Moody’s Investors Service (“Moody’s”) has today affirmed Denmark’s long-term and short-term government bond ratings at Aaa/Prime-1. The outlook on the rating remains stable.
Moody’s decision to affirm Denmark’s Aaa rating reflects the following key drivers:
- (1) The country’s wealthy, well-diversified and export-oriented economy;
- (2) Robust public finances and low government debt levels; and
- (3) A very strong institutional framework with high levels of transparency and a long track record of effective and proactive policy making.
These credit strengths outweigh the risks linked to its elevated level of household debt as well as to certain features of the Danish financial system.
Moody’s maintenance of the stable outlook on the rating reflects the rating agency’s expectation that Denmark’s economy will continue to recover, and that the government’s fiscal strength will remain solid in the coming years.
RATINGS RATIONALE
RATIONALE FOR RATING AFFIRMATION AT Aaa
Denmark’s Aaa rating is underpinned by the country’s very high economic strength, the diversification and competitiveness of which is reflected in sustained current account surpluses of 5-7% of GDP in recent years. The country is very wealthy with high levels of per capita income (at $44,325 in 2014 in purchasing power parity terms), in line with Aaa-rated peers such as Germany and Sweden, and a comparatively even distribution of income and wealth. The flexibility of the labour market, which is high even in comparison with Aaa peers, is another positive feature, with very low long-term unemployment and high participation rates.
Denmark’s Aaa rating is also supported by its strong public finances and low public debt levels. The general government deficit has exceeded 3% of GDP only once since 1996 (in 2012), while the public debt ratio – at 45% of GDP in 2014 – is among the lowest in its peer group even before taking into account the government’s large cash deposits with the central bank of around 13% of GDP (as of February 2015). The debt burden is highly affordable as the country’s safe haven status has ensured low interest rates on government debt. Interest payments on the debt represent less than 3% of general government revenue.
Denmark’s credit profile is also underpinned by the country’s robust institutional framework, with high levels of transparency and a long track record of forward-looking and proactive policymaking by successive governments.
Danish households are highly indebted – household debt was around 290% of disposable income and 140% of GDP in Q3 2014, mainly in the form of mortgages. However, high household leverage does not represent a major threat to Denmark’s creditworthiness in Moody’s view as the household sector’s financial assets are around double the level of its liabilities, including very substantial pension savings. A further mitigating factor is that household indebtedness and income are highly correlated, implying a high capacity to service debt even if financing conditions were to deteriorate — a view that is supported by the low level of arrears on mortgages in the financial system — even though the structure of households’ balance sheets makes the Danish economy more interest-rate sensitive than other countries’.
Denmark’s other credit challenge relates to its large financial sector, and in particular the size of its large mortgage credit system, its reliance on wholesale funding and the maturity mismatch to which its funding structure gives rise. However, the sector proved resilient during the financial crisis, and recent legislative changes with regards to refinancing risks in the mortgage credit sector may somewhat mitigate the already low risk of systemic disruption.
RATIONALE FOR STABLE OUTLOOK
The main driver of the stable outlook on Denmark’s Aaa sovereign rating is Moody’s expectation that it will be able to maintain its strong credit metrics over the coming years. The economic outlook is improving after several years of subdued growth: Moody’s forecasts real GDP growth of 1.7% this year and around 2% over the coming years, compared with 1% in 2014, on the back of stronger domestic demand and a slower decline in oil and gas production than in previous years. In addition, the country’s loss of competitiveness has started to reverse, as a result of a slower increase in unit labour costs and lower wage rises than in Denmark’s trading partners, which should support the country’s export performance.
The stable outlook also reflects Moody’s expectation that the government’s financial strength will remain solid over the medium term. The government will likely post a budget deficit at the general government level this year, after two years of strong fiscal outturns including an estimated surplus of 1.3% of GDP last year due to a temporary increase in tax revenues linked to changes in pension taxation. However, there is broad political consensus on the merits of low budget deficits and the authorities are committed to restricting the annual structural budget deficit to 0.5% of GDP as well as to achieving a structural fiscal balance by the end of the decade, which is consistent with or slightly better than the EU’s “fiscal compact”, to which Denmark subscribes. This will likely ensure that the public debt ratio remains at or below 45% of GDP, a low level compared with most of Denmark’s peers.
WHAT COULD MOVE THE RATING DOWN
Downward pressure on Denmark’s Aaa/stable rating would arise if the country’s economic or fiscal strength were to undergo a sustained deterioration.
The local and foreign currency deposit ceilings and the local-currency and foreign-currency bond ceilings for Denmark are unaffected by this rating action and remain at Aaa/P-1.
- GDP per capita (PPP basis, US$): 44,325 (2014 Actual) (also known as Per Capita Income)
- Real GDP growth (% change): 1% (2014 Actual) (also known as GDP Growth)
- Inflation Rate (CPI, % change Dec/Dec): 0.1% (2014 Actual)
- Gen. Gov. Financial Balance/GDP: 1.8% (2014 Actual) (also known as Fiscal Balance)
- Current Account Balance/GDP: 6.2% (2014 Actual) (also known as External Balance)
- External debt/GDP: 179.4% (2013 Actual)
- Level of economic development: Very High level of economic resilience
- Default history: No default events (on bonds or loans) have been recorded since 1983.
On 24 March 2015, a rating committee was called to discuss the rating of the Denmark, Government of. The main points raised during the discussion were: The issuer’s economic fundamentals, including its economic strength, have not materially changed. The issuer’s institutional strength/ framework, have not materially changed. The issuer’s fiscal or financial strength, including its debt profile, has not materially changed. The systemic risk in which the issuer operates has not materially changed. The issuer’s susceptibility to event risks has not materially changed.
The material has been provided by InstaForex Company – www.instaforex.com