DBRS Ratings GmbH (DBRS Morningstar) confirmed the Kingdom of Sweden’s Long-Term Foreign and Local Currency – Issuer Ratings at AAA. At the same time, DBRS Morningstar confirmed the Kingdom of Sweden’s Short-Term Foreign and Local Currency – Issuer Ratings at R-1 (high). The trend on all ratings is Stable.
KEY RATING CONSIDERATIONS
The confirmation of the Stable trend reflects DBRS Morningstar’s view that the risks to Sweden’s ratings are limited. Despite the extraordinary setback caused by the Coronavirus Disease (COVID-19) pandemic, Sweden continues to exhibit strong credit fundamentals and ample room to support the economy. The Swedish economy has recovered rapidly from the pandemic fallout, with GDP estimated to have grown slightly above 5% in 2021 after the 2.9% contraction in 2020. Provided the economy continues to adapt to the evolution of the pandemic, output growth should remain strong this year. The substantial economic support to weather the effects of the pandemic have deteriorated public finances, although both the fiscal deficit and the public debt ratios have remained among the lowest in the European Union in 2020. DBRS Morningstar expects Sweden’s public finance metrics to continue the improvement path started in 2021 in coming years, guided by its strong and credible fiscal framework.
Sweden’s AAA ratings are underpinned by strong public finances, healthy external accounts, and a robust economic performance. DBRS Morningstar expects Sweden’s high investment rates, employment rates, and skilled labour force to continue to underpin its solid economic performance in the coming years. Nevertheless, as a small and open economy, with strong commercial and financial links with the rest of the world, the country remains exposed to potential shifts in external demand and/or global financial conditions. In addition, managing the risks stemming from the combination of high household leverage, banks’ large exposure to the property market, and housing prices remains a challenge for Sweden. The high level of household debt could amplify shocks, potentially triggering a deleveraging process and weighing on domestic demand, with knock-on effects on the broader economy. Wealthy households and debt affordability mitigate these risks.
DBRS Morningstar could downgrade the ratings if Sweden’s public debt ratio trajectory experiences a material deterioration, although this is viewed as unlikely. A materially higher public debt ratio could result from a severe worsening of the medium-term growth outlook, a lasting and material weakening of fiscal policy, or a substantial materialisation of contingent liabilities.
Sweden Has Recovered Swiftly From The Pandemic Shock And The Outlook Is Strong Despite Challenges
Sweden’s credit fundamentals are underpinned by its high GDP per capita, sound economic performance, and limited output volatility despite its small size. GDP growth averaged 2.3% per annum during 2000-2019. Sweden’s high GDP per capita reflects a competitive and advanced economy with a productive labour force and one of the highest employment rates in the EU. The Swedish economy has recovered rapidly from the pandemic shock driven by its goods exports and manufacturing production. GDP is estimated to have grown at 5.2% in 2021 after a 2.9% drop in 2020, which was milder than the one seen in the EU-27 GDP (-5.9%). While close-contact services remain well below their pre-pandemic levels, in the second quarter of 2021 led by its manufacturing and information and technology sectors, among others, Sweden’s overall output has recovered to its pre-pandemic level. The labour market continues to recover, with the registered unemployment ratio below pre-pandemic levels and hiring and vacancies growing strongly.
Sweden’s economic growth outlook remains strong over the medium-term despite the headwinds posed by supply side disruptions, rapidly rising energy prices, increasing labour shortages, and the rapid spread of the Omicron variant. Favourable financial conditions, higher household savings and wealth during the pandemic, and good prospects for key external markets support this view. The government expects another year of strong growth in 2022 at 3.4% before decelerating towards 1.4%-1.5% pa in 2023-2024. Finally, the pandemic has exacerbated two longstanding challenges: (1) the risks linked to high household debt and housing market pressures, and (2) Sweden’s relatively higher unemployment rate among the low-skilled and foreign-born workers.
A Low Public Debt Ratio and Solid Fiscal Framework Underpin Sweden’s Creditworthiness
Sweden’s very strong fiscal performance, underpinned by its fiscal framework, and its low public debt level constitute important credit strengths. Sweden’s annual fiscal surplus averaged 1.0% of GDP between 2016 and 2019 and the public debt ratio stood at 35.1% of GDP in 2019. This provided the country with ample fiscal room to respond to the coronavirus pandemic shock. The government and the Riksdag have taken economic measures worth SEK 400 billion to fight the pandemic consequences and to stimulate a green recovery in 2020 and 2021, and made available around SEK 1000 in state credit guarantees and loans. Despite this significant deployment of resources, the deterioration in the country’s public finances has been more limited than in many other advanced nations. The fiscal deficit reached 2.6% of GDP in 2020 and is expected to have shrunk to 0.8% of GDP in 2021 driven by the strong economic recovery and less extensive use of support measures.
The latest projections from the government in December 2021 point to a close to balance position in 2022 (-0.1% of GDP) and a fiscal surplus around 1.0% of GDP during 2023-2024, which represents an improvement from the September 2021 projections. The measures passed by the Riksdag, with the amendments proposed by the Moderate Party, the Sweden Democrats, and the Christian Democrats, do not deviate greatly from the SEK 74 billion of reforms proposed by the government to speed up the climate transition, stimulate the recovery and employment, strengthen the welfare system and boost police and judiciary resourcing, with the exception of larger tax cuts to households compensated by lower transfers to households and firms. The evolution of the pandemic and the surge in energy costs could lead to further fiscal costs. In this direction, the government announced in January 2022 additional measures to counter the effects of pandemic until March 2022 (SEK 18 billion) as well as to compensate households for energy price increases during December 2021-February 2022 (SEK 6 billion). While this temporarily higher spending could delay the envisaged improvement, DBRS Morningstar expects the path of fiscal consolidation to continue and fiscal policy to remain well anchored around its surplus target of 0.33% over time.
In spite of the coronavirus pandemic shock, Sweden’s public debt ratio is expected to remain low and among the lowest in the European Union (EU-27). After the sharp increase in the public debt ratio to 39.6% of GDP in 2020 from 35.1% of GDP in 2019, the government’s latest projections suggest the public debt ratio resumed its downward trend last year. On the back of improving economic and fiscal outturns, the public debt ratio is projected to decline to 36.3% of GDP in 2021 and to 32.9% of GDP in 2022. The public debt ratio could pierce the lower band of the debt anchor (35% of GDP +/-5 percentage points) in 2024 assuming a no policy change scenario, although this seems unlikely under a new administration. The Sveriges Riksbank’s (the Riksbank) amortisation of foreign currency loans with Swedish National Debt Office (SNDO) will dampen borrowing by SEK 60 billion per year in 2021-2023.
The materialisation of contingent liabilities, potentially stemming from Sweden’s large public sector, the exposure to financial sector-related entities, or the most recent extension of state guarantees, could lead to a higher but still manageable debt ratio. DBRS Morningstar considers that the associated risks to Sweden’s relatively short average debt maturity and high share of foreign currency-denominated debt are small, given the comparatively low level of debt, steady demand for Swedish government bonds, and the use of derivatives to hedge currency risk. The government continues to benefit from very favourable financing costs.
Risks to Financial Stability are Manageable But Key Systemic Vulnerabilities Remain
While consumer price inflation (CPIF) stood at 4.4% YoY in December 2021, the Riksbank considers monetary policy should remain expansionary for inflation to be persistently close to its 2% target going forward. This view is cemented on the assumption that the effects from a surge in energy inflation, a key driver, and supply side disruptions are temporary. While the Riksbank’s forecast suggest continued asset purchases to compensate for forthcoming principal repayments in 2022 and an unchanged repo rate at 0% until late 2024, more persistent and higher inflationary pressures could accelerate the normalisation of monetary policy. This represents an important risk given the high and increasing indebtedness of the private sector.
The main risks to financial and macroeconomic stability remain linked to the high level of household indebtedness and banks’ exposure to the housing and commercial property markets. The pandemic has exacerbated the underlying risks as household indebtedness and housing prices continue to increase. The household debt-to-income ratio stood at 206% in Q3 2021. The rapid increase in housing prices, which increased by 18.9% between March 2020 and December 2021 (HOX index), albeit slowing down in recent months, will likely lead to further increases in indebtedness. Given a relatively short interest rate fixation period for mortgages, with around 43% having interest-fixation periods of less than 3 months and 44% between 3 months and 5 years, households are particularly exposed to increases in interest rates. While households are expected to have good margins to service their debt in stressed conditions, potential shocks could force a sharp reduction in consumption, risking second round effects to the overall economy.
If there are no changes to the fundamental drivers of the supply and demand imbalances in the property market (i.e., regulations, rental-setting system, taxation) or less favourable financial conditions, tighter macroprudential measures will be needed to manage the risks. In this direction, the Swedish Financial Supervisory Authority has raised the countercyclical buffer from 0% to 1% effective from September 2022.
The commercial property market also remains a source of risk, especially given that the property sector represents around 50% of banks’ non-financial corporate lending and 50% per cent of the outstanding volume of corporate bonds in Swedish kronor, according to the Riksbank. Companies in the sector are generally highly leveraged and therefore vulnerable to interest and income shocks. While property companies have managed relatively well the pandemic effects thus far, the Riksbank warns that property companies have increased their debt relative to their earnings during the pandemic and certain segments could continue to underperform due to structural changes. DBRS Morningstar will continue to monitor risks on this front.
The Swedish banking system has withstood well the pandemic shock. The banks’ strong starting position, the Riksbank’s ample monetary policy response, and temporary regulatory easing, have helped avoid credit or funding cost disruptions. Loan losses have remained relatively contained, helped in part by government support to workers and companies in the hardest hit sectors. On the other hand, the Swedish banking system is relatively large, concentrated, interconnected, and reliant on wholesale and foreign funding, rendering it susceptible to potential shocks, including changes in investor sentiment.
Sweden’s External Position Remains Strong With a Competitive Export Sector
DBRS Morningstar assesses Sweden’s external position as strong and backed by a long period of large current account surpluses, albeit declining over time. Driven by a high savings rate and Swedish firms’ competitiveness, the current account has averaged 5.2% of GDP over the last two decades, resulting in a net international investment position of 16.0% of GDP at the end of 2020. The strong comeback in goods exports driven by Sweden’s manufacturing sector after the initial pandemic shock has been dampened by supply side bottlenecks during Q2 and Q3 of 2021. Assuming supply side constrains ease in coming months, good exports should catch up as external demand is expected to remain strong. Information and technology service exports should remain solid and travel and transport exports eventually regain ground in tandem with the pandemic situation. Sweden’s small, open, and financially and commercially integrated economy remains exposed to potential swings in investor confidence, financial conditions, or global demand. Nevertheless, Sweden’s liquid currency and international reserves amounting to 9.6% of GDP in 2020 enhance its ability to weather significant shifts in investor confidence.
Strong and Stable Political Institutions Foster Predictable Macroeconomic Policies
Sweden’s political system is characterised by strong democratic institutions as reflected by its very strong World Bank Governance indicators. Given the political fragmentation, minority governments requiring outside parliamentary support to pass legislation have been the norm in Sweden, fostering political compromise and consensual policy making, albeit not exempt of events of political turbulences. Following Stefan Löfven’s resignation, Magdalena Andersson was elected Prime Minister in November 2021 and is leading a Social Democratic Party (SAP) minority government. The SAP currently holds 100 out of 349 seats in Parliament. The next parliamentary elections are scheduled for September 2022. While the next government could veer the policy direction in certain areas, DBRS Morningstar expects broad political consensus behind Sweden’s fiscal framework and sound macroeconomic policies to continue to underpin the country’s prosperity.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.
For more information on the Rating Committee decision, please see the Scorecard Indicators and Building Block Assessments. https://www.dbrsmorningstar.com/research/391909.
All figures are in Swedish kronor (SEK) unless otherwise noted. Public finance statistics reported on a general government basis unless specified.
The principal methodology is the Global Methodology for Rating Sovereign Governments https://www.dbrsmorningstar.com/research/381451/global-methodology-for-rating-sovereign-governments (July 9, 2021). Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings, https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (February 3, 2021).
The sources of information used for this rating include the Ministry of Finance (Key Indicators Forecast 22 December 2021; Table of Reforms for Budget 2022), Swedish National Debt Office, Sveriges Riksbank (Financial Stability Report 2021:2; Monetary Policy Report, November 2021), Swedish Financial Supervisory Authority (Stability in the Financial System, November 2021), Statistiska Centralbyran (SCB), The National Institute of Economic Research (The Swedish Economy December 2021), European Commission (Assessment of the Final National Energy and Climate Plan of Sweden), Eurostat, Swedish Environmental Protection Agency (Sweden’s Climate Act and Climate Policy Framework), The Social Progress Imperative (2021 Social Progress Index), Nasdaq OMX Valueguard-KTH Housing Index (HOX), Organisation for Economic Co-operation and Development (OECD), Bank for International Settlements (BIS), International Monetary Fund (IMF), World Bank (WB), and Haver Analytics. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.
With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.
With Rated Entity or Related Third Party Participation: YES
With Access to Internal Documents: NO
With Access to Management: NO
DBRS Morningstar 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 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.
For further information on DBRS Morningstar 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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.
The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/391908.
This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.
Lead Analyst: Javier Rouillet, Vice President, Global Sovereign Ratings
Rating Committee Chair: Nichola James, Managing Director, Co-Head of Sovereign Ratings
Initial Rating Date: April 17, 2012
Last Rating Date: August 27, 2021
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