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

DBRS Ratings Limited has confirmed the Kingdom of Sweden’s long-term foreign and local currency issuer ratings of at AAA and the short-term foreign and local currency ratings at R-1 (high). The trend on all ratings remains Stable.

The confirmation of the Stable trend indicates that risks to the ratings are balanced and reflects DBRS’s views that the challenges faced by the sovereign are manageable. 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.

One of the factors underpinning Sweden’s ratings is its strong fiscal position. 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 response to the global financial crisis, the headline deficit has remained below 2%. Public expenditure will increase in the short term as a result of higher costs associated with the recent rise in refugee immigration, but the budget is forecast to return to balance by 2018-19. General government debt has remained moderate and is estimated to have peaked at 44.3% of GDP in 2014. The government sector also enjoys a strong net asset position of about 20% of GDP. Moreover, previous reforms of the pension system have ensured the long-term sustainability of public finances.

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 has managed to increase the exports of services, partly offsetting the decline in the goods trade surplus. The current account is forecast to remain at close to 6% 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. Over the past decade, the average annual growth rate of the Swedish economy has been 1.7%, above the European Union average of 1.0%. The above-peers performance was driven by high labour productivity growth. Economic prospects also remain robust. Following stronger-than-expected growth of 2.3% in 2014, real GDP is expected to accelerate to around 3% in 2015 and 2016, supported by loose monetary conditions and an improving external environment, while increased refugee immigration could also boost public and private consumption in the short term.

Another factor that supports Sweden’s ratings is its credible institutional and macroeconomic policy framework. The Swedish fiscal policy framework aims at preserving the long-term sustainability of public finances and ensuring the government maintains the fiscal flexibility to respond to economic downturns or to moderate the impact from negative macroeconomic shocks. The Swedish central bank is also committed to its inflation rate target, while the financial stability framework is supported by the financial stability authority tasked with identifying and addressing risks arising in the financial system.

However, managing risks to financial stability represent the main challenge for the sovereign. Persistently low inflation in Sweden has prompted 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 175% of disposable income in Q2 2015, driven by high and rising house prices, low interest rates and generous tax incentives on mortgage interest payments.

Over the past year, housing prices have also risen strongly by 18% on average. Therefore, a sharp correction in house prices, a rise in interest rates, or an adverse macroeconomic shock, could affect households' debt servicing capacity and their consumption patterns. These shocks could also 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 both its concentration in four large banks closely linked in the Nordic region, and its reliance on wholesale funding, a large proportion of which is denominated in foreign currency. Retaining market confidence remains crucial for Swedish banks to ensure a stable source of funding. Banks, nevertheless, remain strongly profitable and have strengthened their capital base. In DBRS’s view, recent regulatory changes, together with macroprudential measures, also make the system more resilient to shocks. Tighter capital requirements and higher regulatory risk-weightings on mortgage loans have been adopted, and a countercyclical capital buffer of 1% has been introduced. The Financial Supervisory Authority has also maintained a maximum loan-to-value of 85%, aimed at containing the risks from rising household debt and house prices. Furthermore, amortization requirements are expected to be introduced by 2016 with the aim of slowing growth in household indebtedness.

Finally, another challenge for Sweden is the relative exposure of government debt to refinancing risk. Government debt has a short average maturity, of 4.6 years as of October 2015, with approximately half of the total debt stock maturing before 2019. Foreign-currency denominated debt, at about 16% of total debt, also exposes government debt to changes in exchange rates to some degree. Counterbalancing these exposures is Sweden’s good debt servicing capacity. The government’s interest bill is modest at 1.4% of government revenues in 2014 and government borrowing costs are low.

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, Swedish National Debt Office, The Swedish National Financial Management Authority, 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.

DBRS does not typically accept editorial changes other than to correct for factual, accuracy and/or to remove confidential, material non-public, or sensitive information that might otherwise be inadvertently disclosed.

Lead Analyst: Adriana Alvarado, Assistant Vice President
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer
Initial Rating Date: 17 April 2012
Most Recent Rating Update: 5 June 2015

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