DBRS Confirms Kingdom of Denmark 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 high levels of household debt, an interconnected financial system, and potential pressures on the housing market. The Stable trend reflects DBRS’s view that the challenges Denmark faces are manageable. The economy continues to grow at a steady pace, 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 6.1% of GDP over the past ten years. The country is also a large net external creditor, with a net external asset position of 56.1% of GDP in 2016. The external position is expected to remain in surplus, supported by Denmark’s trade competiveness.

Denmark also exhibits sound public finances. This has provided the country with fiscal flexibility and thus allows 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. Nevertheless, the deficit has remained moderate, on average below the EU’s Stability and Growth Pact limit of 3% of GDP, and the structural deficit is within the limit of 0.5% set in the Danish Budget Law. A gradual fiscal adjustment is expected to lead to a structural balance by 2025. Moreover, Denmark has reduced its government debt ratio significantly over the past two decades to 37.8% 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 sound public finances, together a strong external position, 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. A recent revision to the national accounts indicates that the real GDP growth has been higher than previously estimated. Growth is expected to remain steady, driven by both domestic demand and solid export performance. Reforms adopted over recent years have helped improve external competitiveness, and should help increase structural employment and improve growth potential. The resilience of the economy is also bolstered by a high income per capita, at USD 47,985 in PPP terms in 2016, 22% higher than the EU average.

Nevertheless, Denmark faces some challenges. Firstly, indebtedness in the household sector remains high, at 266% of disposable income and 132% of GDP in Q4 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 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, particularly to the covered bond market, could have a large impact on the economy. Nevertheless, SIFIs are subject to extra capital requirements, liquidity appears robust and banks profitability has improved notably in recent years. 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 from the burst of the housing boom and have helped rebuild households’ net wealth. After rising strongly by over 10% Y-o-Y from Q2 2015 to Q1 2016, price growth for owner-occupied flats eased to 6.7% in the second half of 2016. However, price increases have been particularly strong in the Copenhagen area. A country-wide spread of this trend could lead to concerns over financial stability. A new housing taxation system, which removes the 2001 tax freeze, is set to be implemented from 2021 and expected to have a stabilising effect on house prices.

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 Danmarks Nationalbank, Ministry of Finance of the Kingdom of Denmark, Ministry for Economic Affairs and the Interior, Danmarks Statistik, Copenhagen Economics, European Central Bank, European Commission, Eurostat, OECD, IMF, United Nations Development Programme (UNDP), and 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 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, Global Sovereign Ratings
Rating Committee Chair: Thomas R. Torgerson, Senior Vice President, Global Sovereign Ratings
Initial Rating Date: 20 September 2012
Last Rating Date: 13 January 2017

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