## 1dnkea2023001 ## Source details **Canonical URL:** [1dnkea2023001](https://www.imf.org/-/media/files/publications/cr/2023/english/1dnkea2023001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2023/english/1dnkea2023001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2023/english/1dnkea2023001.pdf.json) --- ### Measures to Compensate for Higher Energy Prices - Compensation package size and comparators: - Denmark’s compensation measures amount to about ½ percent of GDP during 2022–23. - European average comparison: around 2½ percent (2022–23). - Composition and targeting: - Targeted measures: “Heat checks” benefits to pensioners; lump-sum retiree compensation; child and youth benefits; elderly checks. - Untargeted measures: Cuts to electricity VAT; increased employment deductions; pool to phase out fossil fuels in district heating; freezing scheme on some items. - Rent policy: Ceiling on rent increases, capping at 4 percent during 2022–23. - IMF staff note: Some untargeted measures (e.g., cuts to electricity VAT, higher employment deductions) are not targeted and “would impede the price passthrough.” - Fiscal cost and funding: - Total stated fiscal cost in 2022–23: about ½ percent of GDP. - Table fragment entries shown in the source: 3,464 DKK million and 9,205 DKK million with total percent of GDP of 0.12 and 0.32 in the same fragment. - Most measures funded by reallocation of other spending items. - Other funding sources (except for the “heat check”): tapping general reserves; bringing forward revenues (from contributions into pension savings); cutting some public investment. - Support for energy companies: - Temporary liquidity support via loan guarantees up to 125 billion DKK to electricity companies facing higher collateral requirements. - No take-up of guarantees due to steep terms; companies borrowed from banks instead. - IMF staff assessment and implications: - Package is small relative to peers; trade-offs between immediate relief and preserving efficient price signals. - Targeted measures (e.g., “heat checks”) praised for protecting vulnerable groups; untargeted tax cuts and deductions viewed as potentially distortionary. ### Economic outlook and near-term projections - GDP growth projections: - 2022: 3¾ percent. - 2023: 1¼ percent. - 2024: 1½ percent. - Near-term dynamics: - First half of 2023: weaker external demand (Europe and the United States) and tightening financial conditions weigh on activity. - Subsequent momentum contingent on moderation in energy prices, overall inflation, and improved external demand. - Inflation outlook: - Inflation will continue to decelerate but stay above 2 percent in the near term. - Headline and core inflation projected to remain high at around 2½–2¾ at the end of 2024. - Recent collective bargaining: wage growth at around 5 percent annually over the next two years. - Limited signs of a self-enforcing wage-price spiral; households’ inflation expectations declining. - Medium-term and structural constraints: - Beyond 2025, medium-term growth constrained by lower external demand and a steady decrease in the working-age population. - Medium-term growth expected to slow to around 1.3 percent (down from pre-pandemic average of 1.8 percent). - Uncertainty over sustainability of recent exceptional manufacturing performance (pharmaceuticals). - Risks: - Downside growth risks: escalation of Russia’s war in Ukraine; renewed supply disruptions; deepening geo-economic fragmentation; sharper and more persistent tightening of global financial conditions; weaker euro area policies leading to spillovers to Denmark; accelerated house price corrections that impair household balance sheets. - Upside inflation risks: renewed supply shocks; backward-looking wage formation producing stronger wage pressures. - Upside growth scenarios: end to the war in Ukraine; stabilization of commodity markets; easing supply-chain bottlenecks; stronger external demand; overperformance of pharmaceuticals, ICT, and green technologies. ### Fiscal policy — near term and medium term - Spring 2023 Budget and near-term stance: - Structural balance: surplus of ¾ percent of GDP in 2023 (broadly unchanged from 2022). - Discretionary spending measures: amounting to 0.4 percent of GDP in total to support Ukraine, provide temporary support to vulnerable population segments, and improve hospital services. - Government compensation for higher energy prices: 0.2 percent of GDP. - Measures (except Ukraine Fund) offset by expiration of Covid-19 measures and reallocation, keeping structural balance broadly unchanged. - Ministry of Finance estimate: fiscal plan would reduce output growth by around 0.8 percentage points in 2023. - Footnote: Ministry of Finance estimates fiscal plan would reduce the output gap by 0.9 percentage points of GDP in 2023. - Staff recommendations: - Improve structural balance by ½ percentage points of GDP in 2023 through tight spending control and saving any revenue above budget forecasts. - With inflation expected to remain persistently elevated in 2024, fiscal policy should support disinflation. - If downside growth risks materialize and inflation eases, allow automatic stabilizers to operate fully. - Medium-term fiscal prospects and sustainability: - Structural balance will weaken from a surplus of around 1 percent of GDP in 2023 to a small deficit by 2028 (reflecting increased defense and age-related spending). - Authorities plan supply-side measures (cancel public holiday, tighten duration of student grants, strengthen early retirement rules) to contain the structural deficit within the medium-term objective of 0.5 percent of GDP set for 2030. - Staff assess Denmark has substantial fiscal space; public debt projected to stay steadily around 30 percent of GDP over the medium term. - Public pensions: statutory retirement age raised to 68 years old by 2030 and thereafter linked to life expectancy; Pension Commission suggested a slower pace of the link. ### Financial stability: systemic features, vulnerabilities, and stress tests - Financial system structure and size: - Financial system assets amount to nearly six times GDP. - Banking system accounts for more than 40 percent of financial system assets; dominated by seven domestic systemically important financial institutions. - Largest bank (Danske Bank Group) has assets of about 1 34 percent of GDP (text preserves original spacing/punctuation). - Banking system exposures: large domestic real estate exposure (68 percent of total loans); cross-border exposures (assets and liabilities amounting to about 43 percent of GDP). - Household sector risks: - Household debt: 195 percent of net disposable income as of end-2022. - Share of riskier mortgages (variable-rate mortgage loans with deferred amortization) risen to more than one-third of all mortgages. - House prices expected to fall further; amortization calls could increase repayment pressures and reduce consumption. - Mitigants: strong labor markets, households’ sizeable wealth, generous social safety net. - Liquidity and other sectoral risks: - Banks’ liquidity coverage ratios remain high; raising liquidity more expensive. - Mortgage Credit Institutions may need more liquidity due to collateral requirements in a severe property price decrease. - Pension and insurance firms may face increased liquidity needs for variation margin calls if interest rates rise further. - CRE debt: around 30 percent of total corporate sector debt; foreign investors play an important role and can transmit global CRE volatility to Denmark. - Corporate sector risks: increased costs from high inflation and interest rates; weaker demand; corporate bankruptcies increased, mainly driven by small businesses. - Stress test assumptions and results (DN’s severe recession test): - Assumptions: cumulative GDP contraction of 6½ percent over three years; unemployment rate rising by more than 6 percentage points; 100 basis points higher interest rates than baseline. - Results: All banks would meet risk-based capital requirements with release of the countercyclical capital buffer (CCyB); some banks come close to buffer requirements. On liquidity, all systemic banks would survive at least five months in the most severe scenario (closure of market access and deposit withdrawals). - Supervisory and macroprudential recommendations: - Maintain vigilant supervision; ensure adequacy of impairment charge assessments. - Expand credit registry data coverage to include deposits, financial guarantees, and internal ratings-based capital requirements. - Carefully assess households’ creditworthiness given mortgage concentration. - Monitor cross-border macrofinancial risks, especially CRE exposures in the Nordic region. - Close data gaps on CRE; consider increasing risk weights on CRE exposures or introducing a sectoral systemic risk buffer. - Continue close attention to cyber security risks. ### Macroprudential policies, housing, and insurance - Macroprudential stance: - CCyB raised from 0 percent to 2.5 percent in steps since September 2022 (among the highest in Europe). - Suggested additional measures: lower loan-to-value limits for new mortgages to highly leveraged households; mandate amortization until a minimum equity share is reached; extend “growth area guidelines” beyond Copenhagen and Aarhus; review risk weights of riskier mortgages. - In severe shocks, CCyB can be released to support credit flows. - Housing sector and taxation recommendations (once house prices and inflation stabilize): - Reduce incentives for bigger mortgages and debt bias by lowering mortgage interest deductibility. - Link property taxes to market valuations; implement 2017 housing taxation agreement in 2024 as planned. - Reduce rent controls—while protecting the most vulnerable—to increase supply of rental properties. - Insurance sector: - Solvency capital ratio: around 245 percent. - DN analysis: life insurance companies can handle liquidity needs in case of at least 200 basis points further increase in interest rates. - Continued supervisory vigilance recommended. ### Structural reforms to support growth and labor supply - Productivity and labor supply challenges: - Multifactor productivity slowed since the pandemic, particularly in services. - Working-age population expected to decline steadily; structural reforms needed to boost productivity and labor supply. - Digitalization and product-market efficiency: - Government committed to accelerating digitalization (SMEs, public administration, rural broadband, health sector). - Digital accounting system requirements to phase in through 2026. - Explore increasing ICT specialists, women in digital jobs, and talent with advanced digital skills. - Address weak areas in product markets: lawyers and other professional services, utilities (especially district heating), and semi-private health providers. - Support for business activity and startups: - Tax measures to explore: relaxation of cap on carry-forward losses; reduction of taxation of dividends without unduly distorting personal and corporate tax integration; introduction of allowance for corporate equity. - Authorities reviewing reforms to business support (R&D grants and tax credits); staff recommend cost-benefit analysis. - Labor market policies: - Government target: increase labor supply by 1.8 percent by 2030. - Abolishing a public holiday (effective May 2024) estimated to permanently increase annual hours worked by ¼percent. - Planned measures: reduce high METRs and increase earned income credit; tighten early retirement conditions; utilize immigrant labor more effectively (lowered salary requirement limit from around US$65,000 to US$54,000 equivalent and expansion of positive list); support on-the-job and Danish language training; enhance education outcomes for students with immigrant backgrounds. ### Climate change policy - Policy architecture: - Phase 1 of the Green Tax Reform and Green Restart aim to facilitate green transitions and expand renewables. - Phase 2 (to begin in 2025) would deliver the bulk of industrial sector emission reductions: higher and more harmonized carbon prices across sectors; transition support for hard-hit companies; investment in carbon capture and storage (CCS) technologies. - Combined measures would reduce emissions by 63 percent below 1990 levels by 2030 (short of the 70 percent target); proposals to address remaining shortfall (mainly in agriculture) expected later in the year. - Additional needs and staff recommendations: - Strengthen carbon pricing and introduce complementary fiscal incentives at sectoral level (including feebates in agriculture). - Increase energy savings (including in buildings); adopt EU directive on energy savings when expected. - Update the Danish Strategy for Adaptation to Climate Change (2008). ### Authorities’ views (summary) - Economic outlook: Authorities broadly agreed with staff assessment; expected GDP growth to slow in 2023; energy prices to drag down headline inflation while core inflation remains elevated; wage increases in line with euro area. - Fiscal policy: Authorities view fiscal policy as appropriately tight to bring down inflation; MOF does not see structural balance as the right measure to assess fiscal stance. - Financial sector: Authorities assess system as sound with adequate capital and liquidity; acknowledge macrofinancial risks from riskier mortgages; FSA reviewing adequacy of bank capital requirements for riskier mortgages. - Institutional reforms: Ministries and FSA cautious about tightening borrower-based measures due to potential adverse impacts on house prices and demand; DN stressed need for legal basis for binding borrower-based measures and lowering interest deductibility; ministries did not see need for legislative changes on some 2020 FSAP recommendations. ### External sector assessment (select findings) - Overall assessment: External position in 2022 assessed as stronger than level implied by medium-term fundamentals and desirable policies. - Current account dynamics: - CA surplus: 2021 9 percent of GDP; 2022 surged to 13.1 percent of GDP. - Services balance surplus widened by 4.3 percent of GDP; goods balance narrowed by 0.7 percent of GDP. - CA surplus expected to decline to around 7.5 percent of GDP over the medium term. - NIIP and gross positions (2022): - NIIP: 64.1 percent of GDP. - Gross assets: 313.8 percent of GDP. - Gross liabilities: 249.7 percent of GDP. - Debt assets: 100.9 percent of GDP. - Debt liabilities: 99.5 percent of GDP. - Transport price shock and adjusted measures: - Impact of surge in international freight rates on CA estimated at about 6.6 percent of GDP in 2022 (assessed as temporary). - Cyclically adjusted CA: 14.3 percent of GDP in 2022. - EBA norm: 4.8 percent of GDP. - Staff gap: 2.9 percent of GDP after adjustments. - Real exchange rate (REER): - Danish krone depreciated by 2.6 percent in real effective terms (ULC based) in 2022. - REER gap estimates: CA gap model indicates REER undervaluation of −20 percent in 2022; REER index and level models suggest overvaluation of 15.5 percent and 11.4 percent, respectively. ### Key quantitative projections and indicators (select Table 1 highlights, 2020–28) - Real GDP (change, percent): 2020 −2.0; 2021 4.9; 2022 3.8; 2023 1.3; 2024 1.4; 2025 1.2; 2026 1.3; 2027 1.3; 2028 1.3. - CPI (year average): 2020 0.3; 2021 1.9; 2022 8.5; 2023 4.1; 2024 2.8; 2025 2.1; 2026 2.1; 2027 2.0; 2028 2.0. - Output gap (percent of potential output): 2020 −2.7; 2021 0.1; 2022 1.9; 2023 1.3; 2024 0.9; 2025 0.4; 2026 0.2; 2027 0.0; 2028 0.0. - Gross debt (percent of GDP): 2020 42.2; 2021 36.7; 2022 30.1; 2023 30.5; 2024 30.3; 2025 30.1; 2026 30.2; 2027 30.3; 2028 30.4. - Current account (percent of GDP): 2020 7.9; 2021 9.0; 2022 13.1; 2023 9.1; 2024 7.8; 2025 7.7; 2026 7.6; 2027 7.6; 2028 7.6. ### Fiscal and financial tables (select numeric highlights) - Table 2 (GFSM 2001, Billions of DKK): Total revenues: 2020 1,249.1; 2021 1,363.2; 2022 1,360.0; 2023 proj. 1,402.9. Total expenditures: 2020 1,244.1; 2021 1,272.2; 2022 1,267.1; 2023 proj. 1,346.6. Net Lending/Borrowing: 2020 5.0; 2021 91.0; 2022 93.0; 2023 proj. 56.3 (Billions of DKK). - Table 3 (GFSM 2001, Percent of GDP): Total revenues: 2020 53.8; 2021 54.4; 2022 48.6; 2023 49.5. Net Lending/Borrowing (percent of GDP): 2020 0.2; 2021 3.6; 2022 3.3; 2023 2.0. - Table 5 (FSIs, Percent, 2013–2022): Regulatory capital to risk-weighted assets 2022 24.5; Core / common equity tier 1 capital to risk-weighted assets 2022 20.4; Nonperforming loans to total gross loans (new IFRS9) 2022 2.4; ROA (aggregated data) 2022 0.3; ROE (aggregated data) 2022 4.0; Liquid assets to total assets 2022 34.4. - Table 6 (BoP, Billions of DKK and Percent of GDP): Current account 2020 183.1 (7.9 percent of GDP); 2021 226.2 (9.0 percent); 2022 367.2 (13.1 percent). Merchandise exports f.o.b. 2022 1,045.2 (37.4 percent of GDP); Merchandise imports f.o.b. 2022 953.9 (34.1 percent of GDP). - Table 7 (IIP, Billions of DKK and Percent of GDP): Net Investment Position 2022 assets 9,305; liabilities 6,986; net 2,319 (Percent of GDP 2022 64.1). ### Risk Assessment Matrix — key risks and policy responses (select) - Global intensification of regional conflicts: High likelihood; Medium impact. Response: Step up structural reforms and let flexicurity operate to facilitate reallocation and regional labor mobility. - Abrupt global slowdown or recession: Medium likelihood; Medium impact. Response: Allow automatic stabilizers; use fiscal space for targeted support offset by other measures if wage and inflation pressures persist. - Monetary policy miscalibration: Medium likelihood; Medium impact. Response: Stand ready to tighten fiscal policy while protecting the vulnerable; deploy prudential tools. - Deepening geo-economic fragmentation: High likelihood; High impact. Response: Support global cooperation and multilateralism; step up structural reforms. - Domestic systemic financial instability: Medium likelihood; High impact. Response: Vigilant monitoring of households’ creditworthiness, cross-border exposures, and liquidity; macroprudential policies to target pockets of vulnerability. ### Implementation of past IMF recommendations (select) - Fiscal policy advice (2022): Fiscal policy tightened in 2022; energy-related measures fully funded but some not well targeted. Government lowered structural deficit limit to 1 percent of GDP in March 2022. Carbon pricing Phase 2 envisaged to start in 2025; authorities do not support feebates. - Financial sector advice (2022): Recommendations to tighten borrower-based tools and reduce mortgage interest deductibility have no plans for implementation currently. Progress made on enhancing risk-based AML/CFT supervision. - Structural reform advice (2022): Plans to reduce marginal tax rates and increase earned income credit; indexation of retirement age to life expectancy maintained; review of early retirement scheme initiated; labor market measures to facilitate foreign labor implemented. ### Statistical and exchange rate notes - Official exchange rates reported: 762.824 per 100 euro and DKr 729.252 per 100 euro. - Article IV: Last consultation concluded by Executive Board on June 12, 2022; staff report published with Press Release No. 22/197 (June 16, 2022). - Data provision: Adequate for surveillance; Denmark subscribes to the Fund’s Special Data Dissemination Standard Plus. - Common Indicators Required for Surveillance: various latest observations and reporting frequencies as reported (dates include 5/18, 2023:M3, 2023:M4, 2023:Q1, 2022:Q2, 2022:Q4 as applicable). *Source: Box 1 and IMF staff report chapter content extracted from 1dnkea2023001.* ### 1. Measures to Compensate for Higher Energy Prices ____________________________________________ 7 ### Measures to Compensate for Higher Energy Prices ### Overview of compensation measures - Denmark’s compensation measures to mitigate the impact of higher energy prices are small: amounting to about ½ percent of GDP during 2022–23. - This is small relative to the European average of around 2½ percent (2022–23 comparison). ### Composition and targeting - Targeted measures: - “Heat checks” benefits to pensioners; lump-sum retiree compensation; child and youth benefits; elderly checks. - These measures are characterized in the source as targeted. - Untargeted measures: - Cuts to electricity VAT; increased employment deductions; pool to phase out fossil fuels in district heating; freezing scheme on some items. - The source notes some untargeted measures (e.g., cuts to electricity VAT, higher employment deductions) are not targeted and “would impede the price passthrough.” - Rent policy: - The authorities imposed a ceiling on rent increases, capping at 4 percent during 2022–23. ### Fiscal cost and funding - Total stated fiscal cost of compensation measures in 2022–23: about ½ percent of GDP (presented as DKK million and percent of GDP entries in the source table; aggregated total in the Box: 3,464 DKK million and 9,205 DKK million entries are shown in the table fragment, with a total percent of GDP of 0.12 and 0.32 in the same fragment). - Most measures are funded by reallocation of other spending items. - Funding sources (except for the “heat check”): - Tapping general reserves. - Bringing forward revenues (from contributions into pension savings). - Cutting some public investment. ### Support for energy companies - The government offered temporary liquidity support in the form of loan guarantees of up to 125 billion DKK to electricity companies facing a “cash crunch” due to rising collateral requirements. - No take-up of these guarantees occurred due to steep terms; companies resorted to borrowing from banks instead. ### IMF staff assessment and implications - The IMF highlights that Denmark’s compensation package is small relative to peers and that some untargeted measures could impede price passthrough. - Targeted measures such as “heat checks” are noted positively for targeting vulnerable groups, while untargeted tax cuts and deductions are identified as potentially distortionary. - The Box implies trade-offs between providing immediate relief and preserving efficient price signals. *Source: Box 1, “Measures to Compensate for Higher Energy Prices,” Denmark country chapter (excerpt).* ### 13. Economic activity is set to soften in the ### 13. Economic activity is set to soften in the ### Economic outlook and near-term projections - GDP growth for 2023 is projected at 1¼ percent, down from 3¾ percent in 2022. - In the first half of 2023, weaker external demand (especially from Europe and the United States) and tightening financial conditions will weigh on activity. - Activity is expected to gain momentum subsequently, assuming a continued moderation in energy prices and overall inflation and an improvement in external demand. - Growth recovery will continue into 2024, driven mainly by private consumption, with growth expected at 1½ percent. ### Inflation outlook - Inflation will continue to decelerate but stay above 2 percent in the near term. - Moderating energy prices will continue to reduce headline inflation, but core inflation will decelerate slowly as the positive output gap persists in the near term. - Headline and core inflation is projected to remain high at around 2½–2¾ at the end of 2024. - The recent collective bargaining agreed on wage growth at around 5 percent annually over the next two years, broadly in line with euro area countries. - There are limited signs of a self-enforcing wage-price spiral, with a decline in households’ inflation expectations. ### Medium-term outlook and structural constraints - Beyond 2025, medium-term outlook is less sanguine: - Global growth is not expected to return to pre-pandemic growth levels, limiting Denmark’s external demand. - Denmark’s potential growth will be constrained by a steady decrease in the working-age population. - Uncertainty exists whether the recent exceptional performance in the manufacturing industry (especially the pharmaceutical sector) is sustainable. - Staff expect medium-term growth to slow to around 1.3 percent, down from the pre-pandemic average of 1.8 percent. ### Risks to growth and inflation - Risks to growth are broadly balanced; risks to inflation are tilted to the upside. - Downside growth risks: - Escalation of Russia’s war in Ukraine (disrupting global trade), renewed supply disruptions, deepening geo-economic fragmentation, and a sharper and more persistent tightening of global financial conditions. - If euro area policies do not act forcefully to bring down inflation, greater monetary tightening might result in weaker growth in the euro area and Denmark. - Under these scenarios, house price corrections could accelerate, triggering a downward spiral in house prices, households’ balance sheets, and the real economy. - Upside inflation risks: - Renewed supply shocks pushing up energy and commodity prices. - Domestically, backward-looking wage formation could produce stronger wage pressures over time, driving inflation higher and reducing competitiveness. - Upside growth scenarios: - An end to the war in Ukraine, stabilization of global commodity markets, easing of supply-chain bottlenecks, and stronger recovery in external demand would spur faster growth. - Denmark’s pharmaceuticals and other globally competitive export industries (including ICT and green technologies) could overperform, boosting overall economic growth. ### Policy discussions — key priorities - Key policy priorities: - Bring down inflationary pressures while achieving a soft-landing of the economy amid high uncertainty. - Ensure financial stability in the wake of tightening financial conditions and increased global financial market volatility. - Boost productivity and labor supply to sustain strong, sustainable, and inclusive long-term growth and the welfare state. ### Fiscal policy: Spring 2023 Budget and near-term stance - The Spring 2023 Budget shows the structural balance will remain in a surplus of ¾ percent of GDP in 2023, broadly unchanged from 2022. - The budget includes small discretionary spending measures amounting to 0.4 percent of GDP in total to: - support Ukraine; - provide temporary support to vulnerable segments of the population hit hard by higher prices; and - improve hospital services. - The government continues to provide compensation measures for higher energy prices (0.2 percent of GDP). - These measures (except the Ukraine Fund) are offset by the expiration of remaining Covid-19 related measures and the reallocation of other spending items, making the structural balance broadly unchanged. - The Ministry of Finance estimates that the fiscal plan would reduce output growth by around 0.8 percentage points in 2023. - Footnote: The Ministry of Finance estimates that the fiscal plan would reduce the output gap by 0.9 percentage points of GDP in 2023. - Staff recommendation: - Authorities should make every effort to improve the structural balance in the order of ½ percentage points of GDP in 2023 through tight spending control and saving any revenue above budget forecasts. - With inflation expected to remain persistently elevated in 2024, fiscal policy should continue to support disinflation. - If downside growth risks materialize and inflation eases, automatic stabilizers should be allowed to operate fully. ### Medium-term fiscal prospects and sustainability - Over the medium term, the structural balance will weaken to a deficit: - The structural balance will deteriorate from a surplus of around 1 percent of GDP in 2023 to a small deficit by 2028, reflecting an increase in defense and age-related spending. - To contain the structural deficit within the medium-term objective of 0.5 percent of GDP set for 2030, authorities plan supply-side measures, including canceling a public holiday, tightening the duration of student grants, and strengthening early retirement rules. - Staff assess Denmark to have substantial fiscal space, with public debt projected to stay steadily around 30 percent of GDP over the medium term. - Given uncertainty around demographic trends and effectiveness of labor market reform measures, the government should continue to recalibrate fiscal policy as needed to ensure long-term sustainability. - On public pensions: - The government has gradually raised the statutory retirement age to 68 years old by 2030, and thereafter linked to life expectancy. - The government’s Pension Commission recently suggested a slower pace of the link—currently one-to-one indexation—for intergenerational fairness. - Any changes to the indexation should safeguard long-term fiscal sustainability. ### Financial stability: systemic features and vulnerabilities - Financial system size and structure: - Financial system assets amount to nearly six times GDP. - The banking system accounts for more than 40 percent of financial system assets and is dominated by seven domestic systemically important financial institutions. - The largest bank (Danske Bank Group) has assets of about 1 34 percent of GDP (text preserves original spacing/punctuation). - Banking system has large domestic real estate exposure (68 percent of the total loans) and cross-border exposures (assets and liabilities amounting to about 43 percent of GDP). - Household sector risks: - Household debt remains high at 195 percent of net disposable income as of end-2022. - The share of riskier mortgages (variable-rate mortgage loans with deferred amortization) has risen to more than one-third of all mortgages. - House prices are expected to fall further; if lenders call for amortization, some borrowers could face increased pressures servicing debt and reduce consumption. - Mitigants include strong labor markets, households’ sizeable wealth, and the generous social safety net. - Liquidity risks: - Banks’ liquidity coverage ratios remain high, but raising liquidity has become more expensive. - Mortgage Credit Institutions may need more liquidity due to requirements to provide additional collateral in case of a severe property price decrease. - Pension and insurance firms might face increased liquidity needs, especially for variation margin calls from derivative contracts if interest rates rise further. - Cross-border and commercial real estate (CRE) risks: - CRE debt accounts for around 30 percent of the total corporate sector debt. - Foreign investors play an important role in real estate transactions, exposing the Danish CRE market to global CRE market volatility. - A downturn in CRE markets abroad might spill over to the Danish financial system due to common ownerships/foreign investors and interconnectedness. - Other corporate sector risks: - Increased costs from high inflation and interest rates and weaker demand from main trading partners can squeeze profits and weaken debt service capacity. - Corporate bankruptcies have increased, mainly driven by small businesses, to which medium-sized banks are particularly exposed. ### Stress tests and buffers - DN’s severe recession stress test assumptions: - A cumulative GDP contraction of 6½ percent over three years. - The unemployment rate rising by more than 6 percentage points. - 100 basis points higher interest rates than the baseline scenario. - Results: - All banks would be able to meet risk-based capital requirements with the release of the countercyclical capital buffer (CCyB). - Some banks will be challenged, coming close to the capital buffer requirements. - On the liquidity front, all systemic banks would be able to survive at least five months in the most severe scenario, which assumes closure of their access to markets and deposit withdrawals. ### Supervisory and macroprudential recommendations - Authorities should continue to be vigilant and maintain close supervision to monitor banks’ risk management and ensure adequacy of impairment charge assessments as economic prospects change. - Expand credit registry data coverage to include deposits, financial guarantees, and internal ratings-based capital requirements to improve monitoring of the financial system. - Given high concentration of banks’ exposure to mortgage loans, households’ creditworthiness should be carefully assessed. - Cross-border macrofinancial risks, potentially arising from CRE markets in the Nordic region, should continue to be closely monitored. - Close data gaps that limit assessment of vulnerabilities in the CRE sector; consider increasing risk weights on CRE exposures or introducing a sectoral systemic risk buffer. - Supervisors should continue to closely pay attention to cyber security risks given increased risks of cyberattacks on critical infrastructure and institutions. *Source: IMF staff report chapter content.* ### 25. To strengthen the resilience of the financial system, further tightening of ### To strengthen the resilience of the financial system, further tightening of ### Macroprudential policies and financial-system resilience - Countercyclical capital buffer (CCyB) was raised from 0 percent to 2.5 percent in steps since September 2022 (among the highest in Europe). - Suggested additional measures: - Subject new mortgages extended to highly leveraged households to a lower loan-to -value limit than the current 95 percent or mandate amortization until a minimum equity share is reached. - Extend the scope of the “growth area guidelines” beyond Copenhagen and Aarhus. - Review the risk weights of riskier mortgages. - In the event of a severe adverse shock, the CCyB can be released to support credit flows. - Macroeconomic Scenarios in Stress Test (Percent) — figures provided in source: - 2.8 - -3 - -6.5 - -6.2 - -18.3 - -27.2 - 0.3 - 3.9 - 6.1 - 2.6 - 4.6 - 3.6 - Systemic Credit Institutions: Excess capital relative to total requirement and excess capital (minimum) shown across 2023, 2024, 2025 for Baseline scenario, Recession, Severe recession (percent of risk exposure amounts) — source: Danmarks Nationalbank. ### Housing sector and taxation - Policy recommendations once house prices and inflation stabilize: - Reduce incentives for bigger mortgages and debt bias by lowering mortgage interest deductibility. - Link property taxes to market valuations; implement the 2017 housing taxation agreement in 2024 as planned. - Reduce rent controls—while protecting the most vulnerable—to increase the supply of rental properties. - Empirical indicator from source: Rental yields in Denmark compared to Europe (Percent; 2022 or latest) — source: Global Property Guide. ### Insurance sector - Domestic insurance companies are sizable with strong buffers: - Solvency capital ratio at around 245 percent. - Danmarks Nationalbank (DN) analysis: life insurance companies can handle the liquidity needs in case of a further increase in interest rates of at least 200 basis points. - Continued supervisory vigilance is recommended to monitor risks and interconnectedness, particularly if capital market volatility intensifies. ### Follow-up on 2020 FSAP recommendations (institutional setting) - Systemic risk oversight and macroprudential policy: - National legislation should incorporate borrower-based tools into the policy toolkit. - The chair of the Systemic Risk Council (SRC) should be given the ability, enshrined in law, to make proposals for a recommendation after due consultation with other SRC members without the need to strive for consensus. - Banking and insurance supervision: - Enhance the operational independence of the Danish Financial Supervisory Authority (DFSA), for example by lengthening terms of Board members. - Financial crisis management and safety net: - Strengthen governance and autonomy of resolution authorities, especially the FSC, limiting government interference in execution of mandate except when fiscal support is needed. ### AML/CFT - Cross-border financial flows expose Denmark to elevated ML/TF threats. - Progress made: enhanced risk-based supervision of banks and supervisory assessment of ML/TF risks. - Recommended actions: - Consider developing a minimum supervisory engagement model. - Ensure Virtual Asset Service Providers have robust AML/CFT preventive frameworks. - Continue close supervision to ensure financial institutions maintain adequate, accurate, and up-to -date beneficial ownership information. - Note: IMF is providing technical assistance to Nordic-Baltic authorities, including Denmark, to analyze cross-border ML/TF threats and vulnerabilities. ### Structural reforms to support growth and labor supply - Productivity and labor supply challenges: - Multifactor productivity was a key driver pre-pandemic but has slowed since the pandemic, particularly in services. - Working-age population expected to decline steadily; structural reforms needed to boost productivity across sectors and sustain labor supply. - Promoting digitalization and product-market efficiency: - Government committed to accelerating digitalization (SMEs, public administration, rural broadband, health sector). - Digital accounting system requirements will phase in through 2026. - Explore increasing ICT specialists, women in digital jobs, and talent with advanced digital skills. - Address weak areas in product markets: lawyers and other professional services, utilities (especially district heating), and semi-private health providers. - Support for business activity and startups: - Tax measures to explore: - Relaxation of the cap on carry-forward losses. - Reduction of taxation of dividends without unduly distorting personal and corporate tax integration. - Introduction of allowance for corporate equity to reduce the cost of capital. - Authorities are reviewing reforms to business support (R&D grants and tax credits); a cost-benefit analysis is recommended. - Labor market policies to increase labor supply: - Government target: increase labor supply by 1.8 percent by 2030. - Parliament approved abolishing a public holiday (effective in May 2024), estimated to permanently increase annual hours worked by ¼percent. - Planned measures: - Reduce high marginal effective tax rates (METRs) and increase the earned income credit; review METR structure including benefits to minimize disincentives, especially for lower-income households. - Tighten early retirement conditions; review early retirement schemes (more than half exit the labor market through early retirement schemes). - Utilize immigrant labor more effectively: lowered salary requirement limit (from around US$65,000 to US$54,000, equivalent) and expansion of positive list are welcome; support on-the-job training and Danish language training. - Enhance education outcomes for students with immigrant backgrounds; monitor PISA gaps and consider measures to address school segregation and other contributors to performance gaps. ### Climate change policy - Progress and reforms: - Phase 1 of the Green Tax Reform and Green Restart aim to facilitate green transitions and expand renewables. - Phase 2 (to begin in 2025) would deliver the bulk of industrial sector emission reductions; includes higher and more harmonized carbon prices across sectors, transition support for hard-hit companies, and investment in carbon capture and storage (CCS) technologies. - Combined measures would reduce emissions by 63 percent below 1990 levels by 2030, short of the 70 percent target; proposals to address the remaining shortfall (mainly in agriculture) expected later this year. - Additional needs: - Strengthen carbon pricing and introduce complementary fiscal incentives at sectoral level (including feebates in agriculture). - Increase energy savings (including in buildings); adopt EU directive on energy savings when expected. - Update the Danish Strategy for Adaptation to Climate Change (2008) to provide comprehensive guidance on adaptation initiatives. - Reference: IMF Denmark 2022 Article IV Consultation Staff Report contains detailed discussion of planned carbon prices. ### Authorities’ views - Economic outlook: - Authorities broadly agreed with staff’s assessment; expected GDP growth to slow considerably in 2023. - Energy prices will drag down headline inflation; core inflation will remain elevated as wage growth picks up. - Wage increases following collective bargaining seen in line with euro area countries. - Risks to the outlook more balanced than end-2022 but slightly skewed to the downside. - Authorities expect house prices to continue falling for the rest of the year; current account surplus in 2022 reflected exceptionally large sea freight revenues and is expected to narrow. - Fiscal policy: - Authorities view fiscal policy this year as appropriately tight to bring down inflation; indicated fiscal stance tightened earlier than in the euro area. - Structural balance not seen as the right measure to assess fiscal stance by MOF. - On medium-term fiscal policy, authorities acknowledged potential need to recalibrate in case of revenue shortfalls but did not see fiscal risks tilted to the downside. - Financial sector: - Authorities assess system as sound with adequate capital and liquidity buffers and low NPL ratios. - Acknowledged macrofinancial risks from riskier mortgages; FSA reviewing adequacy of bank capital requirements for riskier mortgages. - Ministries and FSA concerned about adverse impacts on house prices and demand from tightening borrower-based measures and want further analysis before policy recommendations. - DN stressed need for legal basis for binding borrower-based measures and lowering tax deductibility of interest expense. - On pending 2020 FSAP institutional reform recommendations, ministries did not see need for legislative changes. *Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1dnkea2023001.pdf* ### 41. The authorities agreed that maintaining high productivity and sustaining the labor ### 41. The authorities agreed that maintaining high productivity and sustaining the labor supply would be a priority to support high, inclusive, and sustainable growth. ### Labor market, productivity, and structural employment - Authorities prioritized maintaining high productivity and sustaining the labor supply to support high, inclusive, and sustainable growth. - Government approved the cancellation of a public holiday and still needs to design other measures aimed at increasing structural employment by 45,000 (about 1¾ percent), including reforms to personal income tax, education, and early retirement schemes. - Authorities noted practical challenges in designing tax measures to support new businesses, for example, in designing allowance for cooperate equity. - Authorities did not see the merits of reviewing benefits to reduce the marginal effective tax rate for lower-income households, as they did not expect a large effect. - Authorities pointed to some improvements in the employment rate of immigrants and the educational outcomes of students with immigrant backgrounds. ### Climate goals and adaptation - Authorities agreed that further measures would be needed to meet the climate goals. - Assessment: the 2030 climate goal gap could be met through achieving the sectorial emission reduction target within agriculture and “land use, land-use charge, and forestry.” - Authorities do not support feebates, citing other existing policies to incentivize emission reduction, for example, in the transport sector. - On energy efficiency, authorities welcomed the EU directive but noted it was too early to judge whether additional measures would be necessary. - Government decided in December 2022 to draw up a national climate adaptation plan which supports additional measures. ### Staff appraisal — near-term macroeconomic outlook - Denmark’s recovery from the pandemic was impressive, but strong output and employment growth has contributed to inflationary pressures. - GDP growth is expected to slow in 2023, while inflation will remain elevated in the near term. - Risks to growth are broadly balanced, while upside risks dominate inflation. ### Fiscal policy — near term - Near-term fiscal policy should support disinflation, given persistently elevated inflation. - There is uncertainty regarding the contractionary effects assumed in the fiscal plan, while positive output gaps and high inflation are expected in the near term. - As insurance, authorities should consider keeping tight spending control and saving any revenue above budget forecasts aiming to improve the structural balance by ½ percentage points of GDP. - If downside risks to growth materialize and inflation eases, automatic stabilizers should be allowed to operate fully. ### Fiscal policy — medium term - Medium-term fiscal policy should be recalibrated as needed to adhere to the fiscal rules. - The structural balance will weaken to a deficit over the medium term mainly due to defense and demographic-related spending. - Authorities’ forward-looking efforts to contain the level of the structural deficit within 0.5 percent of GDP set for 2030 by deploying supply-side measures are commendable. - If fiscal trends suggest the risk of breaching the structural deficit limit (one percent of GDP), authorities should stand ready to recalibrate medium-term fiscal policy. - Any changes to the indexation of statutory retirement age to life expectancy should safeguard long-term fiscal sustainability. ### Financial system and macroprudential recommendations - The financial system remains sound, but rising risks warrant continued vigilance and close monitoring. - Authorities should closely monitor banks’ liquidity risk management and ensure that their impairment charges are continuously updated as economic prospects change. - Commercial real estate (CRE) risks should continue to be closely watched, and further efforts are needed to close data gaps. - Considerations include increasing risk weights on CRE exposures or introducing a sectoral systemic risk buffer. - Supervisor’s initiative to develop a pilot stress test for pension and insurance companies is welcome. - Given the increased risk of cyberattacks on critical infrastructure and institutions, efforts to monitor cyber security risks and strengthen resilience against cyberattacks should continue. - Authorities should consider tightening macroprudential policies to target pockets of vulnerability: - The increase of countercyclical capital buffer was appropriate. - Tightening borrower-based macroprudential measures should be considered to contain riskier mortgages, especially variable-rate mortgages with deferred amortization. - Once house prices and inflation stabilize, authorities are encouraged to review the high tax deductibility of mortgage interest expense and complex rental market regulations from the financial stability perspective. - Government’s plan to link property taxes to market valuations starting in January 2024 is welcome. - Authorities are encouraged to consider reforming the institutional setting of financial sector policy making in line with the 2020 Financial Sector Assessment Program. ### AML/CFT and data/technology use - Denmark is exposed to money laundering and terrorist financing (ML/TF) threats. - Progress has been made in strengthening the anti-money laundering/combatting the financing of terrorism (AML/CFT) framework. - Authorities should continue efforts to increase the use of cross-border data and technological solutions in the assessment of ML/TF risks. ### Labor market reform suggestions (staff view) - Canceling a public holiday will help increase annual hours worked; proposed personal income tax reform will help improve work incentives; planned reforms to early retirement schemes aim to increase employment. - Additional measures consistent with Denmark’s flexicurity model to explore: - (i) Reviewing the structure of marginal effective tax rates, including benefits, to minimize disincentives to work and earn more, especially for lower-income households. - (ii) Continuing efforts to increase employment rates of immigrants. - (iii) Enhancing education outcomes of students with immigrant backgrounds. ### Climate policy recommendation (staff) - Further measures are needed to achieve Denmark’s ambitious climate goals. - In addition to strengthening carbon pricing (Green Tax Reform), policy should consider complementary fiscal incentives at the sectoral level, including feebates in agriculture. *Source: IMF staff appraisal and authorities’ discussions as presented in the provided content.* ### 52. It is recommended that the next Article IV consultation be held in the standard ### 1dnkea2023001 - 52. It is recommended that the next Article IV consultation be held in the standard 12-month cycle. ### Recommendation - It is recommended that the next Article IV consultation be held in the standard 12-month cycle. ### Context and Well-Being - Measures indicate Danes rank among the happiest people in the world: Happiness Score, 2020-22 (Index) shown for peer countries (e.g., FIN, DNK, ISL, ... USA) with index range illustrated between 6.2 and 8.0 in the figure. - Inequality is low by international standards: Gini Coefficients (percent of disposable income) plotted for multiple countries. - Gas and electricity matter less for Danish production: Electricity and Gas Usage (Percent share of Gross Output, 2018) places DNK relatively low. - Public debt remained one of the lowest in the region: General Government Gross Debt, 2022 (Percent of GDP) shown with DNK among lower values. - The investment rate continued to increase: Total Investment (Percent of GDP) time series 2001–2022 with EU peers noted. ### Recent Developments (Growth, Demand, Sentiment) - Real GDP growth moderated in 2022: Denmark: GDP and GNI (Percent change, year over year) series show moderation. - Weak private consumption: Household Private Consumption (Percent change, year over year; percentage contribution) shows contraction in goods consumption. - Household savings increased: Gross Household and NPISH Saving Rate (4-quarter moving average; percent) showed an increase. - Exports continued to grow fast: Exports and Imports of Goods and Services (Percent change, year over year) with exports outpacing imports at times. - Industrial production rose: Industrial Production (Index, 2015=100) increased through early 2023. - Confidence indicators are negative: Business and Consumer Survey (Percent balance) shows industrial, consumer, and services confidence in negative territory. ### Labor Market Developments - Employment growth moderated in 2022–2023: Employment Growth (Percent change, year over year; SA) plotted by sector (Total, Construction, Services). - Employment and participation rates remained high: Labor Market Rates (Percent of working age (15-64 years old) population; SA) with values around the high 60s to mid 70s. - Unemployment at lowest range since late 2000s: Unemployment Rates (Percent of labor force; SA) comparisons including registry and survey measures. - Heterogeneity in unemployment: Unemployment Rates by Different Groups (Percent of each group's labor force; 4-quarter moving average) show higher rates for Youth, Low-skilled, and Foreign-born. - Vacancies started falling but remained high: Job Vacancies by Industry (Number) showed declines from prior peaks. - Compensation per employee continued to grow but slower than inflation: Unemployment Rate and Compensation per Employee (Percent; percent change, year over year). ### Financial Soundness Indicators - Risk-weighted capital ratios well above regulatory requirements: Capital Adequacy Ratios (Percent) consistently high across 2011–2022. - Nonperforming loans continued to fall: Nonperforming Loans (Percent) show downward trend. - Profitability dropped in 2022, partly reflecting Danske Bank’s anti-money laundering settlement costs: Return on equity and ROA trends downward in 2022. - Liquid assets ratios decreased slightly: Liquid Assets Indicators (Percent) edged down in 2022. - Net FX open positions decreased: Banks Exposure to FX (Percent of total assets) and Net open position in FX to capital declined. - Loan-to-deposit ratio fell with decline in loans to households: Loans and Deposits Growth (Percent change, year over year) and Loan to deposits ratio (rhs) show declines. ### Housing Market and Credit - Nonfinancial private sector credit increased moderately overall, while household credit declined sharply in 2022: Credit Growth (Percent change, year over year) shows NFCs vs Households. - House prices fell more than 3 percent in 2022:H2: Average Mortgage Rates and House Prices chart indicates house price declines and mortgage rate movements. - Denmark has the world’s largest mortgage covered bond market: Mortgage Covered Bond Markets (Outstanding amount, 2021; percent of GDP) ranks DNK highest in the figure. - Major investors in covered bonds include credit institutions, insurance, and pension funds: Ownership Shares of Danish Mortgage Bonds (Percent). - Household indebtedness is high compared to other advanced economies: Household Debt as Percent of Net Disposable Income (2022 or latest) places DNK among the highest. - Households hold large financial assets: Financial Assets (Percent of gross disposable income; 2021) shows substantial holdings in pensions and insurance, equity and mutual fund shares, and currency/deposits. ### Pension and Insurance Sector Developments - Pension funds experienced a volatile market in 2022: Pension Fund Performance (Return on investments; DKK billions) shows large swings Jan-20 to Mar-23. - Pension and insurance companies scaled down geographical exposures: Insurance and Pension Fund Foreign Exposure Share (Percent) and Insurance and Pension Fund Foreign Exposures (Percent; 2023 March) show concentration. - Exposure to US markets accounts for over 40 percent of foreign exposures: Insurance and Pension Fund Foreign Exposures (Percent; 2023 March) lists North/Central America share at 42.9. - Low-rate environment pushed funds into alternative investments: Asset Composition shows rising share of Alternatives and Investment fund shares over time. - Insurance firms increased market-rate products, raising investment in equities: Market Rate Product Share of Insurance Provisions (Percent) and Investment by Insurance and Pension Companies (Percent) show increased equities investment. ### Key Quantitative Projections and Indicators (Table 1 highlights, 2020–28) - Real GDP: 2020 -2.0; 2021 4.9; 2022 3.8; 2023 1.3; 2024 1.4; 2025 1.2; 2026 1.3; 2027 1.3; 2028 1.3 (change in percent). - Gross national saving (percent of GDP): 2020 30.5; 2021 32.0; 2022 37.7; 2023 34.4; 2024 33.2; 2025 32.9; 2026 32.7; 2027 32.6; 2028 32.4. - Gross domestic investment (percent of GDP): 2020 22.7; 2021 23.0; 2022 24.6; 2023 25.3; 2024 25.4; 2025 25.2; 2026 25.1; 2027 25.0; 2028 24.8. - Potential output (percent): 2020 1.8; 2021 1.9; 2022 2.0; 2023 1.9; 2024 1.8; 2025 1.7; 2026 1.5; 2027 1.4; 2028 1.3. - Output gap (percent of potential output): 2020 -2.7; 2021 0.1; 2022 1.9; 2023 1.3; 2024 0.9; 2025 0.4; 2026 0.2; 2027 0.0; 2028 0.0. - Harmonized unemployment rate (percent): 2020 5.6; 2021 5.1; 2022 4.5; 2023 5.0; 2024 5.0; 2025 5.0; 2026 5.0; 2027 5.0; 2028 5.0. - CPI (year average): 2020 0.3; 2021 1.9; 2022 8.5; 2023 4.1; 2024 2.8; 2025 2.1; 2026 2.1; 2027 2.0; 2028 2.0. - Total revenues (percent of GDP): 2020 53.8; 2021 54.4; 2022 48.6; 2023 49.5; 2024 49.3; 2025 49.0; 2026 49.0; 2027 49.2; 2028 49.2. - Total expenditures (percent of GDP): 2020 53.5; 2021 50.8; 2022 45.3; 2023 47.5; 2024 48.4; 2025 48.7; 2026 49.0; 2027 49.2; 2028 49.4. - Overall balance (percent of GDP): 2020 0.2; 2021 3.6; 2022 3.3; 2023 2.0; 2024 0.9; 2025 0.3; 2026 0.0; 2027 -0.1; 2028 -0.1. - Primary balance (percent of GDP): 2020 -0.1; 2021 3.2; 2022 3.1; 2023 1.5; 2024 0.4; 2025 -0.2; 2026 -0.4; 2027 -0.5; 2028 -0.6. - Gross debt (percent of GDP): 2020 42.2; 2021 36.7; 2022 30.1; 2023 30.5; 2024 30.3; 2025 30.1; 2026 30.2; 2027 30.3; 2028 30.4. - Current account (percent of GDP): 2020 7.9; 2021 9.0; 2022 13.1; 2023 9.1; 2024 7.8; 2025 7.7; 2026 7.6; 2027 7.6; 2028 7.6. ### Fiscal and Financial Tables (select highlights) - Table 2 (GFSM 2001, Billions of DKK): Total revenues in 2020 1,249.1; 2021 1,363.2; 2022 1,360.0; 2023 proj. 1,402.9. Total expenditures in 2020 1,244.1; 2021 1,272.2; 2022 1,267.1; 2023 proj. 1,346.6. Net Lending/Borrowing 2020 5.0; 2021 91.0; 2022 93.0; 2023 proj. 56.3 (Billions of DKK). - Table 3 (GFSM 2001, Percent of GDP): Total revenues 2020 53.8; 2021 54.4; 2022 48.6; 2023 49.5. Net Lending/Borrowing (percent of GDP) 2020 0.2; 2021 3.6; 2022 3.3; 2023 2.0. - Table 5 (Financial Soundness Indicators, Percent, 2013–2022): Regulatory capital to risk-weighted assets series with 2022 value 24.5 (Regulatory capital to risk-weighted assets), Core / common equity tier 1 capital to risk-weighted assets 2022 20.4, Nonperforming loans to total gross loans (new IFRS9) 2022 2.4, ROA (aggregated data) 2022 0.3, ROE (aggregated data) 2022 4.0, Liquid assets to total assets 2022 34.4. - Table 6 (Balance of Payments, Billions of DKK and Percent of GDP): Current account 2020 183.1 (7.9 percent of GDP); 2021 226.2 (9.0 percent); 2022 367.2 (13.1 percent). Merchandise exports f.o.b. 2022 1,045.2 (37.4 percent of GDP); Merchandise imports f.o.b. 2022 953.9 (34.1 percent). - Table 7 (International Investment Position, Billions of DKK and Percent of GDP): Net Investment Position 2022 assets 9,305; liabilities 6,986; net 2,319 (Percent of GDP 2022 64.1). *Source: IMF staff summary of material in 1dnkea2023001.* ### Annex I. Implementation of Past IMF Policy Recommendations ### Annex I. Implementation of Past IMF Policy Recommendations ### Fiscal Policy: 2022 Article IV Advice and Actions - Recommendation: Fiscal policy should be tightened in 2022. Additional compensation for higher energy prices must be well targeted and fiscally neutral. - Action: Fiscal policy was tightened in 2022. Additional energy-related measures were fully funded (fiscally neutral), but some were not well targeted. - Recommendation: A broadly neutral fiscal stance in the medium term would help protect buffers, while relaxation of the structural deficit limit would provide fiscal flexibility. - Action: New permanent spending priorities—notably, defense—are planned to be funded by fiscal savings from supply-side measures. The government decided to lower the structural deficit limit to 1 percent of GDP in March 2022. - Recommendation: A comprehensive climate mitigation strategy—enhanced carbon prices reinforced by fiscal incentives across sectors, including the use of feebates—is required to meet Denmark’s emission targets. - Action: Carbon pricing in the industrial sector (Phase 2 of the Green Tax Reform) is envisaged to start in 2025. The authorities do not support feebates, as there are other policies in place to incentivize emission reduction. ### Financial Sector: 2022 Article IV Advice and Actions - Recommendation: Tighten macroprudential tools: - i) subject new mortgages to highly-leveraged households to minimum down-payment or mandatory amortization; - ii) extend the “growth area guidelines” across Denmark; - iii) consider debt-service-to-income caps. - Action: There are no plans to implement these measures for now. - Recommendation: Mortgage interest deductibility should be reduced, and legislation should include borrower-based tools in the policy toolkit. - Action: There are no plans to implement these measures. - Recommendation: Review the efficacy of institutional arrangements where independent authorities are provided with a legal mandate to implement macroprudential policy. - Action: There are no plans to implement these measures. - Recommendation: Intensify AML/CFT on-site inspections of higher-risk financial institutions and strengthen the AML/CFT regulatory framework for virtual asset providers. - Action: The authorities have made progress in enhancing the risk-based supervision of banks and the supervisory assessment of ML/TF risks. ### Structural Reforms: 2022 Article IV Advice and Actions - Recommendation: Reduce marginal and participation tax rates to promote labor supply. - Action: The authorities are planning to reduce the marginal tax rate except for very high-income earners and increase the earned income credit. - Recommendation: Maintain indexation of the retirement age to life expectancy. Review the adequacy of routes to early retirement. - Action: The indexation of the retirement age to life expectancy has been maintained. The government has initiated a review of the early retirement scheme. - Recommendation: Permanently lower the threshold under the pay-limit scheme, increase the job search period for international students, and expand the Fast-Track Scheme for foreign workers by increasing the number of eligible firms. - Action: Implemented. - Recommendation: Further improve immigrant integration by ensuring that best practices across municipalities are implemented more broadly. - Action: Ongoing. *Source: Annex I. Implementation of Past IMF Policy Recommendations — Denmark (2022 Article IV section).* ### Annex II. External Sector Assessment ### Overall assessment and current account dynamics - Overall Assessment: The external position in 2022 is assessed as stronger than the level implied by medium-term fundamentals and desirable policies. - 2022 Current Account (CA) outcome: - CA surplus surged to 13.1 percent of GDP in 2022 from 9 percent in 2021. - Services balance surplus widened by 4.3 percent of GDP; goods balance narrowed by 0.7 percent of GDP. - The CA surplus is expected to decline to around 7.5 percent of GDP over the medium term. - Potential Policy Responses: - Structural policies aimed at raising investment, including climate- and digital-related, would help reduce the surplus. ### Foreign asset and liability position - Background: NIIP is estimated to have decreased by 13 percentage points to reach 64.1 percent of GDP in 2022, mainly driven by declining portfolio equity and lower FDI. - Assessment: - Gross liabilities decreased by 45 percentage points of GDP to 250 percent of GDP in 2022; half is gross external debt (125 percent of GDP). - Financial institutions hold the bulk of net foreign assets (116 percent of GDP): Insurance/Pension Funds (58 percent of GDP) and Investment Funds (49 percent of GDP). - Mortgage institutions are net external debtors (22 percent of GDP). - Households are external lenders in net assets (8 percent of GDP). - Nonfinancial corporations: -54 percent of GDP (net external debtors). - Government: -6 percent of GDP (net external debtors). - 2022 (% GDP) key positions: - NIIP: 64.1 - Gross Assets: 313.8 - Debt Assets: 100.9 - Gross Liab.: 249.7 - Debt Liab.: 99.5 ### Current account details and adjustments - Background: - CA surplus rose by 4.1 percentage points to 13.1 percent of GDP in 2022, driven mainly by a surge in international freight rates. - Sea transport services account for about half of Denmark’s service exports and about a third of service imports. - Private and public S-I balances in 2022 were 9.6 and 3.5 percent of GDP, respectively. - The impact of the surge in international freight rates on the current account is estimated at about 6.6 percent of GDP in 2022 and is assessed to be temporary. - Medium term: CA projected to stabilize around 7.5 percent of GDP, close to its long-term average. - Assessment: - Cyclically adjusted CA is estimated at 14.3 percent of GDP in 2022. - Transport price shock impact: 6.6 percent (negative adjustment). - Adjusted CA is 7.7 percent of GDP, 2.9 percentage points above the cyclically adjusted EBA norm of 4.8 percent of GDP. - EBA model identifies policy gaps at 2.1 percent of GDP, of which domestic policy gaps are 1.3 percent of GDP. - Measurement error analysis: CA may have been overstated by 0.6 to 1.4 percent of GDP over the last 5 years; EBA cross country estimated measurement bias for Denmark is 0.7 percent of GDP. - 2022 (% GDP) summary: - CA: 13.1 - Cycl. Adj. CA: 14.3 - EBA Norm: 4.8 - EBA Gap: 9.5 - Transport Price Adj.: −6.6 - Other Adj.: — - Staff Gap: 2.9 ### Real exchange rate (REER) - Background: Exchange rate arrangement is a conventional pegged arrangement; Denmark’s currency is pegged to the euro. - 2022 movements: The Danish krone depreciated by 2.6 percent in real effective terms (ULC based) in 2022. - Assessment: - Based on the CA gap model, staff estimates a REER undervaluation of −20 percent in 2022 (applying an estimated elasticity of -0.46). - The REER index and level models suggest an overvaluation of 15.5 percent and 11.4 percent, respectively, in 2022. - REER index based on ULC in 2022 was higher than its 27-year average by 2.2 percent (indicating an overvaluation). - REER CPI-based index pointed to an undervaluation of 2.3 percent. ### Capital and financial accounts, FX intervention and reserves - Capital and financial account balance in 2022: 9.9 percent of GDP (compared to -12.2 percent in 2021). - Drivers: financial derivatives (3.2 percent of GDP), portfolio investment (1 percent of GDP), other investments (5.5 percent of GDP); FDI flows near zero (down from 6 percent of GDP surplus in 2021). - International reserves: increased by 1.9 percent of GDP in 2022, following a 3.7 percentage points increase in 2021. - Assessment: Large fluctuations in capital flows are inherent to countries with a large financial sector; volatility is a potential vulnerability but mitigated by sound financial regulation and supervision. Danish banks remain highly capitalized and liquid. - FX Intervention and reserves level: - In response to large capital inflows, DN purchased an equivalent of EUR 7.4 billion in 2022. - Despite increasing by DKK52 billion in 2022, foreign currency reserves declined in USD terms by 4.3 billion to US$81.4 billion in December 2022. - Reserves were equivalent to 45.1 percent of the short-term external debt, about 22 percent of GDP, and 4.5 months of imports. *Source: Annex II. External Sector Assessment — Denmark (2022).* ### Annex III. Risk Assessment Matrix (RAM) ### Key sources of risks, likelihood, impacts, and policy responses - Global: Intensification of regional conflicts (High likelihood; Medium impact). - Impact: Weakened confidence, lower external demand, supply disruptions, higher inflationary pressures. - Policy response: Step up structural reforms and let flexicurity operate to facilitate reallocation from sectors exposed to shocks and regional labor mobility. - Global: Abrupt global slowdown or recession (Medium likelihood; Medium impact). - Impact: Slowdown in trading partners’ growth, reduced net exports and investment, bankruptcies, weaker consumption, pressure on bank capital adequacy. - Policy response: Allow automatic stabilizers to operate; use fiscal policy space to provide targeted support to vulnerable households and businesses but offset by other measures to avoid stimulating the economy if wage and inflation pressures persist. - Global: Monetary policy miscalibration (Medium likelihood; Medium impact). - Impact: Wage-price spiral, need for aggressive tightening, adverse spillovers to debt servicing and liquidity. - Policy response: Stand ready to tighten fiscal policy while protecting the vulnerable; deploy prudential tools to mitigate financial stability risks. - Global: Deepening geo-economic fragmentation (High likelihood; High impact). - Impact: Higher input costs, supply disruptions, reconfiguration of trade and FDI, lower potential growth. - Policy response: In collaboration with partners, continue to support global cooperation and multilateralism; step up envisaged structural reforms. - Global: Cyberthreats (Medium likelihood; Medium impact). - Impact: Disrupted economic activity, weaker confidence, capital outflows. - Policy response: Promote awareness and preparedness; continue to invest in cyber defense. - Domestic: Systemic financial instability (Medium likelihood; High impact). - Impact: Marked reversal of real estate prices would adversely affect financial conditions given high household debt and rising share of risky mortgages; financial sector asset quality deterioration and curtailed lending. - Policy response: Continue vigilant monitoring of risks (households’ creditworthiness, cross-border macrofinancial exposures, liquidity); macroprudential policies should target known pockets of vulnerability. *Source: Annex III. Risk Assessment Matrix — Denmark.* ### Annex IV. Debt Sustainability Analysis ### Summary assessment and key messages - Overall risk of sovereign stress: Low. - Near term: Low; Medium term: Low; Long term: Low. - Commentary: - Denmark is at a low overall risk of sovereign stress and debt is sustainable. - Fiscal balances remained in surplus in recent years and would weaken to a small deficit over the medium term, broadly consistent with the MTO set for 2030. - The medium-term deficit will increase gross debt, but it will remain at a low level. - Liquidity risks as analyzed by the GFN Financeability Module are low. - Long-term fiscal risks are assessed as low, though demographic-related expenditures will increase in the long term. The indexation of statutory retirement age to life expectancy is a mitigating factor. - Policy recommendation: Maintain an adequate indexation of statutory retirement age to life expectancy; ensure adequate labor supply for long-term fiscal sustainability. *Source: Annex IV. Debt Sustainability Analysis — Denmark.* ### Annex IV. Figure 2. Denmark: Debt Coverage and Disclosures ### Annex IV. Figure 2. Denmark: Debt Coverage and Disclosures ### Debt coverage in the DSA - Chosen coverage: 1/CGGGNF PSCPSOther - 1a. If central government, are non-central government entities insignificant? n.a. ### Subsectors included in the chosen coverage in (1) - Subsectors captured in the baseline — Inclusion - 1 Budgetary central government: Yes - 2 Extra budgetary funds (EBFs): Yes - 3 Social security funds (SSFs): Yes - 4 State governments: No - 5 Local governments: Yes - 6 Public nonfinancial corporations: No - 7 Central bank: Yes - 8 Other public financial corporations: No - Commentary: Denmark does not have state governments. ### Instrument coverage - (No instrument coverage details provided in the source content.) ### Accounting principles - (No accounting principles details provided in the source content.) ### Debt consolidation across sectors — Holder x Issuer summary (percent of total reported) Color code legend in source: █ chosen coverage █ Missing from recommended coverage █ Not applicable - Table rows are Holder; columns are Issuer (values as reported) - 1 Budget. central govt: 10.0 12.2 0.4 0.0 4.5 0.0 0.0 0.0 17.1 - 2 Extra-budget. funds: 31.4 11.2 0.0 0.0 0.2 0.0 0.0 0.0 31.7 - 3 Social security funds: 0.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.4 - 4 State govt.: 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 - 5 Local govt: 5.8 0.0 0.0 0.0 0.3 0.0 0.0 0.0 5.8 - 6 Nonfin pub. corp.: 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 - 7 Central bank: 163.8 8.5 0.0 0.0 0.0 0.0 0.0 0.0 172.3 - 8 Oth. pub. fin. corp: 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 - Total: 201.5 20.7 0.4 0.0 4.7 0.0 0.0 0.0 227.4 - Labels and abbreviations in source: - NFPS - GG: expected - CG - CPS ### Reporting on intra-government debt holdings / Basis of recording / Valuation of debt stock (as reported) - Reporting categories shown in source (no numeric detail provided for these fields): - Reporting on Intra-government Debt Holdings: Non-consolidated, CPS, NFPS, GG: expected, CG, Non-cash basis 4/, Cash basis - Valuation approaches referenced: Nominal value 5/, Face value 6/, Market value 7/ - Debt instrument categories referenced: Debt securities, Loans, IPSGSs 3/, Currency & deposits, Other accounts payable 2/ - Notes from source: - 1/ CG=Central government; GG=General government; NFPS=Nonfinancial public sector; PS=Public sector. - 2/ Stock of arrears could be used as a proxy in the absence of accrual data on other accounts payable. - 3/ Insurance, Pension, and Standardized Guarantee Schemes, typically including government employee pension liabilities. - 4/ Includes accrual recording, commitment basis, due for payment, etc. - 5/ Nominal value at any moment in time is the amount the debtor owes to the creditor. It reflects the value of the instrument at creation and subsequent economic flows (such as transactions, exchange rate, and other valuation changes other than market price changes, and other volume changes). - 6/ The face value of a debt instrument is the undiscounted amount of principal to be paid at (or before) maturity. - 7/ Market value of debt instruments is the value as if they were acquired in market transactions on the balance sheet reporting date (reference date). Only traded debt securities have observed market values. ### Commentary and sources - Commentary (as reported in source): Denmark does not have state governments. - Sources: Danish Authorities; and IMF staff calculations. *Source: Annex IV. Figure 2. Denmark: Debt Coverage and Disclosures (from the provided IMF staff report content).* ### 762.824 per 100 euro and DKr 729.252 per 100 euro. ### 1dnkea2023001 - 762.824 per 100 euro and DKr 729.252 per 100 euro. ### Exchange system and Article VIII obligations - Official exchange rates: 762.824 per 100 euro and DKr 729.252 per 100 euro. - Denmark has accepted the obligations under Article VIII, Sections 2(a), 3, and 4. - Denmark maintains an exchange system free of multiple currency practices and restrictions on the making of payments and transfers for current international transactions, apart from those imposed solely for the preservation of national or international security, as notified to the Fund by the National Bank of Denmark in accordance with Executive Board Decision No. 144-(52/51). ### Article IV consultation and outreach - Article IV Consultation: The last Article IV consultation was concluded by the Executive Board on June 12, 2022. - Publication: The staff report (IMF Country Report No. 22/169) was published with Press Release No. 22/197 (June 16, 2022). - Outreach: The team met with representatives of the private sector, academics, labor and financial institutions. - Press conference: None. - Publication: The staff report will be published. - Technical Assistance: None. - Resident Representative: None. ### Statistical issues — data provision and standards - Data Provision is adequate for surveillance. - The country has a full range of statistical publications, many of which are on the internet. - The quality and timeliness of the economic database are generally very good. - The country subscribes to the Fund’s Special Data Dissemination Standard Plus. - Metadata are posted on the Dissemination Standards Bulletin Board. ### National Accounts - Denmark adopted the European System of Accounts 2010 (ESA 2010) in September 2014. - A revision of data and methods accompanied the transition, improving the quality of the statistics. - Historical data were revised going back to the initial year of 1966. ### Government Finance Statistics - Starting from September 2014, government finance statistics data is based on the ESA 2010 methodology. - Revisions include general government deficit and debt levels from 1995 onwards. - Revised data series was published in October 2014. ### External Statistics - Starting in 2014, external sector statistics are compiled according to the Balance of Payments and International Investment Position Manual, sixth edition (BPM6). - Compilation is in accordance with legal requirements of the ECB and Eurostat. ### Monetary and Financial Statistics - Monetary data reported for International Financial Statistics are based on the European Central Bank’s (ECB) framework for collecting, compiling, and reporting monetary data. - Data are reported to STA through the ECB and largely accords to the Monetary and Financial Statistics Manual and Compilation Guide (MFSMCG). - Data for Other Financial Corporations are currently not available. - Danmarks Nationalbank reports some data and indicators of the Financial Access Survey (FAS), including the two indicators adopted by the UN to monitor Target 8.10 of the Sustainable Development Goals (SDGs). ### Financial Sector Surveillance - Danmarks Nationalbank reports: - All of the 12 core Financial Soundness Indicators (FSIs) and 12 of the 13 encouraged FSIs for deposit takers. - Two FSIs for OFCs. - One FSI for households. - 4 FSIs on real estate markets. - Reporting frequency for these FSIs: quarterly, for posting on the IMF’s FSI website. ### Common Indicators Required for Surveillance (As of May 18, 2023) - Exchange Rates: Date of latest observation 5/18; Date received 5/18; Frequency of Data D; Frequency of Reporting D; Frequency of publication D. - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of latest observation 2023:M3; Date received 4/28; Frequency of Data M; Frequency of Reporting M; Frequency of publication M. - Reserve/Base Money: Date of latest observation 2023:M3; Date received 5/2; Frequency of Data M; Frequency of Reporting M; Frequency of publication M. - Broad Money: Date of latest observation 2023:M3; Date received 5/2; Frequency of Data M; Frequency of Reporting M; Frequency of publication M. - Central Bank Balance Sheet: Date of latest observation 2023:M4; Date received 5/2; Frequency of Data M; Frequency of Reporting M; Frequency of publication M. - Consolidated Balance Sheet of the Banking System: Date of latest observation 2023:M3; Date received 5/2; Frequency of Data M; Frequency of Reporting M; Frequency of publication M. - Interest Rates: Date of latest observation 5/18; Date received 5/18; Frequency of Data D; Frequency of Reporting D; Frequency of publication D. - Consumer Price Index: Date of latest observation 2023:M4; Date received 5/10; Frequency of Data M; Frequency of Reporting M; Frequency of publication M. - Revenue, Expenditure, Balance and Composition of Financing — General Government: Date of latest observation 2022; Date received 3/24; Frequency of Data A; Frequency of Reporting A; Frequency of publication A. - Revenue, Expenditure, Balance, and Composition of Financing — Central Government: Date of latest observation 2023: M3; Date received 3/24; Frequency of Data Q; Frequency of Reporting Q; Frequency of publication Q. - Stocks of Central Government and Central Government-Guaranteed Debt: Date of latest observation 2023: M3; Date received 4/27; Frequency of Data M; Frequency of Reporting M; Frequency of publication M. - External Current Account Balance: Date of latest observation 2023: M3; Date received 5/9; Frequency of Data M; Frequency of Reporting M; Frequency of publication M. - Exports and Imports of Goods and Services: Date of latest observation 2023: M3; Date received 5/9; Frequency of Data M; Frequency of Reporting M; Frequency of publication M. - GDP/GNP: Date of latest observation 2023:Q1; Date received 5/15; Frequency of Data Q; Frequency of Reporting Q; Frequency of publication Q. - Gross External Debt: Date of latest observation 2022:Q2; Date received 2/17; Frequency of Data Q; Frequency of Reporting Q; Frequency of publication Q. - International Investment Position: Date of latest observation 2022:Q4; Date received 3/31; Frequency of Data Q; Frequency of Reporting Q; Frequency of publication Q. *Source: IMF staff report content as provided in the source document.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1dnkea2023001.pdf_