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 ratings 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 indicates that risks to the ratings are balanced and reflects DBRS’s views 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 public debt ratio, or if a sustained deterioration in financial market conditions, significantly increasing borrowing costs, were to impair the sovereign’s and the banking sector’s access to market funding.

The AAA ratings primarily reflect Sweden’s strong fiscal record. The government has delivered annual primary surpluses of 2% of GDP on average for over a decade until 2011. While the fiscal position deteriorated since 2009, reflecting the countercyclical fiscal policy adopted in response to the global financial crisis, the headline deficit remained below 2% and the budget is forecast to return to balance by 2018. General government debt has remained moderate and is expected to peak at 44.2% of GDP in 2015. The government sector also enjoys a strong net asset position of about 20% of GDP. Moreover, previous reforms of the pension system imply that the long-term sustainability of public finances in Sweden is preserved.

Sweden also enjoys a structurally strong external position. The current account surplus has averaged 5.5% of GDP for over two decades, at the same time as the country successfully shifted from a goods to a services exporter. The current account is forecast to remain at 5.8% of GDP this year and to narrow only slightly over the medium term, reflecting strengthening domestic demand.

Moreover, Sweden’s ratings benefit from its solid economic performance, which is expected to continue. Over the past decade, Sweden’s output growth was 1.7% on average, above the OECD average of 1.5% and the European Union of 1.0%. The above-peers performance was driven by high labour productivity growth. Looking ahead, Sweden’s economic prospects remain robust. Following stronger-than-expected growth of 2.1% in 2014, real GDP is expected to strengthen to close to 3% in 2015 and 2016, supported by loose monetary conditions and an improving external environment.

Finally, the ratings are supported by a credible institutional and macroeconomic policy framework. The Swedish fiscal policy framework aims at preserving the long-term sustainability of public finances. This fiscal framework comprises a number of fiscal rules and ensures the government maintains the fiscal flexibility to respond to economic downturns or moderate the impact from negative macroeconomic shocks. The Swedish central bank is also committed to its inflation rate target and to keeping monetary policy expansionary to lift inflation towards target. The financial stability framework has improved following the establishment of a financial stability authority tasked with identifying and addressing risks arising in the financial system.

Managing financial stability risks represent the main challenge for the sovereign. Persistently low inflation in Sweden has led the central bank to adopt a negative repo rate and a government bond purchase programme in 2015. However, credit growth is already strong and Swedish households are highly indebted, with debt increasing to 173% of income in 2014Q3, driven by rising house prices, low interest rates and generous tax incentives on mortgage interest payments. A rise in interest rates, a sharp correction in house prices and/or an adverse macroeconomic shock, could affect households' debt servicing capacity and their consumption patterns. This in turn could have adverse effects on the banking sector, by deteriorating banks’ asset quality and increasing their cost of market funding.

Limiting risks to Sweden’s banking sector is particularly important given its large size relative to the economy, with banks’ assets equivalent to about 300% of GDP. Swedish banks are also highly reliant on wholesale funding. Therefore, maintaining market confidence remains key for Swedish banks to ensure a stable source of liquidity. DBRS notes that banks continue to bolster their resources to withstand a stressed environment. They remain strongly profitable and have strengthened their capital base. Recent regulatory changes will also make the system more resilient to shocks, in DBRS’s view. Tighter capital requirements have been adopted, a countercyclical capital buffer of 1% has been introduced and banks are now also subject to higher regulatory risk-weightings on mortgage loans. The Financial Supervisory Authority also introduced a maximum loan-to-value of 85% in 2010, aiming to contain risks from rising household debt and house prices. Furthermore, despite delays, amortization requirements are expected to be introduced by 2016 with the aim of slowing growth in household indebtedness.

Another challenge for Sweden is that government debt is somewhat exposed to refinancing risk. Government debt has a short average maturity of 4.6 years as of April 2015, with approximately half of the total debt stock maturing before 2018. Foreign currency debt, at 17% of the total at the beginning of 2015, also exposes government debt to changes in exchange rates to some degree. Counterbalancing these risks, DBRS notes that debt servicing capacity is supported by a modest interest bill amounting to 1.6% of government revenues in 2014 and low government borrowing costs, both of which limit refinancing risks.

Notes:
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: Adriana Alvarado
Rating Committee Chair: Alan G. Reid
Initial Rating Date: 17 April 2012
Most Recent Rating Update: 5 December 2014

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