Fitch Affirms Denmark at 'AAA'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed Denmark's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'AAA'. The Outlooks are Stable. The issue ratings on Denmark's unsecured foreign and local currency bonds and commercial paper have also been affirmed at 'AAA'/'F1+'. The Country Ceiling has been affirmed at 'AAA' and the Short-term foreign currency IDR at 'F1+'.
KEY RATING DRIVERS
Denmark's 'AAA' IDRs and Stable Outlooks reflect the following key rating drivers:
Denmark has a high value-added and wealthy economy, supported by strong institutions with a track record of solid macroeconomic, fiscal and financial stability management. Income per capita, development and governance indicators are in line with the 'AAA' median.
Public finance management is strong, with a track record of low fiscal deficits, and bound by the Danish budget law, which contains strict expenditure ceilings at the central and local government levels. The new government that assumed office in June 2015 has continued to pursue the objective of eliminating the structural deficit by 2020, and has sought to accelerate this development by aiming to reduce the structural deficit to 0.4% of GDP in 2016 and 2017.
Fitch estimates the general government balance worsened to -2.4% of GDP in 2015, from a surplus of 1.5% of GDP in 2014. The deterioration in 2015 largely reflects the falling away of extraordinary revenues. The 2015 deficit is also further affected by the fall in revenues from North Sea oil production, due to the further decline in the oil price. Fitch forecasts the budget deficit will worsen in 2016 to 2.8% of GDP due to additional temporary revenues from the Pension Package (1.4% of GDP) falling away, before improving to -2.0% of GDP in 2017.
General government debt/GDP is estimated to be 39.9% at end-2015, and is lower than the 'AAA' median. Debt/GDP fell from 44.6% at end-2014 due to the government's strategy to suspend bond issuance in January-October 2015 to dampen appreciative pressures on the krone in support of the DKK/EUR peg. The strategy resulted in a thinning of average trading volumes and a widening of bid-ask spreads for Danish government securities, which have since recovered towards their normal levels following a resumption of issuance. Fitch forecasts debt/GDP to peak at 43.4% in 2017 driven by the primary budget deficits and the increase in on-lending to state-owned entities (approximately 5% of GDP at end-2015).
External finances are a key rating strength for Denmark. The current account is estimated to be 6.9% of GDP in 2015 and has been in surplus for more than two decades, with the average annual surplus growing from 2.9% of GDP in 2001-2005, to 6.7% of GDP in 2011-2015. Since the global financial crisis in 2008, the net trade account has recovered to its pre-crisis levels. Net factor income also rose to 2.9% of GDP in 2015, from -1.8% in 2001, reflecting interest income from the build-up of the economy's large pension assets invested abroad. Net external debt consequently fell to -9.0% of GDP in 2015, from 35.8% of GDP in 2007.
The economic recovery in 2015 softened slightly with real GDP estimated to grow by 1.2% in 2015 (2014: 1.3%). Private consumption was the main driver of growth in 2015 with households reversing the deleveraging trend of recent years, and supported by rising private sector employment (1.3%yoy), rising nominal wages (2.0%yoy), low inflation and low interest rates. Net exports were hit by weak external demand from the advanced economies, but are still estimated to contribute positively to 2015 growth. Fitch forecasts growth to accelerate to 1.9% in 2016 and 2017 driven by private consumption and investments. Inflation remained low at 0.3% in 2015, driven by the continued fall in oil prices, while core inflation was 1.2%.
Denmark's bank systemic risk indicators are at 'a'/'1', reflecting the strength of the banking system and the low macroprudential risks to financial stability in Denmark. The large Danish banks are well capitalised, with sufficient buffers in the DNB's stress tests. Nonetheless, these banks are heavily reliant on wholesale funding markets, and maintaining solid capital and liquidity buffers are important in keeping investor confidence. The Bank Recovery and Resolution Directive was adopted into Danish law in June 2015, and banks are in the process of finalising details of their resolution plans, which will reduce the probability of financial sector contingent liabilities materialising on the sovereign's balance sheet.
Danish households are highly indebted, with gross debt of 132% of GDP at end-2014, although high net household financial assets of 144 % of GDP mitigate associated risks. This makes private consumption relatively more vulnerable to asset price and interest rate movements.
The Stable Outlook reflects Fitch's assessment that downside risks to the rating are currently moderate. However, future developments that could individually or collectively result in negative rating action include:
- A secular deterioration in growth performance, for example due to adverse developments in the eurozone and other major trading partners, impacting on public finances and the financial sector.
- A significant rise in the reliance on international investors for Danish mortgage bonds could increase liquidity risk in the market and increase the vulnerability of the financial system to shocks.
The ratings and Outlooks are sensitive to a number of assumptions:
Fitch assumes that the Danish krone peg to the euro under the ERM2 remains in place.
We assume Denmark and the eurozone as a whole will avoid long-lasting deflation, with the ECB's asset purchase programme helping to underpin inflation expectations, although deflation risks could intensify in the case of further economic shocks.