Denmark: Risk Assessment
Country Risk Rating
|A2||The political and economic situation is good. A basically stable and efficient business environment nonetheless leaves room for improvement. Corporate default probability is low on average.|
Business Climate Rating
|A1||The business environment is very good. Corporate financial information is available and reliable. Debt collection is efficient. Institutional quality is very good. Intercompany transactions run smoothly in environments rated A1.|
Economic growth is sustained by exports and domestic demand
GDP growth is expected to rise in 2016 as in 2015. Exports and domestic demand will continue as the main determinants of growth. On the one hand, exports will benefit from the improved (though still modest) economic picture in the euro zone and, more broadly, in its main EU partner countries, from the depreciation of the Danish krone against the dollar and the rise in productivity. On the other hand, weak inflation, higher property prices (wealth effect), the renegotiation of mortgages (lower interest rates) and the falling unemployment rate (6.2% of the workforce in 2015) will boost household consumption. Nonetheless, high household debt levels (290% of disposable income, the highest ratio in the OECD) will keep consumption in check. Regarding the sectors, the oil sector will be hit by the low oil prices, leading to lower output and investments; the pharmaceutical sector will be sustained by household consumption and finally, infrastructure projects will sustain the construction sector.
The Transatlantic Trade and Investment Partnership (TTIP), currently being negotiated between the European Union and the United States, could be an opportunity for growth, exports and jobs.
The Danish central bank's accommodative monetary policy (key interest rate: 0%; CD rates: -0.75% since February 2015) will persist in the short term, given weak inflation and the Danish krone's pegging to the euro. This policy has helped maintain export competitiveness and supported domestic demand. Nevertheless, upside property price tensions created by cheap credit will continue to be a risk for the authorities to monitor.
Low debt, high current account surplus
The government has set out three priorities for its 2016 budget: greater public spending on health and pensions, higher transfers to rural regions (consequence of the sharp drop in the price of milk, which accounts for almost 20% of Danish agricultural output) and labor market reform (in particular by means of cuts to unemployment benefit). As a result, the government will reduce development aid (0.7% of GDP) and the research, education and culture budget in order to limit the increase in the public deficit. Managing the public deficit will, however, be one of the government's priorities with the aim of bringing the structural deficit down to below -0.5% of GDP in 2016, compared with -0.9% of GDP in 2015. The gradual raising of the retirement age will also help bring down the deficit in the short term. Denmark's public debt level is low, which enables it to increase its public deficit from time to time, as was the case in 2015.
The Danish current account surplus will remain stable in 2016. This is explained mainly by dynamic exports, buoyed by the depreciation of the krone, pegged to the euro, which will be offset by imports stimulated by consumption. Meanwhile, the capital account balance will remain positive and stable in 2016.
Parliamentary elections won by right-wing party
Lars Lokke Rasmussen was elected Prime Minister in the last parliamentary elections in June 2015, for a term of four years. The right-wing bloc (representing all the parties on the right, such as Venstre, the Prime Minister's Party and the extreme right-wing Danish People's Party (DPP)) won a parliamentary majority against the left-wing bloc, made up in particular of the Social Democratic Party (SD), which obtained the most votes. Under the Danish parliamentary system, a party from the majority bloc governs. Having won fewer votes than the DPP, Venstre will lead the government as it is considered more consensual, but will have to rely on the extreme right-wing party to govern. Nonetheless, no member of government has been drawn from the DPP and significant differences between the DPP and Venstre (over tax reform, the role of the EU) could weaken the alliance between the two parties and spark early elections, without real risk since Denmark is one of the most politically stable countries.
Greenland's desire for independence (the Arctic being a region potentially rich in natural resources) will pose a significant challenge which Denmark will have to deal with in the medium term.
Note that Denmark was third in the World Bank's most recent Doing Business rankings thanks especially to the simplicity of the process for setting up a new business.