DBRS Confirms Kingdom of Sweden at AAA, Stable Trend

DBRS Ratings Limited (DBRS) has confirmed the Kingdom of Sweden’s Long-Term Foreign and Local Currency – Issuer Ratings at AAA and 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 solid public finance outturns. Since 2015, Sweden’s budget balance has been in surplus and, despite an anticipated deceleration in economic activity, it is projected to remain positive in coming years, contributing to a further decline in the public debt-to-GDP ratio (42.2% in 2016).

The Stable trend rests on the assumption that the economy will remain resilient and that the challenges faced by the sovereign are manageable. High household debt, housing market imbalances and the vulnerabilities in the banking sector represent a concern. Nevertheless, DBRS anticipates that the good track record of fiscal performance and policy credibility will to continue to support the country’s creditworthiness.

Sweden benefits from strong public finances. The primary budget was in surplus at around 2.3% of GDP on average for over a decade until 2011. Moreover, while the countercyclical policies resulted in a deterioration of the fiscal position following the financial crisis, over the last two years the government has been able to turn the budget balance back to surplus (0.7% of GDP on average). This reflects stronger growth but also a well-tested fiscal policy framework, which aims to preserve the long-term sustainability of public finances and ensures that the government maintains adequate flexibility to respond to economic downturns.

The ratings are supported by a healthy external position which reflects a highly competitive economy. Sweden recorded current account surpluses for two decades, averaging 5.4% of GDP, which have been also supported by a very high saving rate (30% of GDP). At the same time, the country has managed to increase services net exports, partly offsetting the decline in the goods trade surplus.

Moreover, Sweden benefited from strong economic performance over the past decade, which has translated into one of the highest employment rates in Europe (81.2% in 2016). Between 2006 and 2016, Swedish average output growth (2%) was higher than the Organisation for Economic Co-operation and Development’s (OECD) average output growth (1.5%). Economic prospects also remain favourable with solid economic activity projected this year at 3.1% before decelerating going forward to around 2.5% as investment in construction is expected to recede.

Sweden’s institutional and macroeconomic policy framework also support the ratings. Despite recent political fragmentation, strong democratic institutions and predictable consensus-oriented policies have been conducive to a stable policy framework. In addition, the financial stability framework is supported by the Swedish Financial Supervisory Authority (Finansinspektionen, or FSA), which is tasked with identifying and addressing risks in the financial system. Political parties have also agreed to broaden the FSA’s mandate to further strengthen financial stability.

However, Sweden faces some challenges. The principal challenge is managing the risks associated with high and rising levels of household debt. Low inflation in Sweden prompted the central bank (Sveriges Riksbank) 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, a housing supply shortage and generous tax incentives on mortgage interest payments, the central bank projects household debt to exceed 190% of disposable income by early 2019.

Moreover, housing prices have been rising substantially since 2012. Despite the recent slowdown in housing price growth, risks of a house price correction appear to be increasing. This could both impact households’ wealth perception and in turn consumption, and lower housing investment, creating a significant drag on future economic growth. In addition, a very high share of mortgages at variable rates (about 68% of the total) make households more vulnerable to an abrupt rise in interest rates, which could weaken their debt servicing capacity and, in turn, lower private consumption.

In this context, Swedish banks have substantial exposure to the domestic property market. A shock to the real economy, accompanied by declining housing prices, could adversely affect the 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 refinancing and foreign exchange rate 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 are 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 1.5% has been activated since March this year. In 2010, the FSA also adopted a maximum loan-to-value (LTV) ratio of 85% aimed at mitigating risks from rising household debt and housing prices. Furthermore, amortisation requirements were implemented in June 2016 and an additional one for highly indebted households is expected to be introduced next year in March. In DBRS’s view, these measures are positive but additional effort may be needed to effectively soften the increase in the household debt, as the current drivers are expected to remain in place.

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, if financial conditions markedly deteriorate, potentially as a consequence of a sharp drop in housing prices, 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, UNDP, Sveriges Riksbank, Statistiska Centralbyran, Valueguard, NIER, European Commission, Eurostat, OECD, IMF, World Bank, Haver Analytics. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

This is an unsolicited 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 and US regulations only.

Lead Analyst: Carlo Capuano, Assistant Vice President
Rating Committee Chair: Thomas R. Torgerson, Senior Vice President, Global Sovereign Ratings
Sovereign Ratings
Initial Rating Date: 17 April 2012
Last Rating Date: 19 May 2017

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