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

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

Sweden’s AAA ratings are underpinned by strong public finances, healthy external accounts, and a solid economic performance. The fiscal position deteriorated during the global financial crisis, reflecting the countercyclical response, but since then the headline deficit has remained at moderate levels. While public expenditure is projected to increase slightly in the coming years as a result of rising refugee immigration, the budget is forecast to return to a balanced position by 2019. General government debt is moderate and declining. Debt-to-GDP fell to 43.4% in 2015. Moreover, previous reforms to the pension system support the long-term sustainability of public finances.

The Stable trend rests on the assumption that the economy remains resilient and that the challenges faced by the sovereign are manageable.

The ratings are supported by Sweden’s highly competitive economy and strong external position. The current account surplus has averaged 5.6% of GDP since 1995. At the same time, the country has managed to increase services exports, partly offsetting the decline in the goods trade surplus. The current account surplus is expected to narrow to 5.7% of GDP in 2016 from 5.9% in 2015, reflecting strengthening domestic demand.

Sweden’s economic performance continues to be solid. Average output growth of 1.9% between 2005 and 2015 positioned Sweden’s economy above the OECD average of 1.5%. This outperformance was largely driven by labour productivity growth. Economic prospects also remain robust. Following an unexpectedly strong growth rate of 4.1% in 2015, the economy is projected to gradually decelerate, as internal demand dampens the positive contribution of net exports in the coming years.

Sweden’s institutional and macroeconomic policy framework also support the ratings. The Swedish fiscal policy framework aims to preserve the long-term sustainability of public finances and ensure that the government maintains flexibility to respond to economic downturns. In addition, the Swedish central bank is committed to its inflation rate target, while the financial stability framework is supported by the Financial Stability Authority (Finansinspektionen), which is tasked with identifying and addressing risks arising in the financial system.

The main challenge for the sovereign remains managing financial stability risks. Low inflation in Sweden prompted the central bank to adopt a negative repo rate and initiate a government bond purchase programme in 2015. However, credit growth is strong and Swedish households are highly indebted. With low interest rates, high and rising house prices, and generous tax incentives on mortgage interest payments, household indebtedness is high and rising. In March 2016, household debt as a share of disposable income increased to 179%.

Moreover, housing prices continue to rise at a strong rate. In Q1 2016, home prices increased by 12% compared to the same period last year. An abrupt rise in interest rates or a macroeconomic shock could drive a sharp correction in house prices, which could lead to lower household consumption and weaken debt servicing capacity. On the other hand, households have a high net financial asset position (187% of GDP in 2014), which provides an important buffer.

Swedish banks have increased their exposure to the domestic property market. A shock to the real economy, perhaps accompanied by declining housing prices, could adversely affect bank profitability and asset quality. Moreover, bank market funding (above 60%) is provided by foreign investors, thereby increasing currency and refinancing risk. Managing risks stemming from the banking system is particularly important given the sector’s concentration in the Nordic region. Retaining market confidence remains crucial for Swedish banks to ensure a stable source of funding. However, banks remain profitable and have strengthened their capital base. Recent regulatory changes, together with macro-prudential measures, have also made the system more resilient to shocks. Tighter capital requirements and higher regulatory risk-weightings on mortgage loans have been adopted, and the countercyclical capital buffer was increased from 1% to 2% in March 2016. The Financial Supervisory Authority has also adopted a maximum loan-to-value of 85%, aimed at containing the risks from rising household debt and house prices. Furthermore, amortisation requirements will come into force from the second half of 2016 with the aim of slowing growth in household indebtedness.

RATING DRIVERS
The trend could be changed to Negative if domestic or external shocks were to severely dampen the economic outlook and lead to a materially higher public debt ratio. Furthermore, in the unlikely event that financial conditions markedly deteriorate, thereby impairing the sovereign’s and the banking sector’s access to market funding, the ratings could come under downward pressure.

Notes:

All figures are in 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, Swedish National Debt Office, Sveriges Riksbank, Statistiska Centralbyran, European Commission, Eurostat, ECB, OECD, IMF, Haver Analytics, DBRS. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

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

This rating included participation by the rated entity or any related third party. DBRS had access to accounts, management and other relevant internal documents for the rated entity or a related third party.

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.

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

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: Carlo Capuano, Assistant Vice President
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer, Global FIG and
Sovereign Ratings
Initial Rating Date: 17 April 2012
Last Rating Date: 4 December 2015

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