July 21, 2017 / 8:11 PM / a year ago

Fitch Affirms Denmark at 'AAA'; Outlook Stable

(The following statement was released by the rating agency) LONDON, July 21 (Fitch) Fitch Ratings has affirmed Denmark's Long-Term Foreign- and Local-Currency IDRs at 'AAA' with a Stable Outlook. The issue ratings on Denmark's senior long-term unsecured bonds have also been affirmed at 'AAA'. The Country Ceiling has been affirmed at 'AAA', and the Short-Term Foreign-Currency and Local-Currency IDRs at 'F1+'. The issue ratings on short-term debt issues have also been affirmed at 'F1+'. KEY RATING DRIVERS Denmark's ratings reflect a wealthy, high-value-added and diversified economy that is supported by strong institutions and a track record of macroeconomic policy credibility. External finance metrics are strong. Danish households' high gross debt levels present risks to the macroeconomic outlook, although these are mitigated by high savings and net household wealth. The Danish economy grew at a relatively robust pace in 2016, at 1.7%, following weak outturns in 2H15. The main drivers of growth were investment (+5.6% in 2016) and private consumption (+2.1%). Investment in 2016 expanded at the fastest pace since 2006. Residential investment rose by 11%, in the context of rising house prices. However, on a five-year average, real GDP growth has been weaker than peers (1.2% compared with the 'AAA' median of 2.0%). The investment to GDP ratio is still slightly lower than the 'AAA' median despite the strong rise in capital spending. GDP growth in 1Q17 was estimated at 0.6% qoq. We expect the growth momentum to be maintained over the year and forecast real GDP growth of 2.1%. Growth is expected to slow to 1.7% in both 2018 and 2019. We expect domestic demand to be the main driver of growth. Net trade will boost growth this year, as growth prospects in Denmark's main trading partners improve. Improving growth prospects will translate into positive labour market dynamics. The unemployment rate averaged 6.2% in 2016, and we expect it to decline over the next three years, averaging 5.6% this year, before falling to 5.2% by 2019. Residential property prices have been rising since 2012, with price increases the strongest for flats in the main urban areas. Prices of flats in Copenhagen in real terms are now around 4% higher than the peak in 2006. Measures that may have a stabilising effect on property prices and the build-up of debt are being implemented. The Danish authorities have introduced a debt-to-income limit of 400% for borrowers taking out mortgages with variable rates or deferred amortisation in Copenhagen and Aarhus. Political parties in Denmark have agreed on reforms to property taxation that will take effect from 2021. Household indebtedness remains high (around 243% of disposable income at end-2016), even though the overall debt-to-income ratio has been declining since 2009. Historically low interest rates mean that interest payments are a very low proportion of income (around 2.5% of net disposable income). Moreover, the net asset position of the household sector in Denmark is strongly positive with net wealth of 1.7x GDP at end-2016. At the same time, low interest rates are encouraging households to take on relatively higher levels of mortgage debt, in the context of expectations of higher property prices. The general government deficit narrowed to 0.9% of GDP in 2016 from 1.4% in 2015. The reduction in the deficit was driven by expenditure restraint, which more than offset a decline in the revenue to GDP ratio. We expect the deficit to widen to 1.4% of GDP this year, due mainly to lower revenues from the pension yield tax. In 2018 and 2019 lower expenditure as a share of GDP will push the deficit down to 0.6%. Our public finance projections imply a further decline in the government debt to GDP ratio. The government debt ratio stood at 37.7% at end-2016 (down from 39.6% in 2015, and slightly lower than the 'AAA' median of 42%). We expect the debt ratio to fall to 35.5% by 2019. Denmark has a structural current account surplus (averaging just over 6% of GDP over the past decade). This resulted in the country becoming a net external creditor (net external debt was estimated at -11% at end-2016). The net international investment position is strongly positive (estimated at 53.5% of GDP at end-2016), reflecting the strong balance sheets of the Danish private sector. The current account surplus (8.1% of GDP in 2016, compared with an 'AAA' median of 6.4%) is expected to edge down over the next three years to 7.1%. Fitch assesses the Danish banking system to be resilient with an average standalone rating of 'a'. The Danish central bank's stress tests indicate that even in a severe recession, systemically important banks would still maintain statutory minimum capital requirements by 2019. 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 macroeconomic policymaking underpinned by a 30-year exchange rate peg to Germany. - External finances: +1 notch, to reflect Denmark's strong net external creditor position, large positive net international investment position, and the exchange rate peg. 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 severe macroeconomic shock - potentially originating in the household sector - leading to a sharp deterioration in the public finances through higher deficits and lower GDP growth - Persistent weak growth performance resulting in a deterioration of key credit metrics KEY ASSUMPTIONS Fitch assumes that the Danish krone peg to the euro under the ERM2 remains in place. Fitch expects the global economy to perform in line with the projections included in the latest Global Economic Outlook, in particular eurozone GDP growth of 2.0% in 2017, 1.8% in 2018, and 1.4% in 2019. Contact: Primary Analyst Alex Muscatelli Director +44 20 3530 1695 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Marina Stefani Associate Director +44 20 3530 1809 Committee Chairperson Paul Gamble Senior Director +44 20 3530 1623 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. 16 Aug 2016) here Sovereign Rating Criteria (pub. 18 Jul 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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