Fitch Affirms Denmark at 'AAA'; Outlook Stable

Fri Aug 22, 2014 4:10pm EDT

(The following statement was released by the rating agency) LONDON, August 22 (Fitch) Fitch Ratings has affirmed Denmark's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'AAA' with Stable Outlooks. The issue ratings on Denmark's senior unsecured foreign and local currency bonds have also been affirmed at 'AAA'. The Country Ceiling is affirmed at 'AAA' and the Short-term foreign currency IDR at 'F1+'. KEY RATING DRIVERS Denmark's 'AAA' IDRs and Stable Outlook reflect the following key rating drivers: Denmark is a wealthy, high value-added and diverse economy. Its track record of macro-financial stability is reflected by low and stable inflation, current account surpluses and a stable banking sector, despite severe stresses in the 2009 recession and bursting of the house price bubble in 2008. Danish public finances are consistent with the 'AAA' median with a forecasted budget deficit of 1.3% of GDP and EU debt of 44.1% of GDP in 2014. In June 2014, Denmark's Excessive Deficit Procedure (EDP) was abrogated by the European Commission. Despite being admitted into the EDP in 2010, Denmark's budget deficit exceeded the EU's 3% of GDP threshold only in 2012 as a result of a one-off repayment of early retirement pension contributions. The fiscal framework is characterised by compliance to the Danish budget law and EU fiscal compact and stability and growth pact. Denmark employs expenditure ceilings at central and local government levels, and adheres to the medium-term objective of structural deficit limits of 0.5% of GDP. Strong political support for the government's target to close the budget deficit by 2020 strengthens Denmark's long-standing commitment to fiscal discipline. Denmark's external finances are strong compared with 'AAA' peers, with a persistent current account surplus that has widened significantly since 2010 (2014: 6.9% of GDP). This has resulted in a large positive international investment position (2014: 31.3% of GDP). Fitch forecasts the current account surplus to narrow marginally to 6.6% of GDP in 2016 as private consumption increases. Real GDP grew a sluggish 0.4% in 2013, but is expected to accelerate to 1.5% in 2014, driven by stronger private consumption and the recovery of private investments. Strong confidence and large corporate savings support this growth dynamic, while more robust growth in the eurozone would also provide greater uplift to Denmark's highly open economy. The unemployment rate is expected to remain high at 6.5% at end-2014, but is expected to fall gradually as employment continues to grow with the economy. As a small open economy with a currency peg to the euro, price developments in Denmark are closely linked to that of its eurozone neighbours. Fitch forecasts Denmark's HICP annual average inflation rate at 0.6% for 2014, driven mainly by weak import and energy prices. This increases the risk of inflation dipping into negative territory, although Fitch expects Denmark and the eurozone to avoid long-lasting deflation. Danish households are the most indebted amongst Fitch-rated sovereigns with debt of 131% of GDP at end-2013. A significant positive net financial asset position mitigates some of the risk; however, the illiquid nature of these assets (primarily large pension savings) could pose problems for debt servicing in a severe shock scenario (e.g. further house price correction or a sharp rise in interest rates). Deleveraging by the highly indebted households has been constraining private consumption growth and continues to pose downside risk to Fitch's growth forecasts. Large Danish banks have generally remained resilient in terms of asset quality, capitalisation and liquidity, with profitability improving due to lower loan impairment charges. This is reflected by Fitch's Banking System Indicator of 'a' for Danish banks. Stress tests conducted by the Danmarks Nationalbank (DNB) in 1H14 under the new CRD IV/CRR capital adequacy rules show the capital ratios of Denmark's five systemically important banks to be resilient to the most severe stress scenario, while some non-systemically important banks will require additional capital in such a scenario. Fitch's Macro-Prudential Indicator is currently at '1', reflecting our view of low build-up of systemic risk in the economy. The ratings are further underpinned by Denmark's strong and transparent institutions which contribute to a stable political and economic environment, outperforming the 'AAA' median in five out of six World Bank governance indicators. It also ranks very highly on the Ease of Doing Business Index. RATING SENSITIVITIES The Outlook is Stable, reflecting Fitch's assessment that the downside risks to the sovereign's 'AAA' rating are not material. However, the following risk factors could, individually or collectively, result in a negative rating action: -Further slow growth, possibly as a result of persistent deleveraging by households/corporations or renewed pressure in the housing market, impacting on public finances and the financial sector -Continued demand for Danish mortgage bonds by Danish financial institutions, insurance companies and pension funds, is key to financial stability in Denmark. Fitch's baseline is that domestic demand for these instruments would persist due to their need for liquid, high-quality krone securities; a significant rise in reliance on international investors for these bonds would increase the vulnerability of the financial system in a crisis KEY ASSUMPTIONS The ratings and Outlooks are sensitive to a number of assumptions: There is currently strong and broad political consensus for fiscal discipline in Denmark. Fitch assumes that fiscal policy by the incumbent or incoming government following the 2015 general elections will remain committed to its current medium-term fiscal strategy of closing the general government deficit by 2020. Fitch assumes that the gradual progress in deepening fiscal and financial integration at the eurozone level will continue; key economic imbalances within the currency union will be slowly unwound; and eurozone governments will tighten fiscal policy over the medium term. Fitch assumes Denmark and the eurozone will avoid long-lasting deflation, such as that experienced by Japan from the 1990s. It also assumes that the risk of fragmentation of the eurozone remains low. 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, 'Sovereign Rating Criteria' dated 12 August 2014 and 'Country Ceilings' dated 9 August 2013, are available at www.fitchratings.com. Applicable Criteria and Related Research: Sovereign Rating Criteria here Additional Disclosure Solicitation Status here 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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