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Denmark's Foreign Debt

In 1997 Denmark's foreign debt rose by kr. 15 billion to kr. 268 billion, cf. Table 3. The current-account surplus is estimated at kr. 6 billion, and value adjustment of the debt has been calculated at net kr. 21 billion. The value adjustment particularly concerns non-residents' substantial holdings of krone-denominated bonds and higher capital gains on non-residents' holdings of Danish shares than on residents' holdings of foreign shares. At the end of 1997 the foreign debt was equivalent to 24 per cent of GDP.

The foreign debt was estimated at kr. 261 billion at the end of 1996. In 1997 the Nationalbank conducted a questionnaire survey concerning residents' debt to and claims on non-residents at end-1996. As a result of the survey, the revision of the current-account surplus in 1996 and data from supplementary sources, Denmark's foreign debt at end-1996 has now been compiled at kr. 253 billion, or kr. 8 billion lower than the preliminary statistics show.

The compilation of the foreign debt at the end of 1997 is based on the  balance at end-1996, from which the current-account surplus is deducted, and adjustment is made for recorded and calculated value adjustments of the assets and liabilities which make up Denmark's total external balance.

The central government's net foreign debt at the end of 1997 has been compiled at kr. 385 billion, which is kr. 30 billion more than at the end of

Table 3 Denmark's foreign debt

1996. The debt comprises non-residents' holdings of government bonds issued in Denmark and bonds, etc. issued abroad. In addition to non-residents' purchase of government securities issued in Denmark, the increase in the central government's foreign debt is due to the appreciation of non-residents' holdings by kr. 14 billion in 1997 as a consequence of the decline in interest rates. The net assets of the rest of the government sector, including the Labour Market Supplementary Pension Fund (ATP), rose by kr. 9 billion.

The Nationalbank's foreign-exchange reserve increased by kr. 45 billion, of which value adjustments accounted for kr. 1.5 billion.

During the last two years residents' holdings of foreign shares and non-residents' holdings of Danish shares have increased two to three times, cf. Table 35 of the Appendix of Tables. Insurance companies, pension funds and ATP own approximately half of residents' total holdings of foreign shares, amounting to kr. 150 billion at end-1997. The holdings of private individuals accounted for the largest increase, albeit from a low level. The appreciation due to capital gains is estimated at kr. 33 billion in 1997.

At the end of 1997 non-residents' holdings of Danish shares amounted to kr. 130 billion. Capital gains on non-residents' holdings of Danish shares are estimated at kr. 44 billion. The value adjustments on shares thus represent a net increase of kr. 11 billion in the foreign debt, cf. Table 4.

The banks' net assets decreased by kr. 49 billion in 1997, of which value adjustments accounted for kr. 9 billion net. They comprise non-residents' gains of kr. 13 billion on shares issued by the banks and the banks' gains,

Table 4 Changes in securities portfolios

etc. of kr. 4 billion. The remaining kr. 40 billion can be attributed to non-residents' net purchases of shares in Danish banks and a decrease in the banks' external position by kr. 31 billion.

The rest of the private sector reduced the net debt by kr. 10 billion in 1997. This is related to substantial purchases of foreign securities, primarily shares, and to Danish direct investment abroad in excess of foreign direct investment in Denmark.

Economic Prospects

The decline in unemployment seen in recent years continued in 1997. Unemployment is low, while employment is high and still rising. This positive development has also brought Denmark closer to full capacity utilization during 1997. The external balance has deteriorated significantly in 1997 and the current-account surplus is now very small. This has imposed more stringent demands on economic policy.

Turning to 1998, the effects of the crisis in Southeast Asia are uncertain. The greatest elements of risk relate to the weakening of the Japanese economy, the extent of related loan losses in the financial sector of the OECD area and the risk of the foreign-exchange unrest spreading to countries outside Southeast Asia. The OECD estimates that via foreign trade, including less favourable market opportunities, the crisis in Southeast Asia will entail a reduction in GDP growth for the EU of approximately 1/2 per cent in 1998. However, the drop in long-term interest rates as a consequence of greater demand for bonds rather than shares can be expected to curtail the reduction in growth significantly. In the light of the crisis in Southeast Asia market expectations of monetary-policy tightenings in the OECD countries have also been reduced. Like several other European countries Denmark's direct trade with Southeast Asia is moderate, but the Danish economy is also influenced indirectly via the impact on the other trading-partner countries.

Both the OECD and the European Commission expect domestic demand in the EU to increase by just under 3 per cent in 1998, against just over 2 per cent in 1997, as the international economic upswing gains ground in continental Europe.

For some years domestic demand in Denmark has increased more strongly than abroad, cf. Chart 9. In 1998 the consumption ratio is expected to continue to increase, against the background of high and rising property prices and the decline in long-term interest rates, which can also make it advantageous to remortgage properties at lower interest rates. However, the increase in domestic demand will probably be lower than in

1997. This brings Denmark more in line with abroad and reduces the pressure on the balance of payments. However, the capacity pressure on the labour market and the capital stock may increase at an untenable rate as a consequence of increased demand from abroad and the continuing upturn in domestic demand. Increasing capacity utilization stimulates the propensity to import, while the propensity to export subsides. This causes prospects for the balance of payments to deteriorate, while the high capacity utilization entails a risk of further deterioration in competitiveness. So there is a considerable risk of a current-account deficit.

For a number of years the foreign debt has been so substantial that Denmark has had to devote a considerable proportion of output to interest payments on the foreign debt and has also been vulnerable in the event of unrest on the capital markets. In recent years the debt has been reduced, but still accounts for around 25 per cent of GDP. The shift in the age composition of the population means that there will be relatively more consumers and relatively fewer producers in the future. For this reason especially it is desirable to eliminate the debt within the foreseeable future. Achieving this will probably require higher private savings. However, the private sector is expected to show a savings deficit again in 1998, and it can be difficult to reverse this development in a situation where the high rate of capacity utilization requires more investment.

In view of the favourable economic development a good surplus on general-government finances is expected in 1998. The fiscal policy adopted for 1998 provides for a tightening in relation to 1997. However, there has been a tendency in previous years for the effects of a tightening to fade out during the year, and especially in the present situation it is important to avoid this. Some of the fiscal-policy measures are temporary and apply only to 1998. In view of the balance of payments and the foreign debt it is important that a tight fiscal stance is realized in 1998 and continued in 1999.