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 improve as inflation and interest rates decline while the pharmaceutical sector’s performance remains supportive. Moreover, higher expenditures on defense and the green transition are unlikely to derail the country’s strong public finance position. Denmark will continue to benefit from substantial fiscal space over the medium term, reflecting fiscal surpluses and one of the lowest public debt ratios in the European Union (EU). As economic growth normalises to potential and expenditures increase, fiscal surpluses will decline but should remain above 1.0% of GDP during the 2024-2025 period, while the public debt-to GDP ratio will likely hover around 30%.

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 interest rates.

CREDIT RATING DRIVERS

Given Denmark’s credit strengths, a downgrade to the credit ratings appears unlikely. The credit ratings could be downgraded if one or a combination of the following occur: (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, which is reflected in a high GDP per capita. Moreover, the economy has shown high resilience to shocks, despite its small size and high degree of trade and financial openness, and since 2020 real GDP has expanded by almost 11 percentage points versus a 4 in the EU. Domestic demand has been weak as a result of high inflation and the rapid rise of interest rates, but net exports of pharmaceutical products has provided significant support. GDP expanded by a resilient 1.9% in 2023, with net exports of goods from the pharma industry accounting for a significant chunk - in its absence, Denmark’s GDP growth would have likely been flat. Economic activity is expected to accelerate this year to 2.4%, with a significant contribution accounted for by the reopening of the Tyra field and by exports of medicines. Going forward, Morningstar DBRS anticipates GDP growth to remain robust but decline towards 1.5%. The pharma sector’s contribution to GDP will likely diminish but domestic demand will strengthen as inflation and interest rates ease to more moderate levels.

The labour market will remain resilient, but strong gains in employment are unlikely in the coming years. Since 2021, Denmark has seen strong job creation, which has attracted foreign workers. This has contributed to the employment ratio peaking at 77.2% in Q3 2022 before it slightly decreased to 76.7% as of Q4 2023. Nevertheless, the economic slowdown is weighing on the labour market and the unemployment rate is gradually increasing, although from a very low level, reaching 2.9% as of January 2024 from 2.4% in April 2022.

Denmark’s Strong Public Finances Underpin the Credit Ratings

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. Since 2019, Denmark has had the largest budgetary surplus in the EU as a result of a high level of economy activity, a strong labour market, pension yield taxes, and frozen holiday allowance payments. Going forward, Denmark’s public finances should continue to benefit from sound, although declining, fiscal surpluses, after the 3.1% of GDP estimated in 2023. This is because lower economic activity, the increase in general defense spending along with high donations to Ukraine, and the rise in public wages and social benefits, will put more pressure on fiscal accounts. However, the country’s fiscal position will remain solid and its fiscal space ample, with surpluses remaining above 1.0% of GDP during the 2024-2025 period.

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 29.3% of GDP in 2023 remains one of the lowest in the EU, and its profile bolsters the country’s resilience. Fiscal surpluses are resulting in modest gross issuances, which reduce refinancing risk. Latest estimates from the government point to public debt as a share of GDP declining to around 28% in 2025, while net public assets as a share of GDP are expected to remain at 19.2%. Debt is mostly denominated in local currency, and more than half 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 200 billion (7.2% of GDP) by the end of 2024, provides the government with an additional financial buffer.

Financial Stability Risks Appear Contained, but High Household Debt at Variable Rates Remains a Source of Vulnerability Amid High Interest Rates

The fall in inflation, including in the euro area, has increased the likelihood of a cut in policy interest rates in the coming months. This will mitigate the impact of the increase in the net interest burden on indebted Danish households who are experiencing a repricing in interest rates, and ease the pressure on commercial property valuations. Like the European Central Bank (ECB), Danmarks Nationalbank (DN) has kept its policy rate unchanged since September 2023. But with inflation falling both in the euro area and in Denmark, monetary policy is expected to be less restrictive going forward. This is particularly important in Denmark due to the high level of indebted households and the large exposure of the banking sector to commercial real estate (CRE) companies. A prolonged period of elevated interest rates might negatively affect consumption and weigh on banks’ balance sheet via losses from 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 it remains among the highest within the Organisation for Economic Cooperation and Development (OECD) countries, household debt as a share of adjusted disposable income at 192% in Q4 2023 was almost 30 percentage points lower than at the end of 2021. 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 with a variable rate, making them vulnerable to elevated interest rates. 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 most wealthy households as mitigating factors. The introduction of the housing tax reform may have contributed to some recent rise in house prices at the end of 2023, but looking ahead it will likely make price fluctuations less volatile, making the housing market more stable.

Danish banks are strong, well capitalised, and liquid, and the surge in net interest income has bolstered profitability further. The system is well equipped to absorb the likely deterioration in credit quality because of the economic slowdown, high interest rates, and potential losses from the commercial real estate market. The banking sector’s exposure to the CRE market is large, concentrated and represents a point of attention, which led the Systemic Risk Council recommending a sector-specific systemic risk buffer for exposures to real estate companies starting in April 2024. 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 Will Remain Strong and Non-pharma Sectors Will Benefit from an Improvement in External Demand

Denmark’s credit ratings are supported by its strong external position. Over the past ten years, the county has registered sizeable current account surpluses averaging 9% of GDP, and Morningstar DBRS does not anticipate a reversal any time soon. The country benefits also from a high net international investment asset position (NIIP) amounting to 58.9% of GDP in 2023. Last year, exports of medicines were very strong and helped maintain a very high current account surplus, estimated at 10.9% of GDP. With the reopening of the Tyra field, Denmark will register an increase in energy exports this year, which will continue to sustain a current account surplus above 10% of GDP. As interest rates and inflation moderate abroad as well, external demand should pick up, thereby supporting exports from non-pharma industries.

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 strong 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.

Strong and Stable Political Framework Supports Economic Stability and Credit Ratings

Denmark's political environment and quality 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, limiting 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, and including the Social Democrats, the Liberals, and the Moderates, is expected to continue to exercise fiscal prudence, and to avoid further stimulating an economy operating above capacity.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

Environmental (E) Factors
There were no Environmental factors that had a relevant or significant effect on the credit analysis.

Social (S) Factors
There were no Social factors that had a relevant or significant effect on the credit analysis.

Governance (G) Factors
There were no Governance factors that had a relevant or significant 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 DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024) https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria:-approach-to-environmental,-social,-and-governance-risk-factors-in-credit-ratings.

For more information on the Rating Committee decision, please see the Scorecard Indicators and Building Block Assessments: https://dbrs.morningstar.com/research/431071/.

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 (6 October 2023) https://dbrs.morningstar.com/research/421590/global-methodology-for-rating-sovereign-governments. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria:-approach-to-environmental,-social,-and-governance-risk-factors-in-credit-ratings 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 Ministry of Finance, Ministry of Economy (Economic Report: The Danish economy remains, strong December 2023), Danmarks Nationalbank (Outlook for the Danish Economy, March 2024; Financial Stability 2st Half 2023, November 2023), Danmarks Statistik, Danish Energy Agency, European Central Bank, European Commission (Winter 2024 Economic Forecast, February 2024), The Social Progress Imperative (2024 Social Progress Index), Eurostat, OECD, IMF, World Bank, BIS, 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: NO
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’s 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/431070/.

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, Global Sovereign Ratings
Initial Rating Date: 20 September 2012
Last Rating Date: 17 November 2023

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