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 ratings reflect Denmark’s strong external position, its sound public finances, its credible and solid policy framework, and its wealthy and diversified economy. These strengths counterbalance the challenges, which include a high level of household debt, interconnected financial system, and potential pressures on the housing market. 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 for decades, averaging 5.5% of GDP over the past ten years. The country is also a large net external creditor, with a net external asset position of 39.4% of GDP in 2015. The external position is expected to remain in surplus, supported by Denmark’s trade competiveness.

Denmark enjoys sound public finances, which have provided the country with fiscal flexibility and have allowed the government to support the economy during downturns. After years of surpluses, the general government balance has been in deficit since 2009, except for 2014, when one-off revenues from a capital pension measure and extraordinarily high pension yield taxes led to a fiscal surplus. Nevertheless, the fiscal deficit has remained moderate, on average below the EU’s Stability and Growth Pact limit of 3% of GDP and estimated at 1.4% in 2016. A gradual normalisation of the fiscal policy stance is underway, expected to lead to a structural balance by 2020. Denmark has also reduced its government debt ratio significantly over the past two decades to an estimated 38.1% of GDP in 2016, one of the lowest ratios in the EU.

The ratings are further supported by Denmark’s credible macroeconomic policy framework. Its robust fiscal policy framework is founded in the Danish Budget Law and the EU fiscal rules. A responsible fiscal policy supporting a sound fiscal positon, together with external surpluses, has helped maintain Denmark’s fixed exchange rate policy, in place since 1982. The Danish krone peg to the euro has been preserved even during periods of significant pressure in European financial markets. The predictable macroeconomic policy framework has underpinned the country’s price and economic stability for decades.

Moreover, Denmark benefits from a wealthy and diversified economy, which counterbalances the vulnerability to external shocks given its small size and openness. The recovery from the 2008-2009 crisis has been moderate, though a recent revision to the national accounts indicates that real GDP growth has been higher than previously estimated over the past six years. Growth is expected to strengthen, supported by favourable labour market conditions and solid 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, estimated at USD 46,603 in PPP terms in 2016, 20% higher than the EU average.

Nevertheless, Denmark faces some challenges. Firstly, indebtedness in the household sector remains high, at 251.8% of disposable income and 119.8% of GDP in Q2 2016, creating a potential vulnerability 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 and interconnectedness of Denmark’s financial sector. Six systemically important financial institutions (SIFIs), including mortgage banks, account for close to 90% of total bank lending. The banking sector is also exposed to the housing market. Mortgage banks fully finance lending through mortgage covered bonds, in which the Danish insurance and pension funds invest. Therefore, a shock to the financial system, including to the covered bond market, could have a large impact on the economy. Nevertheless, SIFIs are subject to extra capital requirements, banks profitability has improved in recent years, 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 increased strongly above 10% on an annual basis from Q2 2015 to Q1 2016, with the largest price increases recorded in the biggest cities. Price growth eased to 7.7% and 6.7 in Q2 and Q3 2016, respectively, as the pace of construction has begun to pick up. The house price to income ratio, however, remains around 35 percentage points below its 2007 peak.

RATING DRIVERS
Downward pressure on the ratings could emerge from a severe shock to the economy, most likely generated by turmoil in financial markets or a shock to Denmark’s mortgage covered bond market. Either of these scenarios could potentially 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, OECD, IMF, Haver Analytics. DBRS considers the information available to it for the purposes of providing this rating to be 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 historical default rates published by the European Securities and Markets Authority (“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, Vice President
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer
Initial Rating Date: 20 September 2012
Last Rating Date: 15 July 2016

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