DBRS Confirms Kingdom of Sweden’s Rating at AAA, Stable Trend

DBRS Ratings Limited (DBRS) has confirmed the long-term, foreign and local currency issuer rating of the Kingdom of Sweden at AAA, with Stable trends. DBRS has also confirmed the short-term, foreign and local currency ratings at R-1 (high), with Stable trends.

The confirmation of the Stable trend on all ratings reflects DBRS’s view that the challenges faced by the sovereign are manageable and are being addressed proactively. The ratings could be subject to downward pressure, if domestic or external shocks were to lead to a materially higher debt stock, or if sudden stops of capital inflows and rapidly rising borrowing costs were to impair the sovereign’s access to liquidity.

The AAA ratings primarily reflect Sweden’s strong fiscal record. Public finances have delivered annual primary surpluses of 3.2% on average between 1996 and 2008. The strong fiscal buffers thus accumulated have allowed the government to embark on countercyclical fiscal policy to counteract the headwinds from the financial crisis, with the result that Sweden’s headline deficit averaged only 0.6% of GDP between 2009 to 2013. Moreover, the headline deficit is expected to peak at 2.2% of GDP in 2014, comfortably below the 3.0% Maastricht Treaty threshold, and to gradually move into surplus by 2018.. The government debt is estimated at 40.2% of GDP for 2014, falling to 34.1% of GDP in 2018. In spite of the recent fall of the current minority government, DBRS does not anticipate a material weakening in the commitment to fiscal discipline. As a result, DBRS sees the long-term sustainability of public finances in Sweden as unaffected

Sweden’s ratings also benefit from its solid economic performance that is expected to continue. Over the past decade, Sweden’s output growth was 2.1% on average, well above the OECD average of 1.7% and the European Union average of 1.0%. The above-peers performance was driven by high labour productivity growth, at 1.4% on average, on par with the U.S. and 40% higher than the OECD average. Looking ahead, Sweden’s economic prospects remain sound. Following stronger-than-expected economic growth of 1.6% in 2013, the economy is expected to enjoy a gradually accelerating broad-based recovery, backed by fiscal stimulus and loose monetary conditions. GDP growth is expected to reach 2.1% in 2014 and 2.7% in 2015.

Further sustaining economic growth, the country’s external position improved markedly, with the current account surplus averaging 7% of GDP between 2000 and 2013 and increasing from 4.1% in 2000 to 6.2% in 2013. Sweden’s current account benefited from increased income inflows as a result of the improved external asset position. These inflows were supported by the increasing lending activity of banks abroad, which reached over 78% of GDP in 2013, as well as by the doubling of the central bank’s foreign currency reserves between 2000 and 2013, to 11% of GDP.

Finally, the ratings are supported by a credible institutional framework. The Swedish fiscal policy framework aims at preserving the long-term sustainability of public finances. It includes three fiscal rules, such as a requirement to achieve a surplus equivalent to 1% of GDP in the general government balance over a business cycle. This fiscal framework allows the government to use the fiscal position counter-cyclically to moderate the negative impact of macroeconomic shocks. The financial stability framework has also improved following the establishment of a financial stability council tasked with identifying and addressing risks arising in the financial system.

Managing financial stability risks represent the main challenge for the sovereign. Risks are both domestic and external. Domestically, Swedish households are highly indebted, with liabilities amounting to 171% of income in 2014Q2, as a result of house prices that more than doubled in real terms over the past twenty years. A rise in interest rates, a sharp correction in house prices and/or an adverse macroeconomic development, would affect households' debt servicing capacity and their consumption patterns. It could also have adverse second round effects on the banking sector, by increasing the number of non-performing loans and the cost of market funding.

Preserving a high debt repayment capacity of households is particularly important in the context of Sweden’s large domestic banking sector, which own assets equivalent to approximately 400% of GDP and is highly reliant on wholesale funding sources. Wholesale securities account for approximately half of total bank funding, and 75% of them are denominated in foreign currencies. Therefore, preserving market confidence in Swedish banks remains key to guaranteeing a stable inflow of liquidity into the country’s banks. With regard to this, DBRS notes that banks continue to bolster their resources to withstand a stressed environment. They remain strongly profitable and have increased their capital base. The core equity Tier 1 (CET1) capital ratio under Basel III stood at over 16% in June 2014 at the major four banks. Regulatory changes will also make the system more resilient to shocks, in DBRS’s view. Tighter capital requirements were introduced in September this year by the Financial Supervisory Authority (FSA) with domestic banks now subject to increased regulatory risk-weightings on mortgage loans (25%, compared to 15%). The FSA has also previously introduced measures to curb potential house price overvaluation via limits on loan-to-value ratios and floors on risk weights for banks extending mortgage loans. Furthermore, the FSA has announced that it will introduce an amortization regulation for new mortgage loans in the coming months.

Another challenge for Sweden is that government debt is somewhat exposed to maturity and refinancing risk. At end-2013, government debt had a low average maturity of 6.1 years on the local currency debt and 2.1 years on foreign currency debt, which implies that approximately half of the total debt stock matures by 2017. Foreign currency debt outstanding was 21% of the total in 2013. To counterbalance liquidity risk, Sweden holds FX reserves that, at end-2013, accounted for approximately half of FX debt maturing in 2014 and 14.4% of total FX outstanding liabilities.

All figures are in Swedish kronor (SEK) unless otherwise noted.

The principal applicable methodology is Rating Sovereign Governments, which can be found on the DBRS website under Methodologies. The principal applicable rating policies are Commercial Paper and Short-Term Debt, and Short-Term and Long-Term Rating Relationships, which can be found on our website under Rating Scales.

These can be found on www.dbrs.com at:
http://www.dbrs.com/about/methodologies

The sources of information used for this rating include Ministry of Finance of the Kingdom of Sweden, Sveriges Riksbank, Statistics Sweden, European Commission, Statistical Office of the European Communities, IMF, OECD, BIS, and Haver Analytics. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

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

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com.

This is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period, while reviews are generally resolved within 90 days. DBRS’s outlooks and ratings are under regular surveillance.

For additional information on this rating, please refer to the linking document under Related Research.

For further information on DBRS historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Giacomo Barisone, Senior Vice President.
Initial Rating Date: 17 April 2012
Rating Committee Chair: Roger Lister
Last Rating Date: 13 June 2014

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