Morningstar DBRS Confirms the Kingdom of Denmark at AAA, Stable Trend

DBRS Ratings GmbH (Morningstar DBRS) confirmed the Kingdom of Denmark's (Denmark) Long-Term Foreign and Local Currency -- Issuer Ratings at AAA. At the same time, Morningstar DBRS confirmed Denmark's Short-Term Foreign and Local Currency -- Issuer Ratings at R-1 (high). The trend on all ratings remains Stable.

KEY CREDIT RATING CONSIDERATIONS
The Stable trend reflects Morningstar DBRS' view that risks to the credit ratings remain limited. The country is well positioned to withstand a potential economic slowdown as a result of international trade protectionist measures thanks to very solid macroeconomic fundamentals and robust export capacity. Moreover, Denmark's very strong fiscal position will likely absorb the impact of the planned increase in military defense expenditures over the medium term. Latest estimates from the central bank (Danmarks Nationalbank, DN) point to a deterioration in the fiscal surplus from 4.2.% of GDP in 2024 to 2.0% this year before increasing again to 2.4% of GDP in 2027. Against this background, in Morningstar DBRS's view, the country will continue to benefit from one of the lowest debt-to-GDP ratios in the European Union (EU), estimated at 31.1% of GDP at end of 2024.

The credit ratings are underpinned by Denmark's sound public finances, strong external position, credible policy framework, and wealthy and diversified economy. Moreover, the country's predictable macroeconomic policy framework has bolstered economic stability for decades. Denmark's strengths offset the credit challenges associated with an interconnected financial system and high levels of household debt, along with a high share of variable-rate mortgages in the context of elevated, although declining, interest rates.

CREDIT RATING DRIVERS
The credit ratings could be downgraded if one or a combination of the following occurs: (1) a severe shock to the economy that materially impairs Denmark's medium-term prospects, or (2) a substantial deterioration of the public debt ratio, which could be triggered by a materialisation of contingent liabilities associated with its large and interconnected financial system.

CREDIT RATING RATIONALE

The Pharmaceutical Sector Remains Supportive While Domestic Demand Expected to Gradually Improve

Denmark's credit profile benefits from a productive, diversified, wealthy, and flexible economy. This is reflected in a high GDP per capita.
Over the last three years, net exports of pharmaceuticals have provided a considerable boost to the economy, mitigating the weakness of domestic demand. High inflation and elevated interest rates weighed on consumption and on the construction sector, which, however, are expected to improve going forward. After a solid growth of 3.6% in 2024, the DN projects GDP to continue to register a strong performance, expanding by 3.6% in 2025 and 2.3% in 2026. The medical sector will remain an important driver, but over time its contribution to GDP will likely diminish.

Risks to the outlook are mainly related to the impact of U.S. trade policy, even though recently announced tariffs by the U.S. do not currently target the medical sector. However, Denmark is small and open economy and indirect implications related to the slowdown of its main trading partners could likely weigh on its economic performance. Against this background, the labour market, which has benefitted from strong job creation over the past few years, will likely soften. The labour market starts from a position of strength. The employment rate is elevated at 77.1% at the end of 2024 while the unemployment rate, at 2.9% in February 2025, is one among the lowest in the EU.

Denmark Strong Fiscal Position Expected to Deteriorate But Debt Ratio Will Remain Moderate

Morningstar DBRS views Denmark's strong public finance metrics and its fiscal track record as key credit strengths, providing the country with valuable fiscal space to stabilise the economy against severe shocks. The government posted large fiscal surpluses over the last five years on the back of robust economic activity, a resilient labour market and a strong performance of the pharmaceutical sector. Latest estimates from DN point to a sizable surplus amounting to 4.2% of GDP in 2024. Going forward, the surplus is expected to decline in order to accommodate increased spending on defense and security, including aid to Ukraine, lower revenue due to the personal tax income reform, and increased support to municipalities and regions. The government announced in February 2025 an Acceleration fund to finance additional military spending amounting to DKK 50 billion (1.7% of GDP) in the 2025-2026 period, along with a reserve fund totaling DKK 10 billion a year from 2027 to 2033. This would likely contribute to a larger than initially anticipated easing in the fiscal policy, lowering the surplus to 2.0% of GDP this year. Nevertheless, the deterioration in the fiscal accounts is expected to be limited, due to its strong starting position, and fiscal prudence will remain a key feature of Danish policymaking.

Denmark's credit ratings are also underpinned by a healthy public sector debt position. Denmark's public debt ratio (European Economic and Monetary Union debt definition), estimated at 31.1% of GDP in 2024, is one of the lowest in the EU. The latest estimates from the Ministry of Economic Affairs point to public debt as a share of GDP declining to slightly below 30% in 2026, while net public assets as a share of GDP are expected to increase to 26%. That said, the planned increase in military spending along with looser fiscal policy might result in a slightly higher debt ratio over the medium term. The public sector debt benefits also from a favourable structure with contained interest costs. Over the last two years, the net interest burden has been negative thanks to the large asset position and declining central government liabilities. The central government's account, estimated to have reached DKK 211.7 billion (7.1% of GDP) by the end of 2024, demonstrates strong flexibility and provides the government with an additional financial buffer. Moreover, the average maturity has increased over the last few years and debt is mostly denominated in local currency. These factors, along with a stable and diversified investor base, mitigate refinancing risks.

Financial Stability Risks Appear Contained; Risks Stemming From Commercial Real Estate Are Mitigated by Macroprudential Measures

Easing monetary policy is expected to relieve the pressure on indebted Danish households, which have experienced a repricing in interest rates, as well as on commercial property valuations. Like the European Central Bank (ECB), the DN has cut the policy rate by 150 basis points (bps) cumulatively since June 2024, and further easing could happen in the coming months. However, inflation could be more persistent than expected, leading to a prolonged period of elevated interest rates. This might negatively affect consumption and weigh on banks' balance sheets via losses from Commercial Real Estate (CRE) firms.

Non-financial corporations and households have withstood well the period of high interest rates and Morningstar DBRS expects some lower pressure as rates normalized. Moreover, household debt has fallen significantly over the past few years, but borrowers have become more sensitive and therefore vulnerable to elevated interest rates. Although household debt as a share of adjusted disposable income remains among the highest within the EU, the ratio, which was estimated at around 178% as end of 2024, was around 45 percentage points lower than at the end of 2020. The fall was mainly due to the increase in disposable income as well as loan refinancing. A large share of borrowers has converted their fixed interest rate mortgages into variable ones but with a lower level of debts. Moreover, mortgage revaluation played an important role in the reduction of the debt ratio. On the other hand, the share of borrowers at a variable rate has risen, making them vulnerable to elevated interest rates. Against this background, Morningstar DBRS considers the strength of the labour market, the large amount of net financial assets of Danish households, and the concentration of debt among the wealthiest households, as mitigating factors.

The banking sector's exposure to the CRE market is large, concentrated, and represents a point of attention. Nevertheless, Danish banks are strong, well capitalised, and liquid, and the surge in net interest income has bolstered profitability. The system is well equipped to absorb a deterioration in credit quality in case of economic slowdown, a prolonged period of higher interest rates, or potential losses from the commercial real estate market. A 7 percent CRE sector-specific systemic risk buffer, effective since the end of June 2024, is expected to be an important mitigant. However, in Morningstar DBRS' view, the large and highly interconnected Danish financial system, with the housing market and covered bond market¿the world's largest as a percentage of GDP¿strongly linked, could act as an amplifier of shocks. This underpins the negative adjustment in the Monetary Policy and Financial Stability Building Block assessment.

The External Position Is Strong, and Non-pharma Sectors Will Benefit From an Improvement in External Demand Over the Medium Term

Denmark's credit ratings are supported by its strong external position. Over the past 10 years, the country has registered current account surpluses averaging around 9.0% of GDP, reflecting strong national savings. Earnings from sea freights and the boom in pharmaceutical exports lifted surpluses even higher, averaging 11.5% of GDP in the last three years. There is high uncertainty over the impact of U.S. tariffs and possible countermeasures, but Denmark external position is expected to remain solid also thanks to expected strong demand of non-pharma products. Moreover, although the U.S. accounts for a fifth of total Denmark's exports, only 3 percent of total export to U.S. are produced in Denmark while only 17% of total exports to U.S. cross the Danish border. This mitigates the direct impact. In addition, Denmark's energy exports are expected to be sustained with the Tyra gas field producing at full capacity this year. According to the DN, the current account surplus could hover above 13% of GDP in the 2025-2027 period. The country also benefits from a high net international investment asset position (NIIP), amounting to 78.3% of GDP in 2024.

While Denmark's peg to the euro reduces its external adjustment capacity, the country has successfully relied on sound economic and fiscal policies to stabilise the economy and to prevent large external imbalances from building up. A strong external position, ample international reserves, sound public finances, and a significant political commitment underpin the high credibility of Denmark's long-standing fixed exchange rate policy. This supports Morningstar DBRS' positive qualitative adjustment of the Balance of Payments Building Block assessment.

Very Strong and Stable Political Framework Supports Economic Stability

Denmark's political environment and institutions are very strong, as reflected in the high scores on the World Bank's Worldwide Governance Indicators. Moreover, key reforms typically benefit from broad-based support across the political spectrum, which is conducive to policy continuity and limits the risk of reversal. This predictable macroeconomic policy framework has underpinned the country's price and economic stability for decades, and it will likely continue in the foreseeable future. The government coalition, which includes the Social Democrats, the Liberals, and the Moderates, is expected to remain in power until the term ends in October 2026. U.S. pressure on Greenland is not expected to negatively weigh on the government stability. It appears that there is consensus among major parties to maintain strong links with Greenland.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

There were no Environmental, Social and Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024) https://dbrs.morningstar.com/research/437781.

For more information on the Rating Committee decision, please see the Scorecard Indicators and Building Block Assessments. https://www.dbrsmorningstar.com/research/451851.

Notes:
All figures are in Danish krone unless otherwise noted. Public finance statistics reported on a general government basis unless specified.

The principal methodology is the Global Methodology for Rating Sovereign Governments (15 July 2024) https://dbrs.morningstar.com/research/436000. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings https://dbrs.morningstar.com/research/437781 in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The sources of information used for this credit rating include Ministry of Finance (Denmark's Fiscal and Structural Policy Plan 2024 - September 2024), Ministry of Economic Affairs (Economic Survey, December 2024), Danmarks Nationalbank (Outlook for the Danish Economy - September 2024; Financial Stability 2st Half 2024 - November 2024), Danmarks Statistik, Danish Energy Agency, European Central Bank, AlTi Global Social Progress Index (2024 Social Progress Index), Eurostat, OECD, IMF (Article IV Staff Report - September 2024, WEO - October 2024), World Bank, BIS, and Macrobond. Morningstar DBRS considers the information available to it for the purposes of providing this credit rating to be of satisfactory quality.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

With Rated Entity or Related Third-Party Participation: YES
With Access to Internal Documents: NO
With Access to Management: NO

Morningstar DBRS does not audit the information it receives in connection with the credit rating process, and it does not and cannot independently verify that information in every instance.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and credit ratings are under regular surveillance.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://www.dbrsmorningstar.com/research/451850.

This credit rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Carlo Capuano, Senior Vice President, Sector Lead, Global Sovereign Ratings
Rating Committee Chair: Michael Heydt, Senior Vice President, Sector Lead, Global Sovereign Ratings
Initial Rating Date: 20 September 2012
Last Rating Date: 11 October 2024

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