust track record of large current account surpluses.

Denmark’s fiscal position is healthy by international standards and has proven resilient throughout the 2008-2009 financial crisis thanks to a robust macroeconomic and fiscal framework, which has proven effective in ensuring stable and sustainable government finances. Despite having deteriorated during 2009, government deficit and debt levels have remained lower than for most 'AAA' rated sovereigns. In 2011, the general government deficit amounted to a moderate 1.9% of GDP, while general government debt was 46.5% of GDP, among the lowest in the Euro area. This track record of fiscal discipline underpins the credibility of the government’s commitment to fiscal consolidation.

Despite these strengths, DBRS notes that Denmark faces challenges stemming from a highly indebted private sector, particularly households. Household debt as a percentage of GDP was approximately 151% in 2010, which is significantly above the European average. The high level of private indebtedness in the domestic economy and elevated house prices leave Denmark more vulnerable to a rise in interest rates with possible knock-on effects to banks and the real economy. In addition, the Danish banking sector is highly exposed to the commercial real estate, SMEs and agricultural sectors and is over-reliant on foreign wholesale funds. This leaves the sector vulnerable to potential market disruptions should liquidity constraints in Euro zone capital markets intensify.

As a small and very open economy with gross exports accounting for almost one-half of GDP, Denmark was particularly exposed to the global economic downturn in 2008-09 with the economy contracting by an unprecedented -5.8%. The deterioration was compounded by a steep fall in house prices as well as a severe disruption in the domestic banking sector. Economic activity recovered modestly in 2010 and 2011, mainly supported by expansionary fiscal stimulus measures and export growth, with GDP expanding by 1.3% and 0.8%, respectively, and unemployment stabilizing around 7.6% in 2011 after having doubled from 3.3% in 2008. For 2012, economic growth is set to remain fragile at 0.9%, following the deceleration in global growth and weaker domestic demand. GDP growth is set to gradually recover in 2013 and 2014, with expected average growth of 1.8% per year.

DBRS believes that Denmark is in a relatively strong position to manage the economic slowdown. Public finances are resilient and provide scope for fiscal policy measures if the economic environment were to deteriorate. The 2012 fiscal stance is set to be expansionary with the budget deficit projected at 4% of GDP, narrowing to 1.9% of GDP in 2013. General government debt, estimated at 46.5% of GDP in 2011, is well below the European Union average and is expected to fall to approximately 44.7 in 2013. Moreover, the Danish economy is characterized by a high gross savings ratio (24% of GDP in 2011) as well as a track record of sizeable current account surpluses for more than a decade averaging 3.5% of GDP.

The AAA ratings also reflect Denmark’s well-established institutional framework whose focus on long-term issue has been proven over the years. The strength and credibility of the macroeconomic framework put in place since the early 1990s has been underpinned by the broad political commitment to sound public finances as a widely accepted national objective. DBRS believes that the Danish authorities’ swift response to several stress tests of economic, exchange rate and banking sector pressures during the 2008-09 financial crisis has proven effective and demonstrates its strong commitment to sound economic management and fiscal responsibility.

A key vulnerability to the ratings is represented by the scale of the highly leveraged banking system. Indeed, the Danish financial system is large compared to the size of the economy, with assets worth 475% of GDP, as a result of relaxed monetary conditions and an extended boom in the housing market during 2002-2007. However, DBRS believes that the banking system’s resilience has strengthened considerably in the wake of the crisis, with the major banks having been successful in raising capital well above regulatory requirements. Moreover, Denmark’s authorities leading role in strengthening the supervisory framework and introducing a transparent burden-sharing scheme that provides for a transparent mechanism to ensure the orderly resolution of banking sector bankruptcies, should limit future contingent liabilities on the sovereign balance sheet.

The Stable trend on the Kingdom of Denmark’s ratings reflects DBRS’s expectation that the ratings will be supported by the country’s track record of political stability, fiscal and monetary flexibility, competitive economy and solid external position. DBRS expects that these strengths will allow Denmark to respond appropriately to slower economic growth and weather market volatility in the medium to long term.

Note:
All figures are in Euros (EUR) unless otherwise noted.

The principal applicable methodology is Rating Sovereign Governments, which can be found on the DBRS website under Methodologies.

The sources of information used for this rating include Denmark’s Ministry of Finance, Danmarks Nationalbank, Statistics Denmark, Eurostat, OECD, IMF and Haver Analytics. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Giacomo Barisone
Rating Committee Chair: Alan G. Reid
Initial Rating Date: 20 September 2012
Most Recent Rating Update: 20 September 2012

For additional information on this rating, please refer to the linking document under Related Research.