Morningstar DBRS Confirms the Kingdom of Denmark at AAA, Stable Trend

DBRS Ratings GmbH (Morningstar DBRS) confirmed the Kingdom of Denmark's (Denmark) Long-Term Foreign and Local Currency - Issuer Ratings at AAA. At the same time, Morningstar DBRS confirmed Denmark's Short-Term Foreign and Local Currency - Issuer Ratings at R-1 (high). The trend on all ratings remains Stable.

KEY CREDIT RATING CONSIDERATIONS
The Stable trend reflects Morningstar DBRS' view that risks to the credit ratings remain limited. Domestic demand is expected to strengthen as inflation and interest rates decline, while exports will benefit from the reopening of the Tyra gas field and positive dynamics in the pharmaceutical sector. Fiscal policy will likely be looser over the medium term. Higher expenditures on defense, green investments and an ageing population will put some pressure on public finance in coming years. Nevertheless, Denmark will continue to benefit from healthy public accounts reflecting sound, although declining, fiscal surpluses and one of the lowest public debt ratios in the European Union (EU). As economic growth normalises to potential and public expenditures increase, fiscal surpluses will decline but should remain positive until 2027. As a result, public debt is expected to remain at around 34% of GDP by 2027.

The credit ratings are underpinned by Denmark's sound public finances, strong external position, credible policy framework, and wealthy and diversified economy. Moreover, the country's predictable macroeconomic policy framework has bolstered economic stability for decades. Denmark's strengths offset the credit challenges associated with an interconnected financial system and high levels of household debt, along with a high share of variable-rate mortgages in the context of elevated, although declining, interest rates.

CREDIT RATING DRIVERS
Given Denmark's credit strengths, a downgrade to the credit ratings appears unlikely. However, the credit ratings could be downgraded if one or a combination of the following occurs: (1) a severe shock to the economy that materially impairs Denmark's medium-term prospects, or (2) a substantial deterioration of the public debt ratio, which could be triggered by a materialisation of contingent liabilities associated with its large and interconnected financial system.

CREDIT RATING RATIONALE

The Pharmaceutical Sector Remains Supportive While Domestic Demand Will Gradually Improve

Denmark's credit profile benefits from a productive, diversified, wealthy, and flexible economy. This is reflected in a high GDP per capita. Over the last two years, domestic demand was weak as a result of high inflation and the rapid rise of interest rates, but net exports of pharmaceutical products provided significant support. GDP expanded by a resilient 1.5% in 2022 and 2.5% in 2023, with net exports of goods from the pharma industry accounting for a significant portion of the growth. Economic activity is expected to continue to register sound growth rates. GDP is expected to expand by 1.9% this year and by 2.2% in 2025, supported by a recovery in domestic demand, the reopening of the Tyra field, and the strength of medicinal exports. Over time, the pharma sector's contribution to GDP will likely diminish, even though the sector is expected to maintain a strong international position.

Risks to the outlook are mainly related to a prolonged period of high interest rates, as well as rising geopolitical tensions and lower than expected growth among Denmark's main trading partners. However, the labour market continues to show resilience despite the economic slowdown. Since 2021, Denmark has seen strong job creation, which has attracted a large amount of foreign workers. This has contributed to the employment ratio peaking at 77.7% in Q2 2024. The unemployment rate, which was 2.9% in August, is one of the lowest in the EU. The labor market is expected to remain robust but job creation will likely slow as economic growth normalizes.

Denmark's Strong Public Sector Position Not Affected by the Decline in Fiscal Surplus in the Medium Term

Morningstar DBRS views Denmark's strong public finance metrics and its fiscal track record as key credit strengths, providing the country with valuable fiscal space to stabilise the economy against severe shocks. Denmark has registered the largest fiscal surpluses in the EU for five years in a row. This reflected a high level of economic activity, a strong labour market, pension yield taxes, and frozen holiday allowance payments. In 2023, the surplus amounted to 3.3% of GDP. Going forward, the surplus is expected to decline in order to accommodate increased spending on defense and security, including aid to Ukraine, lower revenue due to the personal tax income reform, and increased support to municipalities and regions. However, the government expects the budget to remain in surplus through 2027.

Denmark's credit ratings are also underpinned by a healthy public sector debt position. Denmark's public debt ratio (European Economic and Monetary Union debt definition), at 33.6% of GDP in 2023, is one of the lowest in the EU. Fiscal surpluses have resulted in modest gross issuance, which has reduced refinancing risk. The latest estimates from the Ministry of Economic Affairs point to public debt as a share of GDP declining to around 31% in 2025, while net public assets as a share of GDP are expected to remain above 20%. Debt is mostly denominated in local currency, and a large share of government bonds are held by Danish insurance companies and pension funds. Despite the significant rise in interest rates, Denmark's net interest burden is expected to remain low in the coming years as a result of a large amount of assets bearing interest. Moreover, the central government's account, estimated to reach almost DKK 230 billion (8.0% of GDP) by the end of 2024, demonstrates strong flexibility and provides the government with an additional financial buffer.

Financial Stability Risks Appear Contained; Risks Stemming From Commercial Real Estate Are Mitigated by Macroprudential Measures

Easing monetary policy is expected to relieve the pressure on indebted Danish households which are experiencing a repricing in interest rates, as well as on commercial property valuations. Like the European Central Bank (ECB), Danmarks Nationalbank (DN) has cut the policy rate by 50 basis points (bps) cumulatively since June 2024, and further easing is expected in the upcoming months. A prolonged period of elevated interest rates might negatively affect consumption and weigh on banks' balance sheets via losses from Commercial Real Estate (CRE) firms.

Morningstar DBRS views positively the fall in household debt over the past few years, but borrowers have become more sensitive and therefore vulnerable to elevated interest rates. Although household debt as a share of adjusted disposable income remains among the highest within the EU, the ratio, which was estimated at around 177% in Q2 2024, was almost 80 percentage points lower than at the end of 2020. The fall was mainly due to a large share of borrowers converting their fixed interest rate mortgages into variable ones but with a lower level of debt, along with the mark-to-market impact on mortgage valuations. On the other hand, it has increased the share of borrowers at a variable rate, making them vulnerable to elevated interest rates. As interest rates decline, this trend could continue. Against this background, Morningstar DBRS considers the strength of the labour market, the large amount of net financial assets of Danish households, and the concentration of debt among the wealthiest households as mitigating factors.

The banking sector's exposure to the CRE market is large, concentrated, and represents a point of attention. Nevertheless, Danish banks are strong, well capitalised, and liquid, and the surge in net interest income has bolstered profitability. The system is well equipped to absorb the likely deterioration in credit quality due to the economic slowdown or higher interest rates, or potential losses from the commercial real estate market. However, financial institutions have downgraded only over a third of property values behind loans to real estate firms since Q3 2022, despite high interest rates. Against this background, a 7 percent CRE sector-specific systemic risk buffer, effective since the end of June 2024, is expected to be an important mitigant. However, in Morningstar DBRS' view, the large and highly interconnected Danish financial system, with the housing market and covered bond market¿the world's largest as a percentage of GDP¿strongly linked, could act as an amplifier of shocks. This underpins the negative adjustment in the Monetary Policy and Financial Stability Building Block assessment.

The External Position Is Strong, and Non-pharma Sectors Will Benefit From an Improvement in External Demand Over the Medium Term

Denmark's credit ratings are supported by its strong external position. Over the past 10 years, the country has registered current account surpluses averaging around 8.0% of GDP, reflecting strong national savings. Morningstar DBRS does not anticipate a significant reversal any time soon. Earnings from sea freights and the boom in pharmaceutical exports lifted surpluses even higher, averaging 10.7% of GDP in the last two years. With the reopening of the Tyra gas field, Denmark will likely register an increase in energy exports this year, which will continue to sustain a current account surplus above 10% of GDP, according to the Ministry of the Economic Affairs. In the medium term, the improvement in economic growth abroad will likely bolster Danish exports, including non-pharma industries. Therefore, the current account surplus will likely continue to be sizeable. The country also benefits from a high net international investment asset position (NIIP), amounting to 49.5% of GDP in 2023.

While Denmark's peg to the euro reduces its external adjustment capacity, the country has successfully relied on sound economic and fiscal policies to stabilise the economy and to prevent large external imbalances from building up. A strong external position, ample international reserves, sound public finances, and a significant political commitment underpin the high credibility of Denmark's long-standing fixed exchange rate policy. This supports Morningstar DBRS' positive qualitative adjustment of the Balance of Payments Building Block assessment.

Very Strong and Stable Political Framework Supports Economic Stability

Denmark's political environment and institutions are very strong, as reflected in the high scores on the World Bank's Worldwide Governance Indicators. Moreover, key reforms typically benefit from broad-based support across the political spectrum, which is conducive to policy continuity and limit the risk of reversal. This predictable macroeconomic policy framework has underpinned the country's price and economic stability for decades, and it will likely continue in the foreseeable future. The coalition government formed after the elections in November 2022. The coalition, which includes the Social Democrats, the Liberals, and the Moderates, is expected to remain in power until the term ends in October 2026.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

There were no Environmental, Social, or Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024) https://dbrs.morningstar.com/research/437781

For more information on the Rating Committee decision, please see the Scorecard Indicators and Building Block Assessments: https://dbrs.morningstar.com/research/441080.

Notes:
All figures are in Danish krone unless otherwise noted. Public finance statistics reported on a general government basis unless specified.

The principal methodology is the Global Methodology for Rating Sovereign Governments (15 July 2024) https://dbrs.morningstar.com/research/436000. In addition Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings https://dbrs.morningstar.com/research/437781 in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The sources of information used for these credit ratings include the Ministry of Finance (Denmark's Fiscal and Structural Policy Plan 2024 - September 2024), Ministry of Economic Affairs (Economic Survey, August 2024 - September 2024), Danmarks Nationalbank (Outlook for the Danish Economy - September 2024; Financial Stability 1st Half 2024 - May 2024), Danmarks Statistik, Danish Energy Agency, European Central Bank, European Commission (Spring 2024 Economic Forecast - July 2024), The Social Progress Imperative (2024 Social Progress Index), Eurostat, OECD, IMF (Article IV Staff Report - September 2024, WEO - April 2024), World Bank, BIS, Macrobond and Haver Analytics. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, these are unsolicited credit ratings. These credit ratings were not initiated at the request of the issuer.

With Rated Entity or Related Third Party Participation: YES
With Access to Internal Documents: YES
With Access to Management: NO

Morningstar 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.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and ratings are under regular surveillance.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://dbrs.morningstar.com/research/441082.

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Carlo Capuano, Senior Vice President, Sector Lead, Global Sovereign Ratings
Rating Committee Chair: Michael Heydt, Senior Vice President, Sector Lead, Global Sovereign Ratings
Initial Rating Date: September 20, 2012
Last Rating Date: April 12, 2024

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