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
