DBRS Confirms Sweden at AAA, Stable Trend

DBRS Ratings Limited (DBRS) has today confirmed the long-term foreign and local currency issuer ratings of the Kingdom of Sweden at AAA and the short-term foreign and local currency issuer ratings at R-1 (high). All ratings have a Stable trend.

Sweden’s AAA ratings are underpinned by strong public finances, healthy external accounts and robust economic performance. The sound fiscal position reflects a well-developed and tested fiscal framework that has resulted in very low general government deficits. Despite the recent increase in public spending associated with the surge in refugee inflows, Swedish public finances are projected to remain solid going forward. DBRS anticipates that the debt-to-GDP ratio will continue to decline despite more moderate, albeit sustained, economic growth in 2017–2018. These credit strengths outweigh the challenges of high household debt, high and rising house prices and subsequent banking sector vulnerabilities.

The Stable trend rests on the assumption that the economy will remain resilient and that the challenges faced by the sovereign are manageable. The good track record of fiscal performance and policy credibility are projected to continue to support Sweden despite risks stemming from the housing market imbalances and vulnerabilities in the financial sector.

The ratings are supported by Sweden’s highly competitive economy and strong external position. The country has recorded current account surpluses for more than two decades, averaging 5.3% of GDP. At the same time, the country has managed to increase services net exports, partly offsetting the decline in the balance of goods surplus.

Sweden’s economic performance continues to be robust. Between 2005 and 2015, Swedish average output growth (1.9%) was higher than the Organization for Economic Cooperation and Development’s (OECD) average output growth (1.5%). This outperformance was largely driven by labour productivity growth. Economic prospects also remain favourable. Following an unexpected strong growth rate of 4.1% in 2015, the economy is projected to gradually decelerate.

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 adequate flexibility to respond to economic downturns. In addition, the Swedish central bank, Swedish National Bank (Sveriges Riksbank), is committed to its inflation-rate target, while the financial stability framework is supported by the Swedish Financial Supervisory Authority (Finansinspektionen), which is tasked with identifying and addressing risks in the financial system.

However, Sweden faces some challenges. The principal one is managing the risks associated with the high levels of household debt. Low inflation in Sweden prompted the central bank to adopt an accommodative monetary policy that resulted in a negative repo rate, bond-purchase programme and a weaker currency. Against this background, credit growth has been strong and Swedish households are highly indebted. With low interest rates, high and rising housing prices and generous tax incentives on mortgage interest payments, the central bank projects household debt to exceed 190% of disposable income by 2019.

Moreover, housing prices, despite a deceleration in the first half of 2016, continue to rise. An abrupt rise in interest rates or a macroeconomic shock could drive a sharp correction in housing prices, which could lead to lower household consumption and weaken debt servicing capacity, especially considering that the share of mortgages at a variable rate is above 65% of the total. On the other hand, DBRS views that the high level of savings has built up buffers to absorb shocks.

Swedish banks have increased their exposure to the domestic property market. A shock to the real economy, accompanied by declining housing prices, could adversely affect banks’ profitability and asset quality. Moreover, only half of the banks’ funding is via deposits whereas market funding is predominantly in foreign currency (about two-thirds), thereby increasing foreign exchange rate and refinancing risks. 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 in order 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 a countercyclical capital buffer increase to 2% from 1% is expected to be effective next year. The Swedish Financial Supervisory Authority has also adopted a maximum loan-to-value of 85% aimed at containing the risks from rising household debt and housing prices. Furthermore, amortisation requirements came into force in June 2016 but are applied only to the new stock of mortgages.

RATING DRIVERS
The trend could be changed to Negative from Stable if domestic or external shocks were to severely dampen the economic outlook and lead to a materially higher public debt ratio. Furthermore, in the event that financial conditions markedly deteriorate, potentially as a consequence of a sharp drop in housing prices, thereby impairing the sovereign’s and 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, and DBRS. DBRS considers the information available to it for the purposes of providing this rating to be 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 no access to 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 historical default rates published by the European Securities and Markets Authority (“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: 3 June 2016

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