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Denmark, Government of -- Moody's affirms the Aaa ratings of Denmark; maintains stable outlook

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Rating Action: Moody's affirms the Aaa ratings of Denmark; maintains stable outlookGlobal Credit Research - 11 Feb 2022Frankfurt am Main, February 11, 2022 -- Moody's Investors Service ("Moody's") has today affirmed the Government of Denmark's Aaa long-term issuer ratings, Aaa senior unsecured bond ratings and (P)Aaa MTN programme rating. Moody's has also affirmed Denmark's Prime-1 (P-1) short-term Commercial Paper rating. The outlook remains stable.The key drivers for today's rating action are the following:(1) Denmark's very strong fiscal position has been maintained during the pandemic and is in Moody's view sustainable in the long-term;(2) Denmark's economic strength has been resilient to the pandemic shock and is supported by its wealthy and highly competitive economy;(3) Denmark's institutional set-up is in Moody's view one of the strongest globally resulting in forward-looking policies which address the country's long-term challenges.The stable outlook reflects Moody's view that that downside risks to Denmark's very strong credit profile are predominantly external in nature and effectively mitigated by the country's very strong, forward-looking policy effectiveness as well as very high economic and fiscal resilience.Denmark's local and foreign currency country ceilings remain unchanged at Aaa.RATINGS RATIONALERATIONALE FOR THE AFFIRMATION OF THE Aaa RATINGSFIRST DRIVER: DENMARK'S VERY STRONG FISCAL POSITION HAS BEEN MAINTAINED DURING THE PANDEMIC AND IS SUSTAINABLE IN THE LONG-TERMDenmark entered the pandemic with very strong fiscal metrics and has maintained its large fiscal buffers. The country had a sizeable fiscal surplus of 4.1% in 2019 and general government debt was with 33.6% of GDP at its lowest level since 2008.[1] The fiscal balance turned into a deficit in 2020 because of the pandemic shock and the pandemic-related support measures. The fiscal deficits registered 0.2% of GDP on average in 2020-21, the smallest level among all advanced economies rated by Moody's. [2] Moody's expects the fiscal deficit to turn into a surplus of 1.2% of GDP in 2022 as pandemic-related support measures phase out and a tightening of traditional fiscal policy measures takes place.Debt-to-GDP increased by 8.5 percentage points to 42.1% of GDP in 2020.[3] Roughly half of the increase was driven by an increase in reserves, on-lending and financing of social housing and Danish debt-to-GDP remained below the median of Aaa-rated sovereigns (45.1% of GDP).[4] Because of the robust economic recovery and the return to fiscal surpluses in 2022, Moody's expects the Danish debt-to-GDP level to decline to pre-pandemic levels in 2023 which positions Denmark favourably among Aaa-rated sovereigns. Apart from Denmark, the debt-to-GDP ratio among Aaa-rated sovereigns only falls to pre-pandemic levels in 2023 for Norway (Aaa stable), Sweden (Aaa stable) and Switzerland (Aaa stable).Denmark's debt affordability metrics also improved despite the pandemic from an already very strong position. The interest payment-to-revenue ratio decreased to 1.0% in 2020 from 1.4% in 2019 and an average of 2.4% over the past decade.[5] This is lower than the Aaa-median (1.3% in 2020) [6]. In January 2022, Denmark issued its first green twin bond under its green bond framework which further diversifies the country's investor base.Over the medium-to-long term, Moody's expects Denmark's prudent fiscal policies and relatively low debt levels to be sustained. Denmark's general government debt ratio has not exceeded the Maastricht criteria of 60% of GDP since 1999, and Denmark shows a high compliance with national and EU fiscal rules as signalled by the compliance score of 84% on the rules of the Stability and Growth Pact over the period from 1998 to 2020; the third highest in the EU only behind Luxembourg (Aaa stable) and Sweden.[7]The long-term fiscal sustainability is supported by the implementation of the pension reform of 2011 that links the retirement age to life expectancy which also supports labor supply and therefore potential growth. According to projections of the European Commission, the total cost of ageing will remain broadly stable and only increase by 1.5 percentage points between 2019 and 2070 to 27% of GDP. Healthcare and long-term care spending levels will rise by around one and three percentage points, respectively, by 2070 as the population ages, whereas public pension spending will fall continuously from its current level of 9.3% of GDP to 7.3% of GDP in 2070.SECOND DRIVER: DENMARK'S ECONOMIC STRENGTH HAS BEEN RESILIENT TO THE PANDEMIC SHOCK AND IS SUPPORTED BY ITS WEALTHY AND HIGHLY COMPETITIVE ECONOMYDenmark's economy is highly competitive generating very high wealth levels and trend growth of 2.1% over 2016-25F[8], in line with the Aaa-rated median. Economic strength is supported by the economy's high diversification, high education levels, well-developed physical and digital infrastructure, high technological advancement and a very flexible labor market.Against that backdrop, the economy proved to be resilient to the pandemic shock. This is highlighted by a relatively mild GDP contraction of 2.1% in 2020 compared to the Aaa-median (-2.7%) and a rapid recovery resulting in GDP already surpassing the pre-pandemic level since the second quarter of 2021.[9] The economy's resilience has benefitted from rapid progress on vaccinations rates. As of end of January, 81% of the population was fully vaccinated and 61% had received vaccine booster doses.[10] Strong household income, flexible labor markets and exports consisting of non-cyclical goods such as green tech and pharmaceuticals have also supported Denmark's economic resilience as pandemic related support measures and sizeable automatic stabilizers inherent in the tax and transfer systems kept the supply side of the economy intact.Given the country's large fiscal buffer, Denmark continues to possess the ability to apply sizeable, effective countercyclical fiscal policy if needed in the case of a resurgence of the pandemic shock or other shocks to its economy.Moreover, the pandemic has had no negative impact on Denmark's potential growth amounting to 2.2% in 2021-25 according to Moody's estimate compared to an average 2.0% over 2019-20. Main driver of potential growth is labor productivity, but hours worked will also contribute in light of the further increase of the participation rates of older workers as the pension entry age increases, being linked to life expectancy.Moody's expects the further reduction of greenhouse gas emissions out to 2030 to continue to have only a small negative impact on economic growth. Denmark is a forerunner in climate policy and has cut emissions by 36% between 1990 and 2019 which is roughly half of the goal of reducing greenhouse gas emission by 70% in 2030 compared to 1990 levels.[11] Denmark's well designed climate policy governance resulted in a decoupling of greenhouse gas emission from economic growth. While emissions were already reduced significantly between 1990-2019, this was not disrupting economic or employment growth.THIRD DRIVER: DENMARK HAS ONE OF THE STRONGEST INSTITUTIONAL SET-UPS GLOBALLY RESULTING IN FORWARD-LOOKING POLICIESMoody's views Denmark's institutional set-up as one of the strongest among all sovereigns rated by Moody's. The country's institutions are characterized by the high quality of legislative and executive institutions, a strong civil society and high-quality judiciary, as well as strong fiscal, monetary and macroeconomic policy effectiveness. Policy formulation and implementation is predictable and forward-looking which is, for example, reflected in the 10-year policy plans that successive governments have presented over the years.The quality of legislative and executive institutions in Denmark is very high. This is reflected in Denmark being positioned among the strongest countries globally in the Worldwide Governance Indicators for government effectiveness and regulatory quality. Moreover, the actions and well-designed support measures in the context of the pandemic also support Moody's view of quality of Denmark's legislative and executive institutions being very high.Moody's assessment of civil society and the judiciary is also robust as Denmark actively supports civil society engagement with freedom of speech guaranteed by Article 77 of the 1849 constitution and has a robust legal framework that complies with international standards and effective access to justice. Law enforcement in Denmark is highly predictable and consistent. This is shown by Denmark's favorable position in the Worldwide Governance Indicators for rule of law, control of corruption as well as voice and accountability. In addition, Denmark is ranked first among all countries both in the World Justice Project Rule of Law Index and the Corruption Perceptions Index of Transparency International.Danish public finances are supported by a sound fiscal framework and a high degree of fiscal policy effectiveness. The sustained commitment and broad consensus to preserve strong public finances results in a track record of maintaining prudent fiscal policies and relatively low debt levels and a high compliance with the various national and European fiscal rules.Denmark's stable and long-standing exchange rate peg since the early 1980, initially against the deutschmark and then against the euro, underlines the very high credibility of monetary policy. The fixed-exchange-rate policy has provided a solid anchor for low and stable inflation expectations. The central bank of Denmark has an agreement with the European Central Bank (ECB) to keep the krone within a 2.25% band around a rate of DKK 746.038 per 100 euro, although in practice it sticks to a much tighter range.[12]RATIONALE FOR STABLE OUTLOOKThe stable outlook reflects Moody's view that downside risks to Denmark's very strong credit profile are predominantly external in nature and effectively mitigated by the country's very strong, forward-looking policy effectiveness as well as very high economic and fiscal resilience.Denmark's proven track record of managing external shocks and proactively addressing long-term challenges, in particular demographic and climate change, underscores its very high resiliency to external shocks. In the recent past, the economic and fiscal resilience as well as very effective policymaking was shown during the pandemic.ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONSDenmark's ESG Credit Impact Score is positive (CIS-1), reflecting low exposure to environmental and social risks, and like many other advanced economies, very strong governance and capacity to respond to shocks.Denmark's exposure to environmental risks is low across all categories. Its overall E issuer profile score is therefore neutral to low (E-2).Denmark has very low or low exposure to most sources of social risks, with widely available and accessible high-quality education, housing, healthcare and basic services. Like many advanced economies, Denmark faces demographic change through an ageing population, but Moody's views the long-term economic and fiscal pressures as comparatively limited, given past labor market and pension reforms. Overall, Moody's assesses Denmark's S issuer profile score as positive (S-1).Denmark's very high institutions and governance strength is reflected in a positive G issuer profile score (G-1). This is underpinned by the government's high credibility, transparency and consensus on key fiscal policy goals and macroeconomic policies. It also reflects the professional and well-staffed public administration and Denmark's very strong scores in global surveys assessing rule of law, voice and accountability, and the control of corruption. Coupled with comparatively strong government financial strength this supports a very high degree of resilience.GDP per capita (PPP basis, US$): 59,136 (2020 Actual) (also known as Per Capita Income)Real GDP growth (% change): -2.1% (2020 Actual) (also known as GDP Growth)Inflation Rate (CPI, % change Dec/Dec): 0.4% (2020 Actual)Gen. Gov. Financial Balance/GDP: -0.2% (2020 Actual) (also known as Fiscal Balance)Current Account Balance/GDP: 8.1% (2020 Actual) (also known as External Balance)External debt/GDP: 151.2% (2020 Actual)Economic resiliency: aa1Default history: No default events (on bonds or loans) have been recorded since 1983.On 08 February 2022, a rating committee was called to discuss the rating of the Denmark, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have materially increased. The issuer's institutions and governance strength, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. The issuer's susceptibility to event risks has not materially changed.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSWHAT COULD CHANGE THE RATINGS DOWNDenmark's Aaa ratings are at the highest level on Moody's rating scale. The Aaa ratings would come under pressure if its strong fiscal metrics were to record a multi-year and material deterioration with no indication of a reversal. In particular, a significant erosion of Denmark's long-term fiscal sustainability caused by taking back reforms would be credit negative. While Moody's views the ratings resilient to an external economic shock, downward pressure would emerge if an external shock would be accompanied by a collapse of house prices and the materialization of significant contingent liabilities from the financial sector on the government's balance sheet.The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are unsolicited.a.With Rated Entity or Related Third Party Participation: YESb.With Access to Internal Documents: YESc.With Access to Management: YESFor additional information, please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.REFERENCES/CITATIONS[1] Statistics Denmark 05-Feb-2022[2] Statistics Denmark 05-Feb-2022[3] Statistics Denmark 05-Feb-2022[4] National Statistical Offices 05-Feb-2022[5] Statistics Denmark 05-Feb-2022[6] National Statistical Offices 05-Feb-2022[7] EFB Compliance Tracker Dataset 05-Feb-2022[8] National Statistical Offices 05-Feb-2022[9] National Statistical Offices 05-Feb-2022[10] Our World in Data 05-Feb-2022[11] OECD Economic Surveys of Denmark 2021. OECD (2021) 05-Feb-2022[12] Danmarks Nationalbank 05-Feb-2022Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. 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