DBRS Confirms Kingdom of Denmark’s Rating at AAA, Stable Trend

DBRS Ratings Limited (DBRS) has confirmed the long-term foreign and local currency issuer ratings of the Kingdom of Denmark at AAA, with Stable trends. DBRS has also confirmed the short-term foreign and local currency ratings at R-1 (high), with Stable trends.

The confirmation of the Stable trend reflects DBRS’s view that risks to the ratings remain broadly balanced. Credit challenges are manageable and are being overseen and addressed by the country’s authorities. Downward pressure on the ratings could arise from a severe shock to the economy, possibly related to a turmoil in financial markets, which could derail the economic recovery and have an adverse impact on the performance of the banking sector, with potential negative effects on public finances.

The AAA ratings for Denmark are underpinned by the country’s strong external position. Denmark has recorded current account surpluses since 1990s, averaging 4.5% of GDP over the past 10 years. The country also has a large net external asset positon, with a net international investment position of 48% of GDP in 2014. Favourable developments in external competiveness and in Denmark’s export markets are expected to support the ongoing robust performance of the country’s external sector.

Denmark also enjoys structurally sound public finances that have allowed the government to support the economy during downturns. After years of fiscal surpluses, the general government balance turned to a moderate deficit in 2009, reflecting an accommodative stance in response to the 2008-2009 recession and subsequent recovery. Nevertheless, following a projected structural deficit of 0.6% of GDP in 2015, a gradual normalisation of the fiscal policy stance is expected to lead to a structural fiscal balance in the longer term, ensuring fiscal sustainability and that economic policy remains in line with the business cycle. At the same time, Denmark has reduced its government debt ratio significantly over the past two decades to 45.2% of GDP in 2014, one of the lowest ratios in the EU and with a favourable maturity profile supporting its resilience to shocks.

Moreover, Denmark benefits from a wealthy, diversified and competitive economy, which counterbalances the vulnerability to external shocks given by its small size and openness. The recovery is expected to strengthen, with growth forecast at 2.0% and 2.1% in 2015 and 2016, respectively, supported by very low interest rates, favourable labour market conditions and improving export performance. Reforms adopted over recent years have helped restore external competitiveness and should also increase structural employment and improve growth potential. The resilience of the economy is also underpinned by a high income per capita of USD 44,343 in PPP terms in 2014, 21% higher than the EU average.

The ratings are also supported by Denmark’s credible macroeconomic policy framework. Its stable fiscal position and outlook is supported by a robust fiscal policy framework, founded in the Danish Budget Law and the EU fiscal rules. A responsible and stable fiscal policy has been crucial to maintaining Denmark’s fixed exchange rate policy, which has provided the country with price and economic stability for several years. The Danish krone peg to the euro has been maintained even during periods of pressure in European financial markets. This was demonstrated at the beginning of 2015, when the Danish central bank responded firmly to appreciation pressures on the krone, by cutting its policy rates and intervening in the foreign exchange market.

Denmark also faces some challenges. Indebtedness in the household sector remains high, estimated at 265% of disposable income in 2014, leaving households susceptible to shocks. Nevertheless, mitigating this risk is the robust asset position of households, with net financial assets of 158% of GDP, and their resilient debt service capacity. Debt is largely concentrated in high-income households.

Denmark’s financial sector is concentrated in six systemically important financial institutions (SIFIs), including mortgage banks, and the banking sector is large relative to the size of the economy, with assets of over 420% of GDP. Therefore, a shock to the financial system could have a severe and large impact on the economy. Nevertheless, SIFIs are subject to extra capital requirements and banks have rebuilt their capital buffers in recent years, their profitability has improved, and their liquidity appears robust. The banking sector is set to benefit from the stronger recovery of the economy. Therefore, and also reflecting the enhanced regulatory and supervisory framework, DBRS sees vulnerabilities in the financial sector as contained.

Finally, pressures on the housing sector could start to build up. House prices have been recovering moderately from the burst of the housing boom, growing by about 4% over the past two years, and thus contributing to the repair of household balance sheets. However, larger price increases have been evident in the biggest cities, and house prices accelerated in Q1 2015, with the overall house price index at 6.5% y-o-y up from 4.3% in Q4 2014. Demand for housing has been largely driven by low interest rates. The price to income ratio, nevertheless, remains close to 40 percentage points below its 2007 peak. Home-owners have also increasingly re-refinanced their variable-rate mortgages into fixed-rate ones, which reduces the risks from changes in interest rates.

Notes:
All figures are in Danish Kroner (DKK) unless otherwise noted.

The principal applicable methodology is Rating Sovereign Governments, which can be found on the DBRS website under Methodologies. The principal applicable rating policies are Commercial Paper and Short-Term Debt, and Short-Term and Long-Term Rating Relationships, which can be found on our website under Rating Scales.

These can be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include Ministry of Economic Affairs and the Interior of the Kingdom of Denmark, Danmarks Statistik, Danmarks Nationalbank, European Central Bank, European Commission, Statistical Office of the European Communities, IMF, OECD, BIS, and Haver Analytics. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com.

This is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period, while reviews are generally resolved within 90 days. DBRS’s outlooks and ratings are under regular surveillance.

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

For further information on DBRS historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

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

Lead Analyst: Adriana Alvarado
Rating Committee Chair: Roger Lister
Initial Rating Date: 20 September 2012
Most Recent Rating Update: 23 January 2015

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