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Fitch Affirms Denmark at 'AAA'; Outlook Stable
July 29, 2016 / 8:06 PM / a year ago

Fitch Affirms Denmark at 'AAA'; Outlook Stable

(The following statement was released by the rating agency) LONDON, July 29 (Fitch) 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 and Local Currency IDRs at 'F1+'. KEY RATING DRIVERS Denmark's 'AAA' IDRs and Stable Outlooks reflect the following key rating drivers: Denmark has a wealthy, high-value added and diversified economy that is supported by strong institutions with a good track record of sound macroeconomic, fiscal and financial stability management. Governance and business environment indicators slightly outperform the 'AAA' median while income per capita and development metrics are consistent with the median. Public finance management is strong and bound by the Danish budget law - a prudent fiscal framework with strict expenditure ceilings at the central and local government levels. The government remains committed to the elimination of the structural deficit (2015: -0.6% of GDP) by 2020, and is pursuing a strategy of mild fiscal consolidation to unwind the high public consumption levels since the financial crisis. We forecast the general government deficit will worsen to 2.1% of GDP in 2016 (2015: 1.7%) due to the falling away of extraordinary revenues from pension tax reforms (1.4% of GDP) and better than expected tax revenues on pension portfolios in 2014-15. Better than expected revenues from corporate taxes and pension portfolio taxes have resulted in a downward revision to the 2016 deficit from 2.8% of GDP in Fitch's February review. The deficit is expected to improve only marginally to 2.0% in 2017 (also 2.0% in the February review), and to 1.7% in 2018 due to a worsened growth outlook from the expected impact of the UK leaving the EU. These forecasts include 0.3% of GDP of increased spending on asylum seekers by 2020, which are included within the budget law's expenditure ceilings. General government debt/GDP is low relative to the 'AAA' median of 44.2%, and is forecast to be unchanged at 40.2% in 2016 before falling to 39.0% by 2018. This includes an estimated 5% of GDP worth of on-lending to public sector entities. Debt/GDP fell from 44.8% at end-2014 after the government suspended bond issuance in February-September 2015 to counter appreciative pressures on the krone in support of the DKK/EUR peg. In 2016, the government plans to issue debt only to refinance maturing instruments, opting to finance the deficit by drawing on its large cash reserves (8% of GDP at end-2015). Fitch has revised down our forecasts for Denmark's real GDP growth to 1.0% for 2016, and 1.3% for 2017 (1.9% for 2016 and 2017 during the February review), and we forecast 2018 growth to accelerate to 1.8%, driven by domestic demand. The downward revision reflects weaker growth in the eurozone in 4Q15 and 1Q16, and also the expected impact of Brexit on Danish growth. The depreciation of the GBP against the DKK (9.7% since the UK's EU referendum vote) is expected to lower external demand for Danish goods, while uncertainty surrounding Brexit outcomes will weigh further on business confidence and private investments. In 2015, the UK accounted for 6.0% of Denmark's goods exports and 6.7% of services exports. Inflation is forecast to remain weak at 0.5% in 2016 due to energy prices and some pass-through from the strong DKK. External finances are a key rating strength. Denmark has had a structural current account surplus for more than two decades, which averaged 6.7% of GDP in 2011-2015. Net external debt is forecast to fall to -12% of GDP in 2016 from 31% in 2006. Fitch forecasts the current account surplus to fall to 6.0% of GDP in 2016 and 2017 due to weaker external demand and a moderate recovery in private consumption and investments. Denmark's banks have strong credit fundamentals with the average Fitch-rated bank rated 'a' on a standalone basis. Fitch's macroprudential risk indicator is '1' for Denmark reflecting low risks to Denmark's financial stability at present. The large banks are well capitalised with a high banking system capital ratio of 19.7% of risk-weighted assets. Asset quality is improving although some pressure remains in the agricultural sector, which will likely see some more losses. Negative interest rates remain a challenge for bank profitability, but banks are generally managing this well by focussing on fee income and cost-cutting. Danish households are highly indebted (131% of GDP), making private consumption more vulnerable to asset price and interest rate movements. A high and increasing net household financial assets position worth 169% of GDP and gradually falling trend of households' gross debt/GDP ratio in recent years help to mitigate risks. SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns Denmark a score equivalent to a rating of 'AA' on the Long-Term FC IDR scale. Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to rated peers, as follows: - Macroeconomic factors: +1 notch, to reflect the track record of strong fiscal and monetary policy-making and coordination over the years to support the krone's peg to the euro. - External finances: +1 notch, to reflect Denmark's strong external financing flexibility, net external creditor position and large positive net international investment position. Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM. RATING SENSITIVITIES 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 persistent 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 in the Danish mortgage bond market could increase liquidity risk and the vulnerability of the financial system to shocks. KEY ASSUMPTIONS 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. Contact: Primary Analyst Eugene Chiam Associate Director +44 20 3530 1512 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Alex Muscatelli Director +44 20 3530 1695 Committee Chairperson James McCormack Managing Director +44 20 3530 1286 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Country Ceilings (pub. 20 Aug 2015) here Sovereign Rating Criteria (pub. 18 Jul 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1009740 Solicitation Status here Endorsement Policy here ail=31 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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