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 vulnerabilities stemming from the private sector.

The AAA ratings for Denmark are supported by the country’s strong external position. Denmark has recorded current account surpluses since 1990s, averaging 5.0% of GDP over the past ten years. The country is also a large net external creditor, with a net external asset position of 42.0% of GDP in 2015. The external position is expected to remain in surplus, supported by Denmark’s trade competiveness.

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 the operation of automatic stabilisers and 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. Denmark has also reduced its government debt ratio significantly over the past two decades to 40.2% 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 has been weak, but it is expected to strengthen, supported by low interest rates, favourable labour market conditions and improving export performance. Reforms adopted over recent years have helped improve 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 46,704 in PPP terms in 2015, 21% higher than the EU average.

Nevertheless, Denmark faces some challenges. Firstly, indebtedness in the household sector remains very high, at 256.3% of disposable income in Q1 2016, leaving households susceptible to shocks. Mitigating this risk is the robust asset position of households, with net financial assets of over 170% of GDP, their resilient debt service capacity, and the fact that high debt burdens 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, with strong links to the insurance sector and pension funds. 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 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 have risen strongly above 10% on an annual basis since Q2 2015, with the larger price increases recorded 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.

RATING DRIVERS
Downward pressure on the ratings is unlikely in the absence of a severe shock to the economy, most likely generated by 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.

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, European Central Bank, European Commission, Eurostat, IMF, Haver Analytics. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

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

This rating included participation by the rated entity or any related third party. DBRS had no access to relevant internal documents for the rated entity or a related third party.

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.

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

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, Assistant Vice President, Global Sovereign Ratings
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer, Global FIG and Sovereign Ratings
Initial Rating Date: 20 September 2012
Last Rating Date: 15 January 2016

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