Dagong Global Credit Rating Co., Ltd.
June 21, 2018
Dagong Global Credit Rating Co., Ltd. (hereafter referred to as “Dagong”) has decided today to maintain the local and foreign currency sovereign credit ratings of the Kingdom of Denmark (hereafter referred to as “Denmark”) at AA+, each with a stable outlook. Denmark’s repayment environment is stable while domestic demand supports the country’s stable growth. Despite slight increases in the primary fiscal deficit resulting from tax cut policies, it is several factors including relatively small debt loads, a comparatively strong financing capacity, and the position of a net creditor country which can guarantee stern government solvency in local and foreign currency.
The key reasons for maintaining the sovereign credit ratings of Denmark are below:
First, Denmark enjoys a stable repayment environment. The coalition government continues to carry out reforms upon the tax system, the employment market, as well as social welfare so as to alleviate the labor bottleneck, and pursue policies to diversify exports in response to external uncertainties, all the while tightening immigration policies and strengthening security overall. However, Denmark’s minority government faces obstruction from the European Union and the opposition concerning its immigration policies and entry into the eurozone, among others, thus great uncertainties take shape. In terms of the credit environment, Denmark’s central bank and the European Central Bank (ECB) maintain a loose monetary policy in tandem. Hence, it is expected that in the short term credit supply will remain reasonably adequate. Nonetheless, as of the year-end of 2017, the ratio of total household debt to disposable income was at a high level. Credit risks will continue mounting as a result of the mismatch between income and heavy household debt, resulting from the real estate loans.
Second, consumption and investment will stimulate short-term growth, while the medium and long term witness this growth somewhat constrained by structural problems. In the near term, there will be tax cuts for low-income employees and reductions in vehicle registration tax as well as pension contributions, while Denmark’s government increases infrastructure investment to unleash domestic demand steadily. Nonetheless, net exports will decline as a result of trade protectionism and the ECB’s monetary policy normalization. It is projected that in 2018 and 2019, Denmark’s growth will slow to 2.0% and 1.9%, respectively. In the medium and long term, Denmark has a competitive edge in shipping services as well as apparent advantages in medicine and new energy, among other high-tech areas. However, the country’s growth potential is limited by population aging and slower growth of labor productivity - among other problems. It is forecasted that in the medium and long term, Denmark’s growth will average around 1.8%.
Third, Denmark’s fiscal deficit increases slightly, yet its repayment sources have sound foundations. In the near term, upcoming reforms in the retirement system will properly ease pressure from income transfer expenditures. Nevertheless, it is due to increases in public spending, as well as declines in pension income tax and corporate tax, among other factors, that the Danish general government’s fiscal deficit is projected to hit 0.8% and 0.7% in 2018 and 2019, respectively, while financing needs over the same periods amount to 10.2% and 9.8% of financial revenues. Moreover, a certain amount of financial assets cause the government debt burden to amount to 17.7%. Given the country’s relatively low financing costs and a comparatively strong financing capacity, the government repayment sources are secure.
Fourth, government solvency in local and foreign currency is stable. Considering Denmark’s widening fiscal deficit, it is expected that in 2018 and 2019, the ratio of Danish general government debt to GDP will slightly improve to 39.0% and 39.9%, and the ratio of that debt to financial revenues will be 77.9% and 82.1%, respectively. Thus, in the short term, repayment pressure will be reduced and government solvency in local currency is stable. Meanwhile, Denmark’s total external debt increases, although it is mainly denominated in local currency. The long-term currency account surplus renders international reserves sufficient. This surplus, combined with Denmark’s steady and ever-stronger international investment position and its role as a net creditor, renders the Danish government’s foreign currency solvency stable.
In the short term, domestic demand in Denmark will shore up stable growth. The country’s relatively loose credit environment can somewhat alleviate possible real estate market risks. A widening fiscal deficit leads the government debt burden to rise modestly, although remaining at a low level. That, coupled with Denmark’s rational debt structure, a relatively strong capacity to generate revenues, as well as its position of a net creditor, all render government solvency stable. Therefore, Dagong assigns a stable local and foreign currency sovereign credit rating outlook for Denmark for the following one to two years.