## 1dnkea2019001

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### Context and recent performance
- Denmark enjoys one of the world’s highest standards of living with strong institutions, sound policies, high social inclusion, and a highly ranked business climate.
- Macroeconomic outcomes (selected 2018 figures and revisions):
  - Real GDP growth: 1.4 percent in 2018.
  - Domestic demand growth: 2.5 percent in 2018.
  - Output gap: 0.9 percent in 2018.
  - Recent national accounts revisions:
    - Investment-to-GDP was lifted by 0.7 percentage point in 2017.
    - Output gap revised upwards by 0.8 and 0.7 percentage points in 2016 and 2017 respectively.
    - Accounting treatment of a single Danish patent increased GDP growth in 2017 by 0.4 percentage point and reduced it by 0.4 percentage point in 2018.
- Labor market:
  - Employment has increased continuously since 2013.
  - Harmonized unemployment rate: 5 percent in 2018 (a ten-year low and below the estimated natural rate).
  - Overall wage growth: 2.2 percent.
- Inflation:
  - HICP headline inflation: 0.7 percent in 2018 (down from 1.1 percent in 2017).
  - Services inflation: 1.6 percent in 2018 (down from 2.9 percent peak in mid-2017).
- Public finances:
  - Structural balance: 0.1 percent of potential GDP in 2018 (largely unchanged from 2017).
  - Gross public debt: 34 percent of GDP in 2018.
- Housing and credit:
  - Property prices (national average): grew 3.5 percent in 2018.
  - Prices for owner-occupied flats in Copenhagen: grew 5.5 percent in 2018 (down from 11.4 percent in 2017).
  - Private sector credit growth: 3.5 percent in 2018 (up from 1.5 percent in 2017).
  - Stock of private sector credit as a share of GDP: broadly at the level that preceded the GFC in early 2007.
  - Household debt: 270 percent of disposable income (highest among OECD countries).
- External sector:
  - Current account: 5.8 percent of GDP in 2018 (down from 8 percent in 2017).
  - National savings: 28.5 percent of GDP in 2018 (down from 29.6 percent in 2017).
  - Investment: 22.7 percent of GDP in 2018 (up from 21.6 percent in 2017).
  - Staff assessment: external position moderately stronger than implied by medium-term fundamentals.

### Outlook and key risks
- Baseline outlook:
  - Continued solid growth, supported by domestic demand (private consumption and investment key drivers).
  - Wealth effects from housing and employment gains from labor market and pension reforms to support consumption and labor supply.
  - Potential output growth projected to increase from 1.4 percent in 2016 to around 1.8 percent over the medium term.
  - Debt sustainability analysis: net public debt ratio projected to decline gradually over the medium term.
- Downside risks (tilted to the downside):
  - Sharper-than-expected slowdown in main trading partners or increased trade tensions could slow export growth.
  - Disorderly Brexit could reduce trade, disrupt supply chains, and tighten financial conditions; sectors exposed include food products, chemicals, machinery, trade and transport.
  - Spillovers from rising sovereign yields in high-debt euro area countries via confidence and trade channels.
- Macro-financial vulnerabilities:
  - High household leverage amid high house valuations is a key vulnerability.
  - Some urban households are highly indebted and vulnerable to housing price and interest rate shocks.
  - Deep Nordic financial integration exposes Denmark to regional shocks.
  - Ongoing money laundering case involving Denmark’s largest bank could impact confidence and financial stability.

### Policy recommendations — macroeconomic and fiscal policy
- General strategy:
  - Keep a neutral fiscal stance while supporting capacity-enhancing policies to boost labor supply, productivity, and investment.
  - Address macro-financial vulnerabilities via an enhanced macroprudential toolbox, tax reforms, and housing supply policies.
  - Strengthen cross-border AML/CFT supervision.
- Fiscal outlook and selected projections:
  - Structural position projected close to balance and above the fiscal framework deficit limit of ½ percent of GDP.
  - Fiscal balance expected to turn into a small deficit of -0.1 percent of GDP by 2021 (from 1.4 percent in 2017).
  - Planned increase in public investment welcomed to 3.5 percent of GDP (above 3.0 percent average since 2000).
  - Gross debt and gross financing needs expected to increase to around 40 percent and 7 percent of GDP respectively in the medium term due to central government financing of social housing; net debt projected to decline as assets increase.
- Revenue-side options:
  - Reduce high marginal and participation tax rates to promote labor supply.
  - Rationalize tax incentives for pension savings.
  - Further reduce Mortgage Interest Deductibility (MID) to slow household balance sheet expansion and reduce maturity mismatches.
  - Introduce an incremental Allowance for Corporate Equity (ACE) to increase investment incentives and reduce the debt bias.
- Spending-side options:
  - Increase public investment to upgrade infrastructure.
  - Broaden R&D support to more firms.
- Institutional recommendations:
  - Review budget law to ensure flexibility in setting the structural deficit limit while maintaining medium-term objective.
  - Expand and improve use of performance budgeting and better link public sector compensation to performance to boost productivity.

### Monetary policy and exchange rate management
- Exchange rate and interventions:
  - The Danish krone recently weakened against the euro after broad stability since early 2017; two successive interventions in December 2018 and January 2019 strengthened the krone.
  - Policy spread between Danmarks Nationalbank and the ECB has remained unchanged at -0.25 percent since March 2016.
  - Deferral of ECB policy normalization in early March 2019 has not resulted in krone appreciation pressures so far.
- Monetary policy objective:
  - Preserve the peg; central bank should stand ready to defend the peg via foreign exchange interventions and policy rate changes as necessary.
  - Situations warranting defense include appreciation pressures from ECB accommodation (e.g., no-deal Brexit or ECB deferral) or depreciation pressures from large confidence shocks (e.g., money laundering case).
- Fiscal stance and authorities’ views:
  - Authorities consider fiscal policy should remain broadly neutral and rely on strong automatic stabilizers.
  - They reiterate the exclusive objective of monetary policy is to maintain the peg, which provides a framework for low inflation.

### Financial sector resilience, AML/CFT, and banking union considerations
- Overall banking system:
  - Banking system remains profitable, liquid, and solvent; profitability decreased but remains solid despite slow credit growth, low margins, and IFRS 9.
  - System-wide NPLs remain low but vary across medium-sized banks and SIFIs.
  - Liquidity coverage ratio comfortably above 100 percent minimum; banks have ample capital buffers (EBA and DN stress tests).
- Pockets of vulnerability and systemic risk:
  - Lending surveys suggest some banks relaxing credit standards for corporate loans.
  - Danske Bank money laundering case effects:
    - Possible laundering of approximately €200 billion through Danske Bank’s Estonia branch has affected confidence.
    - Net profits for Danske Bank declined by 28 percent y/y in 2018; funding cost increased on average by 33 basis points since end-May 2018.
    - Danske Bank’s marginal contribution to systemic risk is material.
  - Nordic financial interlinkages increased joint default probabilities temporarily (end-2018).
- Regulatory reforms and buffers:
  - BRRD final stage completed; banks subject to MREL; MCIs exempt but must hold a debt buffer.
  - MREL set to either eight percent of assets or two times total capital requirement including buffers, whichever is higher.
  - MCI debt buffer to be fully phased-in to 2 percent of unweighted loans in 2020 (1.8 percent in 2019).
  - SRC recommended raising CCyB from zero to 1½ percent by June 2020; implemented in phases (0.5 percent and 1 percent raises to be implemented by March and September 2019).
- AML/CFT priority steps:
  - Develop comprehensive institutional risk assessment model.
  - Increase depth of DFSA AML/CFT on-site inspections.
  - Expand DFSA sanctioning powers, including administrative fine notices.
  - Strengthen regional and international cooperation.
- Banking union (BU) opt-in considerations:
  - Opt-in decision requires careful assessment of costs and benefits; committee established July 2017 to report by fall 2019.
  - Key issues needing clarity: supervisory and resolution treatment of MCIs; treatment of small-to-medium bank resolution practices; accommodation of Greenland and the Faroe Islands (not EU members).
  - BU implications:
    - ECB would supervise significant institutions; SRB would manage resolution for SIs; access to Single Resolution Fund (steady-state target ~1 percent of covered deposits, translating into about €56 billion).
    - Use of SRF limited until at least 8 percent bail-in of liabilities; SRF contribution limit 5 percent of bank liabilities.
    - Macroprudential “top-up” powers for ECB and coordination/access issues for non-euro-area BU participants.

### Housing market vulnerabilities and recommended policies
- Key vulnerabilities:
  - High household leverage and elevated house valuations.
  - Large share of variable-rate and interest-only mortgages (variable terms over 50 percent).
  - Two vulnerable household groups: buyers in potentially overvalued urban areas (higher LTI ratios and credit growth) and low-income households with high housing cost shares.
- Macroprudential recommendations:
  - Increase focus on income-based measures (DTI, LTI, DSTI) in an environment of elevated house prices.
  - Strengthen DTI restrictions for all loans irrespective of LTV; consider tighter limits for interest-only and adjustable-rate mortgages while calibrating for lower-risk groups (first-time buyers, low-levered households, fixed-rate financing).
  - Mandatory amortization for highly-leveraged households (debt-to-income above 400 percent) irrespective of period.
  - Review institutional arrangements and SRC decision process; consider assigning independent macroprudential mandate with legal powers and transparency/accountability.
- Tax and housing supply measures:
  - Further reduce Mortgage Interest Deductibility (MID), potentially conditioned on amortizing and/or fixed-rate mortgages to incentivize mortgage swaps.
  - Rebalance tax incentives for pension contributions to release resources for larger down-payments.
  - Reduce rent controls to stimulate rental market while protecting vulnerable groups.
  - Relax restrictions on size of new apartments in urban areas and upgrade public transportation to relieve urban price pressures.
  - Streamline zoning and planning procedures to increase housing supply.

### Labor market, skills, and productivity policy priorities
- Labor market developments and challenges:
  - Employment and participation up; unemployment below structural rate; moderate wage growth.
  - Denmark has low average work hours among European countries; high labor tax rates weaken work incentives.
  - Youth inactivity increased since the crisis; skill shortages rising; access to skilled foreign labor cumbersome.
  - Lagging unemployment among female refugees and low share of women in management positions.
  - Public childcare limited outside regular hours; women bear larger childcare burdens.
- Policy recommendations:
  - Comprehensive tax and benefit reform to increase labor supply:
    - Increase reliance on in-work benefits and improve targeting to lower-income workers.
    - Reduce marginal tax rates for average income earners to increase hours worked.
    - Staff analysis (Annex I) suggests revenue-neutral reform could increase employment rates by up to 3 percentage points, hours worked by up to 3.5 percent, and average income per capita by 3 percent relative to current levels.
  - Improve skills and migrant integration:
    - Encourage education in high-demand fields (technical and digital skills); support VET.
    - Streamline accreditation of foreign degrees.
    - Lower minimum remuneration requirements for some residency permit schemes and clarify conditions for occupations on the “positive list”.
    - Renew and continue IGU program; prioritize integration of female refugees.
    - Increase flexibility in childcare provision and consider incentives for a more equal split of parental leave.
- Productivity and investment measures:
  - Support broad-based innovation, tailor R&D deductions to incentivize more firms (especially SMEs), make R&D super-deduction more generous/refundable, promote university-business collaboration, and improve IP rights regime.
  - Improve access to equity finance, upgrade capital markets, review pension fund regulation to incentivize domestic equity investment, relax carry-forward loss caps for startups, reduce taxation of dividends while minimizing avoidance, and consider an incremental ACE to reduce debt bias.

### External position and external balance assessment
- External position (2018):
  - Current Account: 5.8 percent of GDP in 2018.
  - Staff’s EBA estimates:
    - Cyclically-adjusted current account position: 6.0 percent of GDP for 2018.
    - Current account norm: 4.3 percent of GDP.
    - Current account gap: 1.7 percent of GDP (external position moderately stronger than medium-term fundamentals).
  - REER assessment:
    - Level REER model: krone overvalued by about 12 percent.
    - Index REER model: krone overvalued by about 10.6 percent.
- Drivers and recommendations:
  - Large NIIP (63.2 percent of GDP in 2018) and accumulation of foreign assets (299 percent of GDP in 2018) driven by offshore activity of multinationals and investment income.
  - Investment in 2018: 22.7 percent of GDP; Savings in 2018: 28.8 percent of GDP.
  - Policy implication: structural policies to raise investment and improve capital markets would help reduce the current account surplus.

### Key projections and headline indicators (selected series, 2016–24)
- Real GDP (change in percent): 2.4 (2016), 2.3 (2017), 1.4 (2018), 1.7 (2019), 1.9 (2020), 1.7 (2021), 1.6 (2022), 1.5 (2023), 1.5 (2024).
- Private consumption (change in percent): 2.1 (2016), 2.1 (2017), 2.3 (2018), 2.5 (2019), 2.4 (2020), 2.3 (2021), 2.2 (2022), 2.2 (2023), 2.1 (2024).
- Gross fixed investment (change in percent): 7.6 (2016), 4.6 (2017), 5.1 (2018), 3.4 (2019), 3.0 (2020), 2.8 (2021), 2.7 (2022), 2.6 (2023), 2.6 (2024).
- Harmonized unemployment rate (percent): 6.2 (2016), 5.7 (2017), 5.0 (2018), 5.0 (2019), 5.0 (2020), 5.0 (2021), 5.0 (2022), 5.1 (2023), 5.2 (2024).
- CPI (year average, change in percent): 0.0 (2016), 1.1 (2017), 0.7 (2018), 1.3 (2019), 1.5 (2020), 1.8 (2021), 2.0 (2022), 2.0 (2023), 2.0 (2024).
- Overall balance (percent of GDP): -0.1 (2016), 1.4 (2017), 0.5 (2018), 0.2 (2019), 0.0 (2020), -0.1 (2021), -0.2 (2022), -0.1 (2023), 0.1 (2024).
- Gross debt (percent of GDP): 37.2 (2016), 35.5 (2017), 34.3 (2018), 33.0 (2019), 31.9 (2020), 33.9 (2021), 35.9 (2022), 37.6 (2023), 38.2 (2024).
- Nominal GDP (Bln DKK): 2,100 (2016), 2,178 (2017), 2,218 (2018), 2,294 (2019), 2,377 (2020), 2,468 (2021), 2,565 (2022), 2,667 (2023), 2,771 (2024).

### Debt sustainability and stress scenarios
- Selected DSA indicators (snapshot as provided):
  - Nominal gross public debt sequence: 41.4 35.6 34.1 33.2 32.0 34.0 35.9 37.7 38.3.
  - Public gross financing needs sequence: 6.7 3.9 4.9 5.3 5.5 5.9 6.5 6.7 6.7.
  - Net public debt: 15.2 14.7 13.6 13.3 12.8 12.5 12.2 11.8 11.2.
  - Real GDP growth sequence: 0.6 2.3 1.4 1.7 1.9 1.7 1.6 1.5 1.5.
  - Effective interest rate examples across scenarios: Baseline 3.9 2.5 3.2 3.1 3.2 3.3; Historical and Contingent Liability Shock scenarios provided with higher rates in stressed years.
- Scenario guidance:
  - Baseline, Historical, Constant Primary Balance, and Contingent Liability Shock scenarios considered; contingent liability shock produces large primary balance and growth impacts in stress year.

### Tax and benefit reform (Annex I) — microsimulation results and policy implications
- Motivation:
  - Reforms can improve equity-efficiency tradeoff; revenue-neutral reforms can materially increase employment and hours worked.
- Key scenario outcomes (selected numbers):
  - Isoelastic (γ = 1.4, revenue-neutral):
    - Employment/participation rate: rises from 90.0 to 92.7.
    - Total hours change: 0.5 percent relative to current system.
    - Total wages change: 0.8 percent relative to current system.
    - Disposable Gini index: rises from 0.2030 to 0.2120.
    - Net revenues (percent of total wages): 29.0 (no change).
  - Const GMI (hold GMI constant, revenue-neutral):
    - Total hours change: 1.5 percent.
    - Total wages change: 1.5 percent.
    - Disposable Gini index: 0.2160.
    - Net revenues: 29.0 percent of total wages.
  - All Gain (make everyone a net gainer, not revenue-neutral):
    - Net revenues fall to 28.0 percent of total wages.
    - Total labor income and hours: increase by 1.5 percent.
    - Employment rate: increases to 90.9.
    - Implied fiscal revenue multiplier: 1.6.
- Design recommendations:
  - Introduce a targeted in-work benefit phased out steeply to reduce PTRs and increase take-up among low-wage workers.
  - Reduce marginal tax rates for median income earners and above to boost labor supply.
  - Consider modest reductions in GMI (e.g., 10 percent in Isoelastic scenario) to lower PTRs while preserving redistribution consistent with social preferences (CRIA γ = 1.4).
  - Recognize trade-offs: revenue-neutral reforms can expand employment/hours while causing a small rise in measured inequality; non-revenue-neutral reforms can deliver universal gains at the cost of lower net revenues.

### Risk Assessment Matrix — principal risks and responses
- High-probability/high-impact risks and policy responses:
  - Rising protectionism and retreat from multilateralism — policy response: contingent temporary fiscal loosening and structural reforms.
  - Failure to address macro-financial risks (high household leverage, ongoing money laundering case, Nordic interlinkages) — policy response: vigilant financial surveillance, macroprudential measures, housing supply reforms, bank buffer strengthening, liquidity support post-shock.
  - Sharp tightening of global financial conditions — policy response: expand macroprudential toolkit with focus on lower-income groups.
- Other risks:
  - Weaker-than-expected global growth — allow automatic stabilizers and consider loosening fiscal policy if necessary; proceed with structural reforms.
  - Tightening of domestic capacity constraints — tighten fiscal policy and accelerate structural reforms to increase labor supply and migrant integration.
- Short-term/medium-term likelihood definitions:
  - Low: <10 percent; Medium: 10–30 percent; High: 30–50 percent.

*Source: 1dnkea2019001 — IMF staff report excerpt and annexes as provided in the supplied content.*

### 1. Context ________________________________________________________________________________________ 24

### 1dnkea2019001 - 1. Context ________________________________________________________________________________________ 24

### Context
- Denmark enjoys one of the world’s highest standards of living, with strong institutions and sound economic and social policies delivering robust economic performance and high levels of social inclusion.
- The business climate ranks among the best in the world and education levels are high.
- A flexible labor market model alongside extensive active labor market policies has fostered high employment and income levels, along with low levels of income inequality.
- Measures of well-being suggest Danes are among the happiest people in the world.

### Recent Developments
- The upswing of the Danish economy continues; with GDP above potential, growth is driven by domestic demand, supported by a strong labor market. Inflation remains subdued and the fiscal position is broadly balanced. House prices seem to be softening, yet the level of household debt remains high. The current account surplus is decreasing amid higher investment.
- Real GDP grew by 1.4 percent in 2018.
- Domestic demand grew by 2.5 percent in 2018.
- The output gap is estimated to have reached 0.9 percent in 2018.
- Recent national accounts revisions:
  - Investment-to-GDP was lifted by 0.7 percentage point in 2017.
  - The output gap was revised upwards by 0.8 and 0.7 percentage points in 2016 and 2017 respectively.
- The accounting treatment of a single Danish patent increased GDP growth in 2017 by 0.4 percentage point and reduced it by the same magnitude in 2018.
- The labor market:
  - Employment has increased continuously since 2013.
  - The harmonized unemployment rate reached 5 percent in 2018, a ten-year low and below the estimated natural rate.
  - Overall wage growth was contained at 2.2 percent.
- Inflation:
  - HICP headline inflation was 0.7 percent in 2018, down from 1.1 percent in 2017.
  - Services inflation fell to 1.6 percent from 2.9 percent peak in mid-2017.
- Fiscal position:
  - The structural balance was 0.1 percent of potential GDP in 2018, largely unchanged from 2017.
  - Gross public debt stood at 34 percent of GDP.
- Housing and credit:
  - Property prices grew on average 3.5 percent in 2018.
  - Prices for owner-occupied flats in Copenhagen grew by 5.5 percent in 2018, down from 11.4 percent in 2017.
  - Private sector credit growth rose to 3.5 percent in 2018 from 1.5 percent in 2017.
  - The stock of private sector credit as a share of GDP is broadly at the level that preceded the GFC in early 2007.
  - Household debt is the highest among OECD countries at 270 percent of disposable income.
- External sector:
  - The current account decreased from 8 percent of GDP in 2017 to 5.8 percent of GDP in 2018.
  - National savings fell from 29.6 percent of GDP in 2017 to 28.5 percent in 2018.
  - Investment rose from 21.6 percent to 22.7 percent of GDP in 2018.
  - Staff assesses the external position to be moderately stronger than implied by medium-term fundamentals.

### Outlook and Risks
- Outlook:
  - Continued solid growth is expected, supported by domestic demand—private consumption and investment are projected to be key drivers.
  - Wealth effects from the strong housing market will further contribute to robust consumption growth.
  - Employment gains from recently approved labor market and pension reforms are expected to continue boosting labor supply.
  - Potential output growth is projected to increase from 1.4 percent in 2016 to around 1.8 percent over the medium term.
  - A debt sustainability analysis points to a gradually declining net public debt ratio over the medium term.
- Risks (tilted to the downside):
  - A sharper than expected slowdown in Denmark’s main trading partners and/or a flareup in trade tensions could further slow export growth.
  - A disorderly Brexit could reduce trade, disrupt supply chains, and tighten financial conditions; several U.K.-exposed sectors (food products, chemicals, machinery, trade and transport) would be negatively affected.
  - A disregard for common fiscal rules and rising sovereign yields for high-debt euro area countries could spread via confidence and trade channels.
- Macro-financial vulnerabilities:
  - High household leverage amid high house valuations is a key source of vulnerability.
  - Some households, particularly in urban areas, are highly indebted and vulnerable to housing price and interest rate shocks.
  - The deep integration of the Nordic financial system exposes Denmark to shocks originating in other Nordic countries.
  - The ongoing money laundering case involving Denmark’s largest bank could impact confidence and financial stability.

### Authorities’ Views
- The authorities broadly concur with staff’s assessment of the outlook and risks.
- They expect the strong economic expansion to continue and the output gap to remain positive over the medium term as domestic demand remains healthy.
- They view external risks, due to Brexit and trade tensions, as tilted to the downside but note that the Danish economy has sufficient buffers.
- They recognize staff’s concerns about macro-financial vulnerability due to elevated household debt.

### Policies for Sustained Growth
- General strategy:
  - Policies need to boost potential growth and enhance macro-financial stability.
  - Continue a neutral fiscal stance while supporting capacity-enhancing policies to boost labor supply, productivity and investment.
  - Address macro-financial vulnerabilities by enhancing the macroprudential toolbox, combined with tax and housing supply policies.
  - Continue efforts to strengthen cross-border anti-money laundering supervision.
- A. Macroeconomic Policies — Fiscal Policy
  - Fiscal outlook and plans:
    - The structural position is projected to remain close to balance, above the fiscal framework deficit limit of ½ percent of GDP.
    - The fiscal balance is expected to turn into a small deficit of -0.1 percent of GDP by 2021, from 1.4 percent in 2017.
    - Higher deductions for pension contributions will compensate for the increase in retirement ages and a partial refund of property taxes will support the transition to a new real estate valuation system.
    - Staff welcomes the planned increase in public investment to 3.5 percent of GDP, higher than the 3.0 percent average since 2000.
    - Gross debt and gross financing needs will increase to around 40 percent and 7 percent of GDP respectively in the medium term as the central government takes a more active role in the financing of social housing.
    - Net debt will continue to decline as a share of GDP, as higher assets will match the increase in liabilities.
    - Staff assesses that Denmark has substantial fiscal space over the medium term, but long-run sustainability hinges on continued implementation of pension reform.
  - Policy recommendations:
    - The fiscal stance should remain neutral, while letting automatic stabilizers operate fully in case of shocks to aggregate demand.
    - In the event of a severe downturn, additional temporary loosening should be considered, while remaining anchored to the medium-term objective.
    - Continue efficiency-improving reforms covering both revenues and expenditures; these could be fiscally-neutral or calibrated to provide stimulus if loosening is warranted.
    - Revenue-side options:
      - Reduce high marginal and participation tax rates to promote labor supply.
      - Rationalize tax incentives for pension savings.
      - Further reduce the Mortgage Interest Deductibility (MID) to help slow household balance sheet expansion and reduce maturity mismatches.
      - Introduce an incremental Allowance for Corporate Equity (ACE) to increase investment incentives and reduce the debt bias.
    - Spending-side options:
      - Increase public investment to upgrade infrastructure.
      - Broaden R&D support to more firms.
    - Institutional recommendations:
      - Continue the ongoing review of the budget law to ensure flexibility in setting the structural deficit limit, while maintaining the medium-term objective of budget balance.
      - Expand and improve the use of performance budgeting.
      - Ensure public sector compensation is better linked to performance to improve resource allocation and boost productivity growth.

*Source: 1dnkea2019001 - 1. Context ________________________________________________________________________________________ 24*

### 16.      Monetary conditions have remained accommodative so far. The Danish krone recently

### 16.      Monetary conditions have remained accommodative so far. The Danish krone recently

### Monetary conditions and exchange rate policy
- The Danish krone recently weakened against the euro after a period of broad stability since early 2017.
- The weakening likely reflected, around the time of exchange pressures, expectations of a relative tightening of monetary policy in the euro area versus Denmark, as indicated by future swap rates.
- Despite remaining within the Exchange Rate Mechanism (ERM) band, pressures prompted two successive interventions in December 2018 and January 2019 that strengthened the krone.
- The deferral of policy normalization announced by the ECB in early March 2019 has not resulted in appreciation pressures on the krone so far.
- The policy spread between Danmarks Nationalbank and the ECB has remained unchanged at -0.25 percent since March 2016, while negative differentials in money market rates have widened slightly.
- Monetary policy objective: preserve the peg. The central bank should stand ready to defend the peg using foreign exchange interventions and changes in the policy rate as deemed necessary.
- Situations warranting defense of the peg could include:
  - appreciation pressures from monetary accommodation by the ECB—in the event of a no-deal Brexit or due to ECB’s deferral of policy normalization;
  - depreciation pressures—in the event of a large confidence shock originating from the ongoing money laundering case.

### Fiscal stance and authorities’ view on monetary policy
- The authorities consider that fiscal policy should remain broadly neutral.
- They concur that Denmark’s strong automatic stabilizers would help dampen shocks to aggregate demand.
- They see limited scope for discretionary fiscal loosening to respond to shocks.
- The authorities did not have a view on whether the ongoing review of the budget law would result in major changes to the structural deficit limit.
- The authorities reiterate that the exclusive objective of monetary policy is to maintain the peg and that the fixed-exchange-rate policy provides a framework for low inflation in Denmark.

### Financial sector—overall assessment
- The banking system remains profitable, liquid, and solvent.
- Profitability has decreased but remains solid despite slow credit growth, low interest margins, and the introduction of IFRS 9.
- System-wide non-performing loans (NPLs) remain low but vary across medium-sized banks and systemically important institutions (SIFIs).
- Danish banks’ liquidity coverage ratio is comfortably above the current minimum requirement of 100 percent.
- Banks have ample capital buffers as confirmed by the 2018 European Banking Authority (EBA) and the Danish central bank stress tests (ST).

### Pockets of vulnerability and systemic risk
- Lending surveys suggest some banks are relaxing credit standards for corporate loans.
- The ongoing money laundering case could undermine financial stability:
  - Higher expenditures for anti-money laundering (AML) controls and increased cost of funding—due to increased risk perception—have already impacted Danske Bank’s profitability, stock price and default probability.
  - Net profits declined by 28 percent y/y in 2018, while funding cost increased on average by 33 basis points since end of May 2018.
- Close interlinkages across the Nordic financial system expose banks to regional spillovers; temporary (end-2018) increases in systemic risk measures, such as joint default probabilities, were observed.
- Danske Bank’s marginal contribution to systemic risk is highlighted as material in the report’s indicators.

### Regulatory reforms and capital buffers
- The Danish Financial Supervisory Authority (DFSA) completed the final stage of the Banking Recovery and Resolution Directive (BRRD).
- Banks are now subject to MREL requirements; Mortgage Credit Institutions (MCI) are exempted but must hold a debt buffer.
- MREL is set to either eight percent of assets or two times the total capital requirement including capital buffer requirements, whichever is higher.
- MCI’s debt buffer will be fully phased-in to 2 percent of unweighted loans in 2020 (in 2019 it is 1.8 percent).
- The Systemic Risk Council (SRC) recommended raising the countercyclical capital buffer (CCyB) from zero to 1½ percent by June 2020; this was done in three phases with two previous raises of 0.5 percent and 1 percent to be implemented by March and September 2019, respectively.

### Recommendations to strengthen resilience and surveillance
- If risks continue to build up, use a combination of micro and macroprudential tools to increase buffers, including revisions to:
  - risk weights;
  - Pillar 2 requirements;
  - the SIFI and capital conservation buffers;
  - in addition to the CCyB.
- Further refine frameworks to assess systemic risk, including:
  - macroprudential stress tests to quantify losses due to contagion across MCIs, the pension and household sectors;
  - extensions to estimate losses due to contagion across banks in the region.

### Money laundering (AML/CFT) concerns and recommended actions
- The possible laundering of approximately €200 billion in transfers through Danske Bank’s branch in Estonia has affected confidence and attracted international scrutiny of Denmark’s cross-border AML/CFT supervision.
- Recent steps taken:
  - Financial groups are required to implement group-wide programs to counter money laundering and terrorist financing (ML/TF).
  - Additional resources allocated to the DFSA; DFSA now has the power to revoke a financial institution’s license in response to gross violations of AML/CFT requirements.
- Priority next steps recommended:
  - (i) develop a comprehensive institutional risk assessment model;
  - (ii) increase the depth of the DFSA’s AML/CFT on-site inspections;
  - (iii) further expand its sanctioning powers, including to issue administrative fine notices;
  - (iv) strengthen regional and international cooperation.

### Banking union participation decision
- A decision on banking union participation should carefully assess costs and benefits given Denmark’s unique characteristics.
- A 2015 report concluded participation was in Denmark’s interest but some areas required further clarification and review before a final decision.
- A committee established in July 2017 is to follow up with a final report expected by fall 2019.
- Key assessment issues include:
  - how participation would change bank supervision and resolution;
  - treatment of Danish specificities such as MCIs, the practice of resolution for small-to-medium banks, and banks in Greenland and the Faroe Islands;
  - the current structure of the banking union and prospects for change.
- Banking union participation will ultimately be a political decision reflecting the Danish authorities’ judgment on its consequences for Denmark.

### Housing market—linkages and vulnerabilities
- The housing market reinforces macro-financial linkages: high mandatory pension contributions and household savings facilitated development of the world’s largest covered bond market in percent of GDP.
- Insurance companies, pension funds, and foreign investors are among the largest holders of covered bonds, which are issued by MCIs to fund household mortgages.
- High household leverage amid high house valuations remains a key source of macro-financial vulnerability.
- Danish households’ debt-to-income ratios are among the highest in advanced economies.
- Large liabilities are counterbalanced by large assets (housing and pension), but high gross debt combined with illiquid assets exposes households to price and interest rate shocks.
- Two household groups are particularly vulnerable:
  - households who purchased in potentially overvalued urban areas, where LTI ratios and credit growth are higher;
  - low-income households who spend a significant share of their income on housing.
- Vulnerabilities are compounded by the large proportion of variable-rate and interest-only mortgages in the system.

### Housing market policy recommendations
- Continue deployment of coordinated policies to address remaining vulnerabilities.
- Macroprudential instruments:
  - In an environment of elevated house prices, increase focus on income-based measures (DTI, LTI, DSTI).
  - Staff welcomes 2018 rules limiting lending via interest-only and floating-rate mortgages to highly-indebted households.
  - Authorities could strengthen DTI restrictions for all loans, irrespective of LTV.
  - Consider tighter limits on income-based measures for interest-only and adjustable-rate mortgages, while calibrating limits for lower risk groups—first-time home buyers and low-levered households—and where financing is via fixed–rate mortgages.
  - Highly-leveraged households—with debt-to-income above 400 percent—should be subject to mandatory amortization, irrespective of amortization periods.
- Macroprudential framework:
  - Review efficacy of policy implementation, including institutional arrangements.
  - The SRC decision process can take too long; consider assigning independent authorities a macroprudential mandate with legal powers to implement policy with corresponding transparency and accountability requirements.
- Tax policy:
  - MID should be reduced further, taking advantage of the current low rate environment.
  - MID could be made conditional on amortizing and/or fixed rate mortgages to incentivize homeowners to swap risky mortgages.
  - Balancing tax incentives for pension contributions could release resources for larger down-payments, thereby reducing household leverage.
- Housing supply:
  - Reduce rent controls to stimulate the rental market while protecting the most vulnerable.
  - Relax restrictions on the size of new apartments in urban areas to improve demand-supply mismatches.
  - Upgrade public transportation to relieve house price pressures around fast-growing urban centers.
  - Streamline zoning and planning procedures across municipalities to increase supply and alleviate price pressures.

*Source: IMF staff report excerpt as provided in the supplied content.*

### 34.      Authorities agree that macro-financial risks stemming from the interaction between

### 34.      Authorities agree that macro-financial risks stemming from the interaction between

### Macro-financial risks and housing
- Authorities agree that macro-financial risks stemming from the interaction between high household leverage and high house valuations should be followed closely.
- Household resilience to interest rate increases likely improved as more homeowners continue shifting towards fixed rate mortgages and longer fixing periods.
- Authorities welcome the recent softening in apartment prices.
- The authorities argue that additional measures would require further analysis of the effects on the housing market and the overall economy.
- The macroprudential framework is seen as well functioning including the timeframe for the CCyB implementation and SRC’s independence.
- The DN notes that the long-term success of the framework depends on policy-makers' continued implementation of the SRC's recommendations.
- Staff appraisal highlights: High household leverage amid elevated house valuations call for coordinated policy action.
  - Increased focus on income-based macroprudential instruments might prove more effective than current instruments that rely more on loan-to -value ratios.
  - Authorities should seek to improve the efficacy of policy implementation, including through a review of the SRC’s institutional arrangements.
  - Mortgage interest deductibility should be reduced further than currently planned.
  - Policies to promote housing supply should be considered.

### Labor market: developments and policy priorities
- The labor market continues to improve owing to the success of past policies.
  - Employment and labor force participation rates have increased, while unemployment has dropped below the structural rate.
  - Overall, wage growth remains moderate and in line with productivity, although there seem to be misalignments in some sectors.
- Key past reforms and initiatives:
  - 2011 pension reform linking statutory retirement age to life expectancy increased employment of older workers.
  - 2018 tax reform increased deductions for pension contributions and lowered taxes on labor income.
  - JobReform imposed tighter work requirements for social assistance.
  - 2016 IGU program to promote labor market participation of refugees.
  - 2017 tripartite agreement to align skills with business demand.
- Remaining challenges:
  - Denmark has one of the lowest average work hours among European countries.
  - High labor tax rates can weaken incentives to work.
  - Youth inactivity increased since the crisis due to the high bar to enter the Danish labor market.
  - Skill shortages are increasing and access to skilled foreign labor remains cumbersome.
  - Lagging unemployment of female refugees remains a concern; gender gaps have narrowed but significant challenges remain (e.g., one of the lowest shares of women in management positions among OECD countries).
  - Public childcare provision tends to be limited outside regular working hours; women bear a larger burden of primary childcare, including maternity leaves.
- Policy recommendations:
  - A comprehensive tax and benefit reform could increase labor supply:
    - Increase reliance on in-work benefits and improve targeting to lower-income workers to alleviate inactivity traps and improve youth employment.
    - Reduce marginal tax rates for average income earners to increase hours worked.
    - Staff analysis suggests such a reform, even if revenue-neutral, could have a significant positive impact on employment rates, hours worked, and the level of output (Annex I).
  - Improve employment in knowledge-intensive sectors, better integrate migrants, and reduce the gender gap:
    - Encourage education in fields of high demand, including technical and digital skills (Technology Pact).
    - Continue budgetary support for VET to align skills to future labor demands and facilitate youth employment.
    - Streamline accreditation of foreign degrees.
    - Lower minimum remuneration requirements for residency permits via the pay limit scheme and clarify conditions for continued residency for occupations on the “positive list”.
    - Renew and continue IGU program; prioritize integration of female refugees.
    - Increase flexibility in childcare provision and consider incentives for a more equal split of parental leave.
- Authorities’ views:
  - Raising labor supply remains a priority.
  - Authorities recognize labor supply could be further increased through tax reforms, targeted in-work benefits, and reducing marginal tax rates.
  - They agree on importance of education in high-demand fields and better migrant integration; note need for political consensus on measures to shrink the gender gap.

### Reforms to boost investment and productivity
- Current situation:
  - Productivity growth remains weak in recent years, partly due to weak investment after the crisis (SIP 2018); national accounts revisions lifted investment-to-GDP by 0.7 percentage point in 2017.
  - Productivity growth weak in less knowledge-intensive service industries (trade, transport, food and accommodation), stronger in knowledge-intensive services.
- Steps taken to increase productivity:
  - Government’s business-oriented policy focuses on digitalization, qualified labor, venture capital, cost of doing business, competitiveness, and good conditions for investment (Ministry of Industry, Business and Financial Affairs 2018).
  - Digital growth reform (early 2018); Digital Hub Denmark; Technology Pact; Danish National Strategy for Artificial Intelligence; public-private partnerships; measures for cyber security.
  - Equity savings accounts; tax deduction for households investing in unlisted SMEs.
  - Tax deduction for R&D expenditures to be gradually increased from 100 percent to 110 percent in 2026.
  - Danish Growth Fund and Innovation Fund to support entrepreneurs and R&D.
- Further measures recommended:
  - Support broad-based innovation:
    - Tailor R&D deductions to incentivize a larger spectrum of firms, especially SMEs.
    - Make the R&D super-deduction more generous; currently only part is refundable.
    - Promote collaboration between universities and businesses; reduce complex cooperation regulation and improve intellectual property rights.
  - Improve institutional framework for competition:
    - Aim for a simple and efficient framework that gives greater power to use administrative instruments.
    - Staff welcomes the April 2018 government agreement to ensure fairer and more equal competition between public and private bodies.
  - Foster environment for high-productivity sectors to expand:
    - Increase ICT investment and ensure labor adapts to the future of work.
  - Improve access to finance and rebalance taxation:
    - Upgrade capital markets to improve equity finance for new and smaller firms; review regulation for pension funds to incentivize investments in domestic equity markets while ensuring adequate risk practices.
    - Ensure adequate resources for vehicles like Danish Growth Capital Funds.
    - Relax cap on use of carry-forward losses to help cash-constrained startups.
    - Reduce taxation of dividends while minimizing avoidance.
    - Introduce an incremental ACE to reduce debt bias and cost of capital, but assess implementation risks (SIP 2018).

### Financial sector, AML/CFT, and fiscal stance
- Financial sector:
  - The banking system is profitable, liquid and solvent, but pockets of vulnerabilities remain.
  - Lending surveys suggest some banks are relaxing credit standards for corporate loans.
  - To strengthen financial resilience, consider a combination of micro- and macroprudential tools to increase capital buffers, in addition to the CCyB, if risks continue to build up.
  - Decision on banking union participation should carefully assess costs and benefits.
- AML/CFT:
  - Authorities should build upon recent efforts to strengthen cross-border AML/CFT supervision.
  - Priority next steps:
    - (i) develop a comprehensive institutional risk assessment model;
    - (ii) increase the depth of the DFSA’s AML/CFT on-site inspections;
    - (iii) further expand its sanctioning powers, including to issue administrative fine notices;
    - (iv) strengthen regional and international cooperation.
- Fiscal stance and exchange rate:
  - Denmark’s public finances are sound with substantial fiscal space in the medium term.
  - The fiscal stance should remain neutral, while letting automatic stabilizers operate fully in case of shocks to aggregate demand.
  - In the event of a severe downturn, additional temporary loosening should be considered, while remaining anchored to the medium-term objective.
  - Efficiency-improving reforms covering revenues and expenditures could be implemented in a fiscally-neutral way or designed to provide stimulus if loosening is warranted.
  - The fixed exchange rate policy has served Denmark well and provides a framework for low and stable inflation.

### Staff appraisal: outlook and priorities
- Growth and risks:
  - Growth remained solid in 2018, supported by domestic demand, with the economy operating above potential.
  - The external position was moderately stronger than the level consistent with medium-term fundamentals in 2018.
  - Outlook: continued strong growth but with downside risks; a sharper than expected slowdown in Denmark’s main trading partners could slow export growth.
  - Key vulnerability: High household debt amid elevated house valuations.
  - Ongoing money laundering case could affect confidence in the financial sector and undermine financial stability.
- Policy priorities summarized:
  - Enhance macro-financial resilience and target higher potential growth.
  - Strengthen cross-border AML/CFT supervision (see priority steps above).
  - Use micro- and macroprudential tools and review SRC institutional arrangements; reduce mortgage interest deductibility further; consider housing supply measures.
  - Increase benefits to low-income workers, reduce marginal tax rates for average income earners, incentivize technical and digital skills upgrading, integrate migrants, and attract skilled foreign labor.
  - Support broad-based innovation, improve competition framework, foster high-productivity sectors, address debt bias and improve access to equity finance for SMEs to promote investment and reduce the current account surplus.

*Source: 1dnkea2019001 - 34.*

### 54.      It is recommended that the next Article IV consultation take place on the standard

### 1dnkea2019001 - 54.      It is recommended that the next Article IV consultation take place on the standard

### Recommendation
- It is recommended that the next Article IV consultation take place on the standard 12-month cycle.

### Context and wellbeing
- Perception-based indicators:
  - Denmark’s business climate is amongst the best in the world (Ease of Doing Business, 2019: DNK and Nordics ranking shown).
- Labor market and social outcomes:
  - High levels of employment (Employment Rates series for 2005–2017 shown).
  - Inequality is low by international standards (Gini Coefficients, Disposable income, 2016; DNK among lowest).
  - High average income and low dispersion.
  - Measures of wellbeing: Danes are among the happiest people in the world (Happiness Score Index; World Happiness Report 2019).

### Recent macroeconomic developments
- Growth and income:
  - Although recently, Denmark’s recovery from the crisis has trailed peers in the region (time series shown).
  - Gross national income has exceeded GDP in recent years (Figure 2).
- Investment and production:
  - Investment growth has accelerated after lagging peers following the crisis.
  - Industrial production remains healthy.
- Prices:
  - Inflation remains subdued.

### Labor market developments
- Employment and participation:
  - Employment and participation rates have increased (Employment rate and Labor force participation rate series).
- Unemployment:
  - Unemployment rates have declined; unemployment rates among migrants remain higher than the economy-wide rate (Unemployment Rates by Country of Birth).
  - Unemployment series (Labor force survey, Registry gross/net) shown for 2007–2018.
- Vacancies and wages:
  - Job vacancies increased, reflecting tight labor markets (Job Vacancies per 1,000 unemployed).
  - Pick-up in wage growth accompanied the fall in unemployment (Unemployment Rate and Private Sector Hourly Earnings).

### Financial sector developments and vulnerabilities
- Profitability and income composition:
  - Despite declining net interest margins, profits remain solid due to a rise in net fee income and income from administration margins (Income of SIFI Credit Institutions, in billions of DKK).
- Asset quality:
  - Small and middle-sized banks continue to show higher impaired loans than large banks though they are on a declining path (Impaired Loans percent of total loans).
  - Nonperforming loans to total gross loans: 7.9 (2011), 8.3 (2012), 8.7 (2013), 8.2 (2014), 6.9 (2015), 5.3 (2016), 4.3 (2017), (2018 series shown).
- Liquidity and capital:
  - Banks have ample liquidity (Liquidity Coverage Ratio of SIFIs; Median and minimum requirement series).
  - Strong capital positions (Regulatory Capital of Credit Institutions: Core Tier 1, Additional Tier 1, Other Capital series).
  - Regulatory capital to risk-weighted assets: 20.1 (2011), 22.1 (2012), 22.3 (2013), 21.0 (2014), 21.8 (2015), 23.2 (2016), 23.8 (2017), 23.3 (2018).
- Credit standards and lending:
  - Pockets of vulnerability remain as some banks have been relaxing credit standards for corporate lending (Credit Standards for Corporate Customers index; NPL under new IFRS9 series).

### Housing sector, household balance sheets, and vulnerabilities
- Pension and mortgage markets:
  - Large household savings and mandatory pension contributions have created a very large pension system.
  - Denmark has the world largest mortgage covered bond market (Outstanding amount, 2016; percent of GDP: DNK 132 shown).
  - Insurance and pension companies, and more recently foreign investors, are among the largest holders of covered bonds (Investors in Danish Covered Mortgage Bonds Over Time).
- Household leverage and assets:
  - Danish households’ debt-to-income ratios are among the highest in advanced economies (Household and NPISH Outstanding Debt to Gross Disposable Income, Percent, 2017).
  - High liabilities are counterbalanced by large housing and pension assets (Financial Assets composition; Pension and Insurance Assets percent of GDP, 2016 or latest).
- House prices and risks:
  - After reforms, house prices appear to have softened but remain high (Real Property Prices index, 2005Q1 = 100; National average, Copenhagen, Aarhus series).
  - Households who purchased in overvalued urban areas such as Copenhagen and Aarhus, and low income households, are particularly vulnerable to house price shocks.
  - Risk compounded by the high share of mortgages on variable terms which is over 50 percent.
  - Stock of Residential Mortgages by Type (Percent of Total) shows Fixed Rate and Variable Rate breakdowns for 2008–2018.
  - Highly indebted households are most vulnerable to house price falls (scenario: 20 percent drop in house prices; share of total debt by loan-to-income and loan-to-value categories shown).

### Key projections and headline indicators (Table 1 highlights, 2016–24)
- Real GDP (change in percent): 2.4 (2016), 2.3 (2017), 1.4 (2018), 1.7 (2019), 1.9 (2020), 1.7 (2021), 1.6 (2022), 1.5 (2023), 1.5 (2024).
- Private consumption (change in percent): 2.1 (2016), 2.1 (2017), 2.3 (2018), 2.5 (2019), 2.4 (2020), 2.3 (2021), 2.2 (2022), 2.2 (2023), 2.1 (2024).
- Gross fixed investment (change in percent): 7.6 (2016), 4.6 (2017), 5.1 (2018), 3.4 (2019), 3.0 (2020), 2.8 (2021), 2.7 (2022), 2.6 (2023), 2.6 (2024).
- Harmonized unemployment rate (percent): 6.2 (2016), 5.7 (2017), 5.0 (2018), 5.0 (2019), 5.0 (2020), 5.0 (2021), 5.0 (2022), 5.1 (2023), 5.2 (2024).
- CPI (year average, change in percent): 0.0 (2016), 1.1 (2017), 0.7 (2018), 1.3 (2019), 1.5 (2020), 1.8 (2021), 2.0 (2022), 2.0 (2023), 2.0 (2024).
- Overall balance (percent of GDP): -0.1 (2016), 1.4 (2017), 0.5 (2018), 0.2 (2019), 0.0 (2020), -0.1 (2021), -0.2 (2022), -0.1 (2023), 0.1 (2024).
- Gross debt (percent of GDP): 37.2 (2016), 35.5 (2017), 34.3 (2018), 33.0 (2019), 31.9 (2020), 33.9 (2021), 35.9 (2022), 37.6 (2023), 38.2 (2024).
- Nominal GDP (Bln DKK): 2,100 (2016), 2,178 (2017), 2,218 (2018), 2,294 (2019), 2,377 (2020), 2,468 (2021), 2,565 (2022), 2,667 (2023), 2,771 (2024).

### Balance of payments (Table 2 highlights, Billions of DKK and percent of GDP)
- Current Account (Billions of DKK): 166.3 (2016), 173.3 (2017), 128.2 (2018), 129.6 (2019), 127.1 (2020), 125.1 (2021), 126.3 (2022), 127.5 (2023), 129.3 (2024).
- Current Account (Percent of GDP): 7.9 (2016), 8.0 (2017), 5.8 (2018), 5.6 (2019), 5.3 (2020), 5.1 (2021), 4.9 (2022), 4.8 (2023), 4.7 (2024).
- Balance on Goods (Billions of DKK): 123.6 (2016), 123.0 (2017), 107.4 (2018), 105.8 (2019), 106.2 (2020), 108.8 (2021), 112.3 (2022), 114.6 (2023), 117.5 (2024).
- Merchandise exports f.o.b. (Billions of DKK): 702.8 (2016), 746.8 (2017), 770.3 (2018), 797.5 (2019), 824.5 (2020), 847.7 (2021), 872.2 (2022), 897.2 (2023), 928.0 (2024).
- Merchandise imports f.o.b. (Billions of DKK): 579.2 (2016), 623.8 (2017), 662.9 (2018), 691.8 (2019), 718.3 (2020), 738.9 (2021), 759.9 (2022), 782.6 (2023), 810.5 (2024).
- Capital and Financial Account (Billions of DKK): 106.9 (2016), 157.4 (2017), 70.4 (2018), 129.8 (2019), 127.4 (2020), 125.4 (2021), 126.5 (2022), 127.8 (2023), 129.6 (2024).

### International Investment Position (Table 3 highlights, Billions of DKK and Percent of GDP)
- Assets (Billions of DKK): 4,771 (2011), 5,133 (2012), 5,328 (2013), 5,832 (2014), 5,956 (2015), 6,528 (2016), 6,896 (2017), 6,640 (2018).
- Liabilities (Billions of DKK): 4,258 (2011), 4,448 (2012), 4,608 (2013), 4,974 (2014), 5,275 (2015), 5,382 (2016), 5,689 (2017), 5,238 (2018).
- Net Investment Position (Billions of DKK): 513 (2011), 686 (2012), 720 (2013), 858 (2014), 680 (2015), 1,146 (2016), 1,208 (2017), 1,403 (2018).
- Net Investment Position (Percent of GDP): 27.8 (2011), 36.2 (2012), 37.3 (2013), 43.3 (2014), 33.4 (2015), 54.6 (2016), 55.5 (2017), 63.2 (2018).

### General government operations (GFSM 2001, Tables 4–5 highlights, Billions of DKK and Percent of GDP)
- Total Revenues (Billions of DKK): 1,104.5 (2016), 1,145.8 (2017), 1,151.8 (2018), 1,186.6 (2019), 1,217.9 (2020), 1,259.0 (2021), 1,303.6 (2022), 1,355.0 (2023), 1,411.1 (2024).
- Total Expenditures (Billions of DKK): 1,106.1 (2016), 1,114.3 (2017), 1,140.5 (2018), 1,183.1 (2019), 1,217.7 (2020), 1,262.2 (2021), 1,307.9 (2022), 1,357.2 (2023), 1,408.5 (2024).
- Net lending/borrowing (Billions of DKK): -1.5 (2016), 31.6 (2017), 1.3 (2018), 3.6 (2019), 0.3 (2020), -3.3 (2021), -4.3 (2022), -2.3 (2023), 2.5 (2024).
- Total Revenues (Percent of GDP): 52.6 (2016), 52.6 (2017), 51.9 (2018), 51.7 (2019), 51.2 (2020), 51.0 (2021), 50.8 (2022), 50.8 (2023), 50.9 (2024).
- Total Expenditures (Percent of GDP): 52.7 (2016), 51.2 (2017), 51.4 (2018), 51.6 (2019), 51.2 (2020), 51.2 (2021), 51.0 (2022), 50.9 (2023), 50.8 (2024).
- Primary Balance (Percent of GDP, memorandum): 0.4 (2016), 1.6 (2017), 0.4 (2018), 0.0 (2019), -0.4 (2020), -0.4 (2021), -0.5 (2022), -0.4 (2023), -0.1 (2024).
- Gross Debt (Percent of GDP): 37.2 (2016), 35.5 (2017), 34.3 (2018), 33.0 (2019), 31.9 (2020), 33.9 (2021), 35.9 (2022), 37.6 (2023), 38.2 (2024).

### Public sector balance sheet (Table 6 highlights, 2011–17)
- Total assets (Billions of DKK): 1,997 (2011), 1,956 (2012), 1,959 (2013), 2,034 (2014), 1,977 (2015), 2,032 (2016), 2,118 (2017).
- Total liabilities (Billions of DKK): 1,110 (2011), 1,149 (2012), 1,095 (2013), 1,172 (2014), 1,088 (2015), 1,080 (2016), 1,064 (2017).
- Net worth (Billions of DKK): 887 (2011), 807 (2012), 864 (2013), 862 (2014), 889 (2015), 952 (2016), 1,053 (2017).
- Net worth (Percent of GDP): 48.0 (2011), 42.6 (2012), 44.8 (2013), 43.5 (2014), 43.6 (2015), 45.3 (2016), 48.4 (2017).

### Financial system indicators (Table 7 highlights, Percent)
- Core / Common Equity Tier 1 capital to risk-weighted assets: 14.4 (2011), 16.3 (2012), 16.7 (2013), 17.3 (2014), 17.8 (2015), 18.3 (2016), 19.3 (2017), 19.0 (2018).
- Nonperforming loans to total gross loans: 7.9 (2011), 8.3 (2012), 8.7 (2013), 8.2 (2014), 6.9 (2015), 5.3 (2016), 4.3 (2017), (2018 shown).
- ROA (aggregated, parent-company basis): 0.1 (2011), 0.2 (2012), 0.4 (2013), 0.4 (2014), 0.8 (2015), 1.0 (2016), 1.2 (2017), 0.9 (2018).
- ROE (aggregated, parent-company basis): 1.3 (2011), 2.7 (2012), 5.7 (2013), 5.7 (2014), 5.6 (2015), 9.1 (2016), 14.1 (2017), 14.2 (2018).
- Liquid assets to total assets: 23.6 (2011), 27.0 (2012), 30.9 (2013), 27.3 (2014), 31.4 (2015), 32.8 (2016), 34.4 (2017), (2018 shown).

*International Monetary Fund — Denmark chapter content unit.*

### Annex I. Tax and Benefit Reform: Reassessing the

### Annex I. Tax and Benefit Reform: Reassessing the Equity-Efficiency Tradeoff

### Overview and motivation
- The Danish social welfare model supports high income levels alongside low inequality through high taxes, public services, flexible labor markets and a generous safety net.
- High tax rates may dampen labor supply incentives, productivity and growth; reform could improve the equity-efficiency tradeoff and produce stronger outcomes.
- Results for revenue neutral reforms suggest employment rates could be increased by up to 3 percentage points, overall hours worked could increase by up to 3.5 percent, and average income per capita by 3 percent compared to current levels.

### Current system: features and distortions
- Guaranteed Minimum Income (GMI) and low poverty:
  - Denmark ranks second among OECD countries in average GMI levels.
  - For 2018, a representative family could be expected to receive the equivalent of around 50 percent of the median disposable income in the total population.
  - Denmark has the lowest poverty rate among all OECD countries at 5.5 percent (OECD average 12 percent).
- Participation Tax Rates (PTR) and Marginal Effective Tax Rates (METR):
  - Average PTR for a worker taking up a job paying 67 percent of the average wage is not quite as high as in other countries; childcare costs are low.
  - Top personal income tax rate: 56 percent applies to incomes in excess of 1.3 times the average wage.
  - Denmark’s average hours per worker is around 10 percent below the average among advanced European economies.
  - METR profile:
    - METRs go from 46 percent on the first krone earned.
    - Peak METR of 71 percent for gross incomes around 150,000 DKK.
    - METR decreases to 55 percent for middle income earners.
    - Top METR rises to 64 percent beyond the average earner.
  - The METR includes consumption taxes; the ratio of indirect tax revenues to GDP was 20 percent in 2018.
- Low-end disposable incomes:
  - For individuals with zero or very low earnings, average disposable income is around 130,000 DKK (net of income and sales tax), equivalent to 49 percent of the median disposable income.
  - Break-even gross income level is around 135,000 DKK.
  - There are no in-work tax credits in Denmark, so disposable income levels in and out of work are virtually identical at the low-end.

### Microsimulation framework and social preferences
- Framework:
  - Microsimulation exercise based on the Mirrlees framework, calibrated to Danish circumstances.
  - Data sources and parameters:
    - Household survey data, education and labor force statistics.
    - Current tax and benefit system parameters calculated using the OECD Tax-Benefit model (OECD 2019).
    - Responsiveness parameters: hours (intensive) elasticity set at 0.10 and average participation (extensive) elasticity at 0.20.
- Social marginal welfare weights:
  - Inferred from PTRs and METRs across the income distribution.
  - Estimated Constant Relative Inequality Aversion (CRIA) parameter γ = 1.4.
  - Interpretation: society values the additional consumption of someone at the 10th percentile 8.3 times more than one at the 90th percentile.

### Reform scenarios and key parameters
- Three reform scenarios examined:
  - Isoelastic: implements optimal reform using isoelastic social welfare weights with γ = 1.4 (revenue-neutral).
  - Const GMI: holds the GMI level constant but otherwise optimizes using the same weights as Isoelastic (revenue-neutral).
  - All Gain: varies net revenues so that everyone benefits from the optimal reform, holding GMI level constant (not revenue-neutral).
- Selected parameter changes (Text Table 1):
  - Guaranteed Minimum Income (DKK, percent median income):
    - Current: 124,811 (49 percent)
    - Isoelastic: 112,330 (45 percent)
    - Const GMI: 124,811 (49 percent)
    - All Gain: 124,811 (48 percent)
  - In-work tax credit (DKK, percent median income):
    - Current: -5,805 (-2 percent)
    - Isoelastic: 27,193 (24 percent)
    - Const GMI: 5,166 (5 percent)
    - All Gain: 11,153 (11 percent)
  - Marginal tax rate (1st percentile):
    - Current: 51 percent
    - Isoelastic: 80 percent
    - Const GMI: 76 percent
    - All Gain: 77 percent
  - Marginal tax rate (median):
    - Current: 56 percent
    - Isoelastic: 52 percent
    - Const GMI: 52 percent
    - All Gain: 52 percent
  - Top marginal tax rate:
    - Current: 63 percent
    - Isoelastic: 65 percent
    - Const GMI: 65 percent
    - All Gain: 65 percent
- Design choices:
  - Introduce a targeted in-work benefit that could reach the equivalent of 10 percent of the median income in some scenarios.
  - The in-work benefit should be well targeted and phased out at a steep rate; this may raise the METR for the bottom percentile up to 80 percent to maintain targeting and fiscal costs.

### Distributional impacts
- Isoelastic and All Gain reforms:
  - Bottom 30 percent of workers see large net income gains.
  - Average gains around 5 to 6 percent of current income, up to 17 percent for workers at the lower end.
  - No net income gains around the median earner in some scenarios.
  - Upper end gains up to 9 percent net income gains for those at the 90th percentile.
- Winners and losers by scenario:
  - Isoelastic:
    - Individuals outside the labor force (around 10 percent of the adult population, excluding students, retirees and individuals with disabilities) would see a decline of 10 percent of net benefits.
  - All Gain:
    - Individuals outside the labor force would see no change in benefits.
    - Net revenues fall and reform is designed to make everyone a net gainer.
  - Const GMI:
    - Workers in the first percentile gain around 10 percent in net incomes.
    - Workers between the second and 60th percentiles experience net income losses of 0.8 percent on average.
    - Above the 60th percentile, average net income gain around 4 percent, peaking at 7 percent for workers around the 95th percentile.

### Aggregate economic outcomes
- Key metrics (Text Table 2; changes relative to current system):
  - Net revenues (percent of total wages):
    - Current: 29.0
    - Isoelastic: 29.0
    - Const GMI: 29.0
    - All Gain: 28.0
  - Total wages change (percent):
    - Current: -3.0
    - Isoelastic: 0.8
    - Const GMI: 1.5
  - Total hours change (percent):
    - Current: -3.5
    - Isoelastic: 0.5
    - Const GMI: 1.5
  - Labor force participation rate:
    - Current: 90.0
    - Isoelastic: 92.7
    - Const GMI: 90.0
    - All Gain: 90.9
  - Disposable Gini index:
    - Current: 0.2030
    - Isoelastic: 0.2120
    - Const GMI: 0.2160
    - All Gain: 0.2120
- Scenario-specific aggregate impacts:
  - Isoelastic:
    - Aggregate labor supply increases by 3.5 percent.
    - Employment rate goes from 90 percent to 93 percent.
    - Total labor income increases by 3 percent.
    - Income inequality rises marginally to 0.21 from 0.20.
    - Reform is revenue-neutral.
  - Const GMI:
    - Lower labor supply gains; total incomes increase by 0.8 percent.
    - Inequality increases to 0.22.
  - All Gain:
    - Not revenue-neutral; net revenues as a share of total wages fall from 29 percent to 28 percent.
    - Total labor income and hours worked both increase by 1.5 percent.
    - Employment rate grows by close to 1 percent, reaching 91 percent.
    - Implied fiscal revenue multiplier of 1.6.

### Policy implications and recommendations
- Introduce a targeted in-work benefit to reduce participation tax rates and increase incentives to take up employment, especially for low-wage workers.
- Reduce marginal tax rates for median income earners and above to boost labor supply, overall hours worked and average income per capita.
- Targeting design:
  - Phase out in-work benefits at a steep rate to maximize support for low-wage earners while controlling fiscal costs; acknowledge this can raise METRs at the very bottom percentile.
  - Consider modest reductions in welfare levels for non-workers (e.g., a 10 percent decrease in GMI in the Isoelastic scenario) as one way to reduce PTRs while preserving redistribution consistent with inferred social preferences.
- Design reforms that respect Denmark’s revealed social preferences (CRIA γ = 1.4) so redistribution is preserved while minimizing labor supply distortions.
- Expect trade-offs:
  - Revenue-neutral reforms can expand employment and hours worked materially while leading to a small rise in measured inequality.
  - Non-revenue-neutral reforms (All Gain) can ensure universal gains but reduce net revenues as a share of wages.

*Source: Annex I. Tax and Benefit Reform: Reassessing the Equity-Efficiency Tradeoff (Denmark), IMF.*

### 15.      Different combinations of average income levels and inequality are possible given

### 15.      Different combinations of average income levels and inequality are possible given

### Efficiency–equity frontier: tax-benefit reform scenarios and outcomes
- Current income inequality (Gini index) as measured is 0.203.
- Under a high inequality aversion scenario (inequality aversion γ = 5):
  - Optimal reform would increase average incomes by 0.9 percent.
  - Gini index would decrease from 0.203 to 0.195.
- Under the Isoelastic reform scenario with γ = 1.4:
  - Average disposable income would increase from 367,000 DKK to 378,000 DKK.
  - Gini index would increase from 0.203 to 0.212 (still below Sweden’s income inequality).
- With even lower inequality aversion (greater tolerance for inequality):
  - Average income gains could exceed 6 percent.
  - Average disposable income could reach 390,000 DKK.
- Interpretation and policy implication:
  - Current Danish income inequality appears close to the lowest desirable levels achievable through tax and benefit reform alone.
  - There is scope for Denmark to move closer to the equity-efficiency frontier through tax and benefit reform, but increases in average incomes that come with higher inequality may be socially costly given likely positive inequality aversion.

### Annex II — Considerations in Denmark’s Banking Union opt-in decision: overview
- Purpose of annex:
  - Outline IMF staff analysis on Denmark’s decision on participation in the EU’s banking union (BU).
  - Not a quantitative cost–benefit assessment and does not make a specific recommendation.
  - Participation decision will be political, reflecting consequences for Denmark’s financial stability and position within the EU.
- Context and timeline:
  - BU established to reduce financial fragmentation and bank–sovereign feedback loops from the 2011–12 crisis.
  - BU architecture involves three pillars: common supervision, common resolution, and a common deposit guarantee scheme with a common fiscal backstop.
  - Single Supervisory Mechanism (SSM) operational November 2014; Single Resolution Board (SRB) operational January 2015; a common deposit insurance scheme proposed but not adopted (as of May 2019).
  - Danish government set up a committee in July 2017 to report back by fall 2019.

### Key practical implications of BU participation for Denmark
- Structural changes if Denmark joins:
  - Ultimate oversight of bank supervision would transfer to the ECB; resolution to the SRB.
  - ECB as direct supervisor of significant credit institutions (SIs); Danish Financial Supervisory Authority (DFSA) retains supervision of less significant institutions (LSIs).
  - SRB undertakes resolution planning and execution for SIs and cross-border banks; Finansiel Stabilitet remains responsible for LSIs.
  - ECB and SRB obliged to follow national law implementations of EU Directives and legally allowed national options and discretions.
- Specific advantages and features:
  - Home/host issues mitigated within the BU; in practice ringfencing can remain due to allowed options and discretions.
  - Foreign banks account for about 10 percent of Denmark’s total banking system balance sheet.
  - About 4 percent of Denmark’s overall banking system balance sheet have EA bank counterparties; non-EA foreign bank counterparties account for about 8 percent (as of end 2017).
  - ECB and SRB are responsible for supervising and resolving 8 globally, systemically important banks (G-SIBs) and many D-SIBs in the BU; were Denmark to join, ECB and SRB would take direct oversight of the largest three Danish banks.
  - Access to the Single Resolution Fund (SRF):
    - In steady-state, the SRF will be over 15 percent of Denmark’s nominal GDP.
    - The steady-state target of the SRF is 1 percent of covered deposits in the banking union, which currently would translate into about €56 billion.
    - Use of the SRF in resolution may occur only after at least 8 percent of the bank’s total liabilities (including own funds) are bailed in.
    - Contribution from the SRF may not exceed 5 percent of the bank’s total liabilities.
    - December 2018 political agreement for a common fiscal backstop to the SRF reinforces this buffer.
  - Macroprudential implications:
    - BU members must provide sufficient notice to the ECB to deploy macroprudential policies.
    - ECB has “top-up” powers over some macroprudential instruments and may impose stricter capital buffer requirements than national authorities.
  - Supervisory decision-making:
    - Supervisory Board (SB) decisions must be adopted by the ECB Governing Council (GC) to be legally binding.
    - Non-euro area (non-EA) BU participants are represented in the SB but not the GC.
    - Safeguards exist: non-EA members can indicate “reasoned disagreement” and may ask for withdrawal of a decision; persistent non-acceptance can lead to suspension or termination of BU participation.
  - Resolution decision-making:
    - Denmark would be represented under the Single Resolution Mechanism (SRM) like other BU members.
    - SRB assesses public interest to resolve a bank versus winding up under national insolvency procedures.

### Denmark-specific issues needing further clarity before opt-in
- Treatment of Mortgage Credit Institutions (MCIs):
  - Danish MCIs are specialized, non-deposit taking credit institutions that match individual mortgages to marketable funding liabilities (balance principle).
  - MCIs account for over half of the banking system balance sheet and are the primary source of real estate and housing finance in Denmark.
  - MCIs do not suffer market funding risk in the same way as deposit-taking banks; supervisory and resolution treatment has typically differed.
  - Authorities and the sector should seek clarity from BU institutions on supervisory and resolution treatment of MCIs prior to any opt-in decision.
- Resolution of small to medium-sized banks:
  - The DFSA applies minimum requirements for own funds and eligible liabilities (MREL) to small and medium-sized banks under the presumption they will be resolved using BRRD tools after public interest tests, rather than wound down through national insolvency.
  - This practice potentially includes the possible use of public funds in recapitalizations of distressed small and medium-sized banks.
  - It is unclear whether the SRB would continue to accept this interpretation; alternative arrangements (e.g., adding resolution to national insolvency procedures) may be needed to maintain current practice.
- Treatment of Greenland and the Faroe Islands:
  - Four small banks in Greenland and the Faroe Islands are currently supervised and resolved by the DFSA.
  - Greenland and the Faroe Islands are part of the Kingdom of Denmark but not part of the EU and cannot technically participate in the BU.
  - How to accommodate their supervision and resolution (for example, keeping them under DFSA with access to Danish resolution funds and deposit insurance) while allowing the rest of Denmark to join the BU is uncertain.

*International Monetary Fund — content from the specified chapter and annex.*

### 6.      The BU’s future prospects also must be taken into account in any decision. As noted

### 6.      The BU’s future prospects also must be taken into account in any decision. As noted

### Banking Union (BU) prospects, risk sharing, and risk reduction
- The third pillar of common deposit insurance—a critical risk sharing component for banking union—is still missing.
- The EC (2017) noted that further progress on risk sharing must go hand-in-hand with risk reduction by national banking systems, highlighting high levels of non-performing loans (NPLs) in some member countries.
- The December 2018 Euro Summit urged the adoption of:
  - the banking package (adopted in April 2019), and
  - the NPL prudential package, which incorporate several risk reduction measures.
- The Eurogroup (2018) is expecting reports on a roadmap for political negotiations on EDIS (the third pillar) and on the current set-up for liquidity provision in resolution by June 2019.
- Numeric safeguards and targets referenced:
  - MCIs debt buffer target: 2 percent of their unweighted loans by 2020.
  - MREL target for banks and banking groups: 8 percent by 2022.
- Footnotes and references cited in the source:
  - Article 45 of the BRRD (EU 2014b) exempts MCIs from MREL minimum requirements.
  - DFSA (2018b) for further detail on targets.
  - Berg, Nielsen and Vickery (2018) discuss Danish mortgage bank model performance during 2007-09.
  - DFSA (2017) referenced.

### AML/CFT supervision and responsibilities
- AML/CFT-related concerns have been cited in the Danish debate about the banking union.
- Current institutional responsibilities:
  - AML/CFT supervision remains a national obligation even for banking union members.
  - Host country authorities: responsible for monitoring and enforcing compliance with AML/CFT requirements for financial institutions operating within their territories.
  - Home country authorities: responsible for oversight of group-wide AML/CFT policies and procedures.
  - Danish authorities would continue to:
    - oversee banks and branches operating domestically for AML/CFT compliance, and
    - be responsible for monitoring and ensuring implementation of group-wide AML policies for Danish banks with foreign branches, in cooperation and coordination with host country supervisors.
- Ongoing discussions at the EU level regarding possible options for further centralization of AML/CFT oversight.
- Reference: EU Council (2018) statement on an EU AML/CFT action plan.

---

### Annex III. The Expansion of Knowledge-Intensive Services, Income Inequality, and Labor Market Institutions

### Key findings on knowledge-intensive services (KIS) and ICT investment
- Denmark’s employment share in knowledge-intensive services (KIS) rose from 12 percent to 17 percent since the mid-1990s.
- Denmark’s expansion of knowledge employment was smaller than in many countries; Denmark’s KIS employment share in 2015 was well below leading European countries (Belgium and the Netherlands).
- ICT investment (as share of gross value added) in KIS in Denmark has been on a downward trend since the early 2000s.
- Denmark’s ICT investment in KIS (and the economy as a whole) was lower than many advanced economies in 2014.
- Policy implication: Denmark should aim to increase employment in KIS and ICT investment to boost productivity and growth prospects.
- Definitions and data notes:
  - KIS comprise finance and insurance, information and communications, and business services.
  - ICT investment includes investment in computing equipment, communications equipment, and computer software and databases.
  - Sources: EU KLEMS (2017); OECD 2019; Hope and Martelli (2019).

### Evidence on KIS expansion and income inequality
- Empirical result (Hope and Martelli 2019): increases in knowledge employment tend to be positively associated with increases in income inequality (panel of 18 OECD countries).
- Denmark’s inequality measures increased between 2002 and 2016:
  - Decile 9/decile 1 gross earnings ratio and the Gini coefficient increased substantially over that period.
- Despite the rise, Denmark still has one of the lowest income inequality levels among OECD countries in 2015; dispersion of earnings in 2015 was similar to other Nordic countries and Belgium, and considerably lower than Anglo-Saxon countries.
- Sources: OECD Labour Force Statistics; Solt (2016).

### Role and status of labor market institutions in Denmark
- Denmark’s Flexicurity model: employers can hire and fire relatively easily while workers have wage solidarity and retraining options.
- Employment Protection Legislation (EPL) for regular contracts:
  - Has remained fairly stable over the last three decades, with a slight increase since the global financial crisis.
  - Denmark’s EPL is similar to or lower than most continental European and Nordic countries, but considerably higher than Anglo-Saxon countries.
- Wage coordination: Denmark exhibits fairly coordinated wage-setting, aligned with other Nordic countries.
- Trade union and collective bargaining statistics:
  - Trade union density declined between 1985 and 2015, but union membership remained substantially higher in Denmark in relative terms.
  - Collective bargaining coverage remained high.
- Data points and scales referenced:
  - EPL measured on a 0-6 scale; Denmark values shown historically (e.g., 2.18, 2.13, 2.13, 2.2 for select years).
  - Wage-setting coordination measured on a 0-5 scale.
  - Collective bargaining coverage and union density presented in percent series and cross-country comparisons.
  - Sources: OECD; J. Visser, ICTWSS Database version 5.1.

### Interaction of KIS expansion and labor market institutions
- Empirical exercise using Hope and Martelli (2019) shows:
  - The expansion of KIS in Denmark has only modest effects on income inequality, conditional on Denmark’s labor market institutions.
  - Estimated effects for an “average” economy in the sample are much larger, illustrating the mitigating role of Denmark’s institutions.
- Data note for exercise:
  - Uses 2013 numbers (latest year with comparable data for four labor market institutions).
  - Sample: Austria, Belgium, Canada, Denmark, Finland, Germany, Greece, Italy, Japan, Netherlands, Norway, Spain, Switzerland, the United Kingdom, United States.

### Policy recommendations to safeguard and adapt labor market institutions
- Ensure labor market institutions extend coverage to workers in new, knowledge-intensive industries, especially where employment is more flexible and precarious.
- Foster closer cooperation between companies, social partners, and the government to guarantee conditions and security for new forms of employment in knowledge-intensive industries comparable to collectively bargained agreements.
- Protect and adapt the flexicurity model:
  - Maintain the current modest level of employment protection for permanent workers, and
  - Harmonize rules on unemployment benefits to ensure security for workers with non-standard employment relationships (e.g., the self-employed, the atypically employed).
- Note: These steps align broadly with recommendations of the Danish Government report Prepared for the Future of Work (2019).

---

### Annex IV. External Balance Assessment

### Summary of external position and recent trends
- The current account (CA) surplus in 2018: 5.8 percent of GDP.
- CA surplus in 2017: 8.0 percent of GDP.
- Post-crisis average CA surplus: 7.5 percent of GDP.
- Net international investment position (NIIP) in 2018: 63.2 percent of GDP.
- Accumulation of foreign assets via direct and portfolio investment: 299 percent of GDP in 2018.
- Drivers: offshore activity of Danish multinational corporations and investment income.

### Drivers of the current account and external income
- Danish net exports of goods accounted for most of the trade balance: 4.8 out of 5.0 percent of GDP in 2018.
- Increasing share of exports produced outside Denmark: 3.4 percent of GDP in 2018 (from less than 1 percent ten years earlier), reflecting merchanting and processing trades and integration in global value chains.
- The large international investment position generates considerable income from abroad, as Danish residents have invested significantly in foreign assets which yield more than foreigners’ holdings of Danish assets.
- Central bank analysis note: about 50 percent (some DKK 3 trillion) of Danes’ foreign assets are interest-rate or equity-price sensitive in 2016, up from 41 percent in 2005 (DN 2018).

### Savings, investment, and implications for the CA
- Investment in 2018: 22.7 percent of GDP (increase of 1.1 percentage points from 2017).
- Savings in 2018: 28.8 percent of GDP (decrease of 0.7 percentage point from 2017).
- Historical behavior:
  - After the global financial crisis, savings and investment declined considerably; savings recovered more quickly than investment.
  - Nonfinancial firms reduced investment and deleveraged, increasing net lending (savings minus investment) of nonfinancial firms and contributing to the CA surplus.
  - Households sought to repay part of large debt and increase savings following a large housing price decline.
- Staff assessment: the external position is moderately stronger than implied by medium-term fundamentals.
- Policy implication: structural policies aimed at raising investment, including through a gradual improvement in capital markets, would help reduce the surplus.
- Sources: Statistics Denmark; IMF staff calculations; referenced analyses in the source document.

*Source: 1dnkea2019001 - 6.      The BU’s future prospects also must be taken into account in any decision. As noted (PDF chapter/section).*

### 4.      Staff assesses the current account to be moderately stronger than the level consistent

### 1dnkea2019001 - 4.      Staff assesses the current account to be moderately stronger than the level consistent

### External balance assessment — key findings
- The IMF’s External Balance Assessment model estimates:
  - Cyclically-adjusted current account position at 6.0 percent of GDP for 2018.
  - Current account norm of 4.3 percent of GDP.
  - Staff assesses the current account gap at around 1.7 percent (indicating the external position is moderately stronger than the level consistent with medium-term fundamentals).
- Assessment changed from last year due to a decline in the current account (previously assessed as stronger than the level implied by medium-term fundamentals).
- Important uncertainties not captured by the estimate:
  - Delineation of household and corporate savings is difficult because many households save via ownerships of corporate entities (preferential tax treatment).
  - Denmark’s large pension contributions from the transition to a fully-funded retirement system create significant structural savings; impact on national savings is debated (cites Samwick 2000; Danish Economic Council 2008; DN 2015).
  - Measurement issues related to merchanting and offshore processing trade may slightly overstate the current account surplus (DN (Jorgensen 2018) analysis).

### REER and competitiveness indicators
- REER model estimates and index:
  - Level REER model: krone overvalued by about 12 percent.
  - Index REER model: krone overvalued by about 10.6 percent.
  - REER indices based on inflation and unit labor costs have hovered around their 20-year average levels in recent periods.
- Competitiveness indicators:
  - Denmark’s unit labor cost has risen faster than in major competitors (e.g., the Euro area) over the past two decades.
  - Increase in Denmark’s terms of trade partly offsets higher unit labor cost, reflecting improved Danish export prices in high-value industries such as pharmaceuticals.
- Text Table 1. External Balance Assessment, 2019:
  - Current account analysis: Current account gap (percent of GDP) = 1.7; REER gap (percent) = -  
  - Index REER analysis: Current account gap = - ; REER gap (percent) = 10.6
  - Level REER analysis: Current account gap = - ; REER gap (percent) = 12.0

### Policy implication from current account analysis
- The External Balance Assessment model does not identify policies that explain most of the excess surplus.
- Structural policies aimed at raising investment, including a gradual improvement in capital markets, would help reduce the surplus.
- A recent DN study finds changes in the exchange rate have only a modest impact on the current account (DN 2019).

### Macroprudential framework (Annex V) — governance and implementation
- Institutional setup:
  - The Systemic Risk Council (SRC) includes representatives from the DN, the DFSA, relevant government ministries and independent experts; chaired by the DN Board of Governors; central bank hosts the secretariat.
  - Decision-making power on most macroprudential instruments lies with the Minister of Industry, Business and Financial Affairs (MIBFA) as designated macroprudential authority.
  - Strengths: sound transparency and accountability arrangements such as the “comply or explain rule” and “the abstention rule”.
- Process for MaPP implementation: three phases — risk assessment, issuance, implementation.
  - MIBFA has three months to comply or explain after a SRC recommendation.
- Timeliness issue:
  - Consensus-building phase can be protracted. Example timeline:
    - Sep 30, 2014: Observation (General) — Build-up of systemic risks.
    - Mar 27, 2015: Observation (Housing Market) — Build-up of systemic risks.
    - June 24, 2013: Recommendation to fully implement CCyB framework from 2015 (legislated to be gradually phased-in from 2015-2019).
    - Dec 20, 2017: Recommendation — Activation CCyB to 0.5%.
    - Mar 31, 2019: Implementation — CCyB to 0.5%.
    - Sep 25, 2018: Recommendation — increase CCyB to 1%.
    - Sep 30, 2019: Implementation — CCyB to 1%.
  - Consensus-building to recommendation on the CCyB took over three years (observations started Sep 2014; recommendation Dec 2017).
  - Other countries in the region increased CCyB earlier than Denmark.

### Macroprudential framework — recommendations to improve efficacy
- Strategy to improve efficacy includes reinforcing confidence in tools, communication, and fine-tuning institutional arrangements.
- Improving confidence in tools:
  - Institutionalize the review process so SRC continuously assesses effectiveness of implemented tools (performance vs. objectives).
  - Characterize risk factors and map them to policy tools (leverage, liquidity mismatch, maturity mismatch, mis-pricing of risk, interconnectedness).
  - Embed flexibility for tool calibration (example: Ireland’s borrower-based measure calibration for first-time home buyers).
  - Develop “encompassing frameworks” for quantitative analysis (integrate models and data; develop macroprudential stress tests to check buffer calibration given Nordic banking integration).
- Reinforcing communication:
  - Communicate cost and benefit analyses of proposed and implemented tools.
  - Clarify objectives to manage expectations and limit push-back.
- Fine-tuning institutional arrangements:
  - Assess adequacy of the current system given decision-making power lies with the government (risk of political considerations delaying action).
  - Consider assignment of independent authority macroprudential mandate with legal powers and transparency/follow-up accountability (example: UK FPC powers).
  - Develop arrangements to ease policy coordination across policies (including tax and housing supply).

### Debt Sustainability Analysis (Annex VI) — key figures and projections (as of March 22, 2019)
- Selected indicators (presented in sequence as in source):
  - Nominal gross public debt: 41.4 35.6 34.1 33.2 32.0 34.0 35.9 37.7 38.3
  - Public gross financing needs: 6.7 3.9 4.9 5.3 5.5 5.9 6.5 6.7 6.7
  - Net public debt: 15.2 14.7 13.6 13.3 12.8 12.5 12.2 11.8 11.2
  - Real GDP growth (in percent): 0.6 2.3 1.4 1.7 1.9 1.7 1.6 1.5 1.5
  - Inflation (GDP deflator, in percent): 1.6 1.4 0.4 1.6 1.7 2.1 2.3 2.4 2.4
  - Nominal GDP growth (in percent): 2.2 3.7 1.8 3.3 3.7 3.8 4.0 4.0 3.9
  - Effective interest rate (in percent): 4/ 4.3 3.0 3.1 3.9 2.5 3.2 3.1 3.2 3.3
- Contribution to changes in public debt (selected rows, cumulative projection):
  - Change in gross public sector debt: 1.1 -1.7 -1.4 -1.0 -1.2 2.0 2.0 1.7 0.6 4.1
  - Identified debt-creating flows: 1.5 -1.9 0.0 0.2 0.0 3.3 3.3 3.1 2.0 11.9
  - Primary deficit: 0.5 -1.6 -0.4 0.1 0.4 0.4 0.5 0.4 0.1 1.8
  - Automatic debt dynamics: 0.9 -0.3 0.4 0.2 -0.4 -0.2 -0.3 -0.3 -0.2 -1.2
  - Residual, including asset changes: -0.4 0.3 -1.5 -1.2 -1.2 -1.3 -1.3 -1.4 -1.4 -7.8
- Underlying assumptions (projections and alternative scenarios):
  - Baseline scenario — Real GDP growth: 1.7 1.9 1.7 1.6 1.5 1.5
  - Baseline scenario — Inflation: 1.6 1.7 2.1 2.3 2.4 2.4
  - Baseline scenario — Primary Balance: -0.1 -0.4 -0.4 -0.5 -0.4 -0.1
  - Historical scenario — Real GDP growth: 1.7 1.0 1.0 1.0 1.0 1.0
  - Historical scenario — Primary Balance: -0.1 -0.6 -0.6 -0.6 -0.6 -0.6
  - Constant Primary Balance scenario — Primary Balance: -0.1 -0.1 -0.1 -0.1 -0.1 -0.1
  - Contingent Liability Shock — Primary Balance: -0.1 -22.1 -0.4 -0.5 -0.4 -0.1
  - Constant Primary Balance scenario — Real GDP growth: 1.7 1.9 1.7 1.6 1.5 1.5
  - Contingent Liability Shock — Real GDP growth: 1.7 -0.3 -0.4 1.6 1.5 1.5
  - Effective interest rate under scenarios provided in table (examples):
    - Baseline: 3.9 2.5 3.2 3.1 3.2 3.3
    - Historical: 3.9 2.5 3.5 3.6 3.9 4.2
    - Contingent Liability Shock: 3.9 2.9 4.5 3.9 3.6 3.7

*Source: IMF staff calculations (as provided in the supplied content).*

### Annex VII. Risk Assessment Matrix

### Annex VII. Risk Assessment Matrix

### Major Risks, Likelihood, Expected Impact, and Policy Responses
- High: Rising protectionism and retreat from multilateralism.  
  - Expected impact: High — "Rising trade tensions would have a negative impact on Denmark, being a small globally-integrated open economy with positive trade balance. A disorderly Brexit could cause market disruption with negative spillovers."  
  - Policy response: "Contingent temporary fiscal loosening, while remaining anchored to the medium-term objective. Proceed with structural reforms to increase labor supply and reform product markets."

- Medium: Weaker-than-expected global growth. Reflecting vulnerabilities in Euro Area, U.S. or China; unsustainable macroeconomic policies or uncoordinated Brexit could be contributing factors.  
  - Expected impact: Medium — "Denmark’s exports are tightly linked to the euro area markets, other Nordic countries, the U.S, and China. Slower growth in those economies for an extended period would weaken exports eventually impacting domestic demand and growth."  
  - Policy response: "Allow automatic stabilizers to operate. If necessary, loosen fiscal policy while remaining anchored to the medium-term objective. Move ahead with structural reforms to increase labor supply and reform product markets."

- High: Failure to address macro-financial risks. These include high household leverage amid elevated house valuations, the ongoing money laundering case, and close interlinkages across the Nordic financial system.  
  - Expected impact: High — "A housing boom/bust cycle would affect highly-indebted households, with severe knock-on effects on the broader economy. The ongoing money laundering case could further impact confidence in the financial sector. A marked reversal of high house prices in the Nordic region would adversely affect financial conditions, given close linkages of the regional banking system."  
  - Policy response: "Continue vigilant financial surveillance and make use of available tools to discourage further build-up of housing debt. Address bottlenecks in rental market and zoning policies, especially in urban areas. Continue implementation of regulatory agenda to bolster banks’ buffers. After the shock, support liquidity as needed."

- Medium: Tightening of domestic capacity constraints. These could intensify wage pressures, potentially weakening competitiveness and medium-term growth prospects.  
  - Expected impact: Medium — "Labor shortages and capacity constraints could weigh on growth, accelerate wage and price inflation."  
  - Policy response: "Tighten fiscal policy. Move ahead with structural reforms to increase labor supply and integration of migrants into the labor force."

- High: Sharp tightening of global financial conditions. Could be triggered by a sharp increase in U.S. interest rates (prompted by higher-than-expected inflation) or a rise in risk premia.  
  - Expected impact: High — "The prolonged period of low interest rates and stretched asset valuations could be disrupted by an abrupt change in risk appetite. Higher interest rates and tighter financial conditions would weigh on households and undermine consumption."  
  - Policy response: "Reduce vulnerabilities of household and financial sectors by expanding macroprudential toolkit, with particular attention to lower-income groups."

### Risk Assessment Matrix (RAM) explanatory notes
- The RAM shows events that could materially alter the baseline path.  
- Relative likelihood definitions: "low" = probability below 10 percent; "medium" = probability between 10 and 30 percent; "high" = probability between 30 and 50 percent.  
- RAM reflects staff views as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly. "Short term" and "medium term" indicate within one year and three years, respectively.

### Related fiscal, structural, and financial context cited in the RAM and accompanying text
- Fiscal: "The most recent update of the 2025-plan aims at structural fiscal balance in 2025."  
  - For 2018 the structural fiscal balance "is estimated to have been in balance at 0.0 percent of GDP."  
  - "The structural fiscal balance includes an estimated structural contribution from the non-permanent North Sea revenues of 0.3 per cent of GDP in 2018."  
  - Budget Law features: expenditure ceilings and a structural deficit limit of "0.5 percent of GDP."

- Structural reforms and labor supply:  
  - "Wide-ranging reforms - of retirement and early retirement rules, the labor market, and taxes - have contributed significantly to the growing labor supply in recent years."  
  - Combined impact of fiscal and structural policies from 2014 to 2018 "is estimated to have dampened capacity pressures to the tune of 0.8 per cent of GDP," with the estimated output gap "only moderately positive at around 1 percent currently."

- Financial sector and AML/CFT measures:  
  - March 27, 2019 political agreement: "16 initiatives to strengthening the AML/CFT regulation and expanding the Danish Financial Supervisory Authority’s (FSA) sanctioning powers."  
  - The FSA will be able to "levy administrative fine notices for non-compliance with the AML/CFT obligations" and "has had its budgetary resources increased significantly."  
  - September 2018 political agreement: Denmark will "actively participate in the upcoming and ongoing international work (at EU level and at Nordic/Baltic level) to strengthen and increase cross-border cooperation in the fight against money laundering and terror financing."

- Monetary policy and exchange rate peg:  
  - "Danmarks Nationalbank should remain ready to defend the peg. Maintaining the peg to the euro is the exclusive policy objective and hence, monetary policy rates are adjusted solely to keep the krone stable against the euro."  
  - Exchange Rate Mechanism II central rate: "DKr 746.038 per 100 euro."  
  - Narrower fluctuation band agreed: "+/- 2.25 percent", giving krone bounds "DKr 762.824 per 100 euro and DKr 729.252 per 100 euro."

*Source: Annex VII. Risk Assessment Matrix and accompanying sections from the IMF staff document.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1dnkea2019001.pdf_