Country risk: Denmark moves in on the top

In October, credit rating agency Moody’s released a report confirming Denmark’s Aaa stable rating. The country’s strengthening economy and robust public finances were credited for its strong position. 

Euromoney Country Risk’s survey places Denmark firmly in tier one in the rankings, with impressive scores across all the factors assessed. And yet Q3 saw the country jump up four places in the overall rankings, overtaking Finland, the Netherlands and Sweden, and squeezing Luxembourg out of the fourth place it had held since Q3 2013.

Delving into the sub-factor scores reveals an interesting shift in one figure in particular. The score from ECR experts for Denmark’s access to capital markets rose by 2.4 points in the third quarter of this year.

Moves on this scale are uncommon among the highest-scoring countries in the ECR survey.

“Denmark is considered a safer prospect again following a concerted and successful defence of the krone’s long-standing fixed euro exchange rate following the decoupling of the Swiss franc earlier this year. This is partially responsible for its perceived safety and enhanced capital access in the light of Denmark’s comparatively strong and stable macro-fiscal metrics,” says ECR economist Jeremy Weltman.

There were also smaller improvements in the scores for bank stability and overall economic outlook for Denmark. The country’s banking sector remains strong and the low interest rate – the key deposit rate is -0.75% – is seen as accommodative to business in the sector.

The housing sector in Denmark has no doubt seen a boom recently, perhaps spurred on by low rates increasing purchasers’ confidence in taking on debt.

“It is worth noting that the Nationalbank, Denmark’s central bank, continues to target a tighter range of exchange-rate fluctuation than is allowed under the Exchange Rate Mechanism II [the system under which the exchange rate of a non-euro area member state is fixed against the euro and is only allowed to fluctuate within set limits], underpinning its credibility, says Weltman.

“Denmark also manages ample reserves to enable forex market intervention whenever necessary. Indeed, despite interventions to maintain the krone peg this year, it still has more reserves than last December and can optionally raise interest rates unilaterally to support capital inflows without endangering economic growth,” he adds.

Looking to the future, there are a few warning flags for the Danish economy. On November 5, the European Commission forecast that the Danish budget deficit will be -3.3% in 2015, which would breach EU rules for deficits not to exceed -3%. However, the report went on to say the deficit is expected to remain largely on the right side of -3% for 2015-16.

Denmark’s large current-account surplus and structural fiscal improvement will likely push the deficit back in a more favourable direction. Government finance scores in the ECR survey declined slightly, perhaps a reflection of the changeable picture.

Elections

The recent elections also brought some uncertainty.

“There are invariably some political risks stemming from the elections, which produced a governing party in a minority. But this is mitigated by a shift from a left-leaning to right-leaning administration, notwithstanding the prospect of some populist measures, including a tightening of immigration required to enable budgets to pass with the support of Dansk Folkeparti, the far-right Danish People’s Party,” says Weltman.

ECR scores for political stability were flat in the latest round of voting – with the Q4 survey about to launch, it will be interesting to track any changes there.

Weltman says the influence of the far-right politicians on the budget should not be considered a “major risk-negative hurdle” in light of various positive economic forecasts for next year.

Real GDP growth is predicted to be a decent 2%, the unemployment rate is seen sliding below 6% (harmonized) and while inflation might rise, the increase is predicted to be less than previously expected the longer low commodity prices persist.

“At the heart of Denmark’s safe-haven status is a gross debt burden falling to just 40% of GDP this year and to below that on projections after that, which is considered low risk given the maturity structure, the predominance of euro-denominated foreign currency borrowings – protected by the exchange-rate peg – and a temporary suspension of new debt issuance,” says Weltman.