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Rating Action:

Moody's affirms Denmark's Aaa rating; maintains stable outlook

29 Nov 2019

Frankfurt am Main, November 29, 2019 -- Moody's Investors Service ("Moody's") has today affirmed the Government of Denmark's Aaa long-term issuer rating, Aaa senior unsecured bond rating and (P)Aaa programme rating. Moody's has also affirmed Denmark's Prime-1 (P-1) short-term rating. The rating outlook remains stable.

The rating affirmation is based on the following key rating drivers:

(1) Denmark's wealthy, competitive and diversified economy, which features a robust economic growth outlook;

(2) The country's sound institutional framework, marked by a consistent track record of proactive and stability-oriented economic policies;

(3) The government's strong finances based on a low and highly affordable government debt burden, and Denmark's long-term fiscal sustainability as a result of past pension reforms.

The stable outlook reflects Moody's view that downside risks to the credit profile -- which are predominantly external in nature -- are mitigated by the very high degree of economic and fiscal resilience, which is also reflected in a proven track record of managing external shocks and addressing long-term challenges such as demographic change. In addition, Denmark's credit profile shows very limited susceptibility to adverse event risks.

The long-term country ceilings for local and foreign-currency bond and bank deposits remain unchanged at Aaa. Denmark's short-term country ceilings for foreign-currency bonds and bank deposits remain unchanged at P-1.

RATINGS RATIONALE

RATIONALE FOR AFFIRMING THE Aaa RATING

FIRST DRIVER: A WEALTHY, COMPETITIVE AND DIVERSIFIED ECONOMY WITH ROBUST GROWTH OUTLOOK

Denmark's GDP per-capita on a purchasing power parity (PPP) at $52,279 in 2018 is close to peers such as Germany (Aaa stable) at $52,386 and Sweden (Aaa stable) at $53,652, and compares well to the Aaa-rated median at $55,070. This high level of wealth is reflected in high standards of living, and Denmark exhibits comparatively low income inequality. The Gini index, which represents the income distribution of a country's residents, is one of the lowest in the world, similar to its Nordic peers.

The economy is well-diversified with a large public sector accounting for 20% of Gross Value Added (GVA) together with trade and transportation, followed by financial and business services (16%). Other key sectors include manufacturing (15%), and construction (14%, including dwellings). The Danish economy's diversification is also evident in the composition of exports where 50% of Denmark's manufacturing exports comprise of high and medium-high technology products, underscoring Denmark's high competitiveness.

Denmark's skilled labor force, competitive market and good infrastructure have fostered an innovative and entrepreneurship-friendly environment, boosting corporate investment in research and development and knowledge-based capital. Supporting innovation and education is a key government priority, reflected in the large share of public expenditure on education of 6.5% of GDP in 2018 which is the second highest in the EU, surpassed only by Sweden (6.7% of GDP in 2017). Similarly, Denmark's public spending on research and development reached 1.75% of general government expenditure in 2018, the second-highest in the EU after Germany (Aaa stable, 2.1%).

For the period 2019 to 2023, Moody's expects Denmark's real GDP growth to average 1.6% per year, which is in line with the median for Aaa-rated peers of 1.7%, but higher than the weighted average growth expected for the euro area of 1.3%. The European Commission estimates Denmark's potential growth around 1.7% in 2020 and 2021. Due to its trade openness, Denmark is exposed to external headwinds, including a potential no-deal Brexit and global trade protectionism, but the strong labour market and sustained real wage growth will support private consumption, which contributes almost 50% to overall growth. While household debt levels remain very high in a global comparison at around 105% of GDP, Danish households have deleveraged and refinanced mortgages in the recent economic upswing, which has supported consumption and contributed to an improved mortgage structure.

SECOND DRIVER: A SOUND INSTITUTIONAL FRAMEWORK, MARKED BY STRONG CONSENSUS FOR STABILITY-ORIENTED POLICIES

Denmark has one of the strongest institutional set-ups globally. Moody's assessment is based on the high quality of legislative and executive institutions, a strong civil society and high-quality judiciary, as well as a track record of fiscal and macroeconomic policy effectiveness. Denmark's institutions are highly credible and policy formulation and implementation is predictable and forward-looking, which is also reflected in strong scorings in global surveys. Despite the money laundering scandal that came to light in 2018 and involves Denmark's largest bank, the quick political reaction and implementation of measures to strengthen financial supervision supports Moody's assessment.

Monetary policy credibility is underlined by the stable and long-standing exchange rate peg to the euro (and prior to that to the deutschmark). The government's operations are highly transparent, data is of high quality and timely, and public debt management is very professional. This is complemented by forward-looking economic and social policy, including for example the 10-year policy plans that successive governments have presented over the years.

Moody's assessment also incorporates sustained commitment and broad consensus to preserving strong public finances. Denmark has a track record of maintaining prudent fiscal policies and relatively low debt levels. Since 1999, the general government debt ratio has never exceeded the Maastricht criteria of 60% of GDP. Despite a notable but temporary rise associated with the global financial crisis, general government debt remains considerably lower than that of most of its close peers.

Budgetary outcomes have tended to outperform budget forecasts, reflecting the cautions setting of budgetary parameters and municipalities' disciplined spending behavior under the National Budget Law. The law stipulates that the budget proposal for each year much be based on a structural deficit of no more than 0.5% of GDP, except in extraordinary circumstances such as natural disasters. Although these rules are subject to debate, Moody's does not expect the limits to be significantly loosened given the consensus regarding fiscal prudence.

THIRD DRIVER: A VERY STRONG GOVERNMENT BALANCE SHEET AND LONG-TERM FISCAL SUSTAINABILITY

Denmark's debt burden (around 34% of GDP at the end of 2018) is below the median for Aaa-rated sovereigns and the sovereign also shows very strong debt affordability. Moody's expects the debt level to decline gradually to 33% of GDP this year and 32.8% in 2020, and start to increase from 2021 onwards. The new system of social housing financing, where the central government will have a more active role as it borrows and buys up all social housing mortgage bonds, as well as on-lending to state-owned enterprises are the main drivers for the expected increase in general government debt.

At the same time, Moody's also takes into account sizable central government deposits in the central bank, which amounted to DKK112 billion at the end of 2018, equal to around 5% of GDP, as well as other government funds' assets of about 2% of GDP.

The new government that came into power this year has pledged to boost spending. That said, the government still shows commitment to maintain prudent fiscal policy by basing its fiscal policies on achieving a balanced budget by 2030, and Moody's expects only small fiscal deficits of less than -0.5% of GDP from 2021 onwards.

Despite an ageing population, long-term fiscal sustainability is benefiting from the implementation of pension reform that links the retirement age to life expectancy. According to European Commission projections, the total cost of ageing will remain broadly stable at around 28% of GDP until 2070.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook reflects Moody's view that downside risks to the credit profile -- which are predominantly external in nature -- are mitigated by the very high degree of economic and fiscal resilience, which is also reflected in a proven track record of managing external shocks and addressing long-term challenges such as demographic change.

In addition, Denmark's credit profile shows very limited susceptibility to event risks. The large financial sector, and interconnectedness within (housing market, households, mortgage credit institutions, banks) poses the main source of potential contingent liabilities for the government. However, country-specific features and ongoing improvements to the financial supervisory system are important mitigating factors in this respect.

Domestic and geopolitical event political event risks are low, despite a fairly fragmented domestic political landscape and some mild exposure to regional geopolitical event risk. Small government gross financing needs of less than 5% of GDP and strong market access are limiting government liquidity risk, while Denmark's structural current account surplus, coupled with a sizable and growing net asset international investment position, which stood at close to 60% of GDP in 2018, shield the country from external liquidity pressures.

WHAT COULD CHANGE THE RATING DOWN

While currently unlikely given the stable rating outlook, Denmark's Aaa rating would come under pressure if its strong fiscal and government debt metrics were to record a strong deterioration over several years with no indication of a reversal. In this respect, rolling back of past reforms, leading to a sharp erosion of Denmark's long-term fiscal sustainability would be credit negative. An external shock to growth would in itself not be sufficient to exert meaningful downward pressure on the rating, unless it were to be accompanied by a rapid decline in house prices, reversal in risk premia and crystallization of contingent liabilities from the financial sector on the government's balance sheet.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Moody's takes account of the impact of environmental (E), social (S), and governance (G) factors when assessing sovereign issuers' economic, institutional and fiscal strength and their susceptibility to event risk. In the case of Denmark, the materiality of ESG to the credit profile is as follows.

Denmark faces some exposure to environmental risks, mainly through climate change-related weather events that could affect agricultural sector performance, and more longer-term through rising sea levels. On the other hand, Danish producers of wind turbines have been benefitting from increased focus on renewable power generation, which is reflected in GDP growth and trade performance.

Exposure to social risks is limited for Denmark, given its high and relatively evenly distributed wealth levels, and the comprehensive social safety net. Also, while facing changing demographics, past reforms have largely addressed fiscal sustainability challenges, and Moody's expects the broad-based consensus for pro-active and forward-looking policy formulation and implementation to be maintained.

As for all sovereigns, governance considerations play an important role in Moody's view of Denmark's credit profile. The overall institutional framework is very strong, but the recent money laundering scandal involving the largest Danish bank highlighted shortcomings with regards to the financial supervisory framework. Having said that, the Danish authorities have taken swift action, underscoring Moody's assessment that the impact on the sovereign credit profile is very limited.

GDP per capita (PPP basis, US$): 52,279 (2018 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 2.4% (2018 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 0.7% (2018 Actual)

Gen. Gov. Financial Balance/GDP: 0.5% (2018 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: 7.0% (2018 Actual) (also known as External Balance)

External debt/GDP: 138.7% (2018 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 27 November 2019, 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 issuer's susceptibility to event risks has not materially changed.

The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Steffen Dyck
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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