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

DBRS Ratings Limited (DBRS) has confirmed the Kingdom of Denmark’s long-term foreign and local currency issuer ratings at AAA and its short-term foreign and local currency issuer ratings at R-1 (high). The trend on all ratings remains Stable.

The Stable trend reflects DBRS’s assessment that the challenges Denmark faces are manageable. The economy continues to recover and Denmark’s economic policy framework is solid, both of which limit the risks stemming from the private sector. Downward pressure on the ratings is unlikely in the absence of a severe shock to the economy, most likely generated by a turmoil in financial markets or a shock to Denmark’s mortgage covered bond market, which could weaken private sector balance sheets and have an adverse impact on the financial system.

The AAA ratings for Denmark are supported by the country’s strong external position. Denmark has recorded current account surpluses since 1990s, averaging 4.5% of GDP over the past ten years. The country is also a large net external creditor, with a net external asset position of 46.4% of GDP in 2014. The external position is expected to remain supported by Denmark’s trade competiveness and improving demand from its export markets.

Denmark also enjoys sound public finances, which have allowed the government to support the economy during downturns. After years of fiscal surpluses, the general government balance turned into a moderate deficit in 2009, reflecting an accommodative stance in response to the 2008-2009 recession and subsequent recovery. Nevertheless, the fiscal deficit has remained moderate. A gradual normalisation of the fiscal policy stance is expected to lead to a structural fiscal balance by 2020, ensuring fiscal sustainability and an economic policy in line with the business cycle. At the same time, Denmark has reduced its government debt ratio significantly over the past two decades to an estimated 39.9% of GDP in 2015, one of the lowest ratios in the EU. Moreover, a favourable maturity profile reinforces the resilience of government debt to shocks.

The ratings are further supported by Denmark’s credible macroeconomic policy framework. Its stable fiscal position and outlook are buttressed 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 contributed to the country’s price and economic stability for decades. 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.

Moreover, Denmark benefits from a wealthy and diversified economy, which counterbalances the vulnerability to external shocks given its small size and openness. The recovery is expected to strengthen, with growth forecast at 1.8% and 2.0% in 2016 and 2017, 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 increase structural employment and improve growth potential. The resilience of the economy is also bolstered by a high income per capita of USD 44,625 in PPP terms in 2014, 21% higher than the EU average.

Nevertheless, Denmark faces some challenges. Firstly, indebtedness in the household sector remains very high, at 254.6% of disposable income in Q3 2015, leaving households susceptible to shocks. Mitigating this risk is the robust asset position of households, with net financial assets of 158% of GDP, their resilient debt service capacity, and the fact that high debt ratios are largely concentrated in high-income households.

Another challenge is the concentration of Denmark’s financial sector in six systemically important financial institutions (SIFIs), including mortgage banks. The banking sector is also exposed to the housing market and is large relative to the size of the economy. Mortgage banks, in particular, fully finance lending through mortgage bonds, in which the Danish insurance and pension funds invest. 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, profitability has improved, and liquidity appears robust. Reflecting these conditions and the enhanced regulatory and supervisory framework, DBRS views vulnerabilities in the financial sector as contained.

Finally, pressures on the housing market could build up again. House prices have been recovering moderately from the burst of the housing boom and have contributed to the repair of household balance sheets. However, prices for owner-occupied flats accelerated to 11.5% year over year (YOY) in Q3 2015 and large price increases have been evident in the biggest cities. The house price to income ratio, nevertheless, remains close to 40 percentage points below its 2007 peak. Mortgages remain largely at variable interest rates, but home-owners have re-refinanced their variable-rate mortgages into fixed-rate ones recently, which reduces the risk 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 Finance of the Kingdom of Denmark, Danmarks Statistik, Danmarks Nationalbank, Danish Financial Services Authority, 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.

DBRS does not typically accept editorial changes other than to correct for factual, accuracy and/or to remove confidential, material non-public, or sensitive information that might otherwise be inadvertently disclosed.

Lead Analyst: Adriana Alvarado, Assistant Vice President
Initial Rating Date: 20 September 2012
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer
Last Rating Date: 7 July 2015

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