Morningstar DBRS Confirms Kingdom of Sweden at AAA, Stable Trend

DBRS Ratings GmbH (Morningstar DBRS) confirmed the Kingdom of Sweden's (Sweden) Long-Term Foreign and Local Currency - Issuer Ratings at AAA. At the same time, Morningstar DBRS confirmed Sweden's Short-Term Foreign and Local Currency - Issuer Ratings at R-1 (high). The trend on all credit ratings is Stable.

KEY CREDIT RATING CONSIDERATIONS
The Stable trend reflects Morningstar DBRS' view that Sweden's credit fundamentals remain very strong despite challenges related to global trade disruptions and general macroeconomic uncertainty. The cyclical upturn of the economy in the second half of last year, having benefited from lower price pressure and interest rates, stalled to start 2025 due to trade interference and deteriorating private-sector sentiment. The Ministry of Finance (MoF) expects real GDP to remain below trend growth and expand below 1% this year. Yet in the years to come, lower interest rates, healthy real wage growth, and expansionary fiscal policy create conditions for a more accelerated recovery. On public finance, the fiscal deficit--which averaged a 0.0% balance from 2016-2023--deteriorated to 1.5% in 2024 due to the combination of slower tax revenue and spending pressures on infrastructure and defense. The European Commission (EC) forecasts the deficit to remain at 1.5% this year and gradually improve over the forecast period.

Sweden's AAA credit ratings are underpinned by its robust institutions, wealthy and productive economy with large external savings, and strong public finances. The country's high level of GDP per capita (roughly 133% of the EU average in 2024), its high investment rate, its productive labour force and one of the highest employment rates in the EU, and its limited output volatility underpin the credit fundamentals. The country also faces structural challenges. Sweden's small and open economy with strong commercial and financial links with the rest of the world exposes it to potential shifts in external demand or global financial conditions. In addition, the relationship between elevated housing prices and high household leverage is a risk. Financial stability risks are mitigated by high household net wealth, stable labour market conditions, and a highly capitalized banking system.

CREDIT RATING DRIVERS
Morningstar DBRS would downgrade the credit ratings if a worsening of fiscal accounts or a crystallisation of contingent liabilities resulted in a material deterioration in the trajectory of Sweden's public debt ratio. A significant shock stemming from the financial sector would also put negative pressure on the credit ratings.

CREDIT RATING RATIONALE

Sweden's Economic Recovery was Interrupted by Global Trade Disruptions

Performance of the Swedish economy has been weak since the last quarter of 2022. The spike in inflation and the subsequent rise in interest rates weighed primarily on household consumption and on investment. The cost-of-living challenges from higher consumer prices were compounded by the high level of household debt and the rapid transmission of monetary policy, as most mortgages in Sweden have a short fixation period. Normalisation of prices and interest rates, and some recovery of household purchasing power, led to a gradual recovery in economic activity during the second half of 2024. Real GDP expanded by 1.0% last year, following the 0.1% contraction in 2023. However, global trade disruptions and heightened uncertainty brought on by U.S. tariff policy and geopolitical conflicts stalled the recovery to start the year. Real GDP contracted quarter-over-quarter by 0.2% in the first quarter of 2025, and direct trade links between the U.S. and Sweden are material. These external disruptions have weighed on business and consumer confidence and slowed consumption and investment. The MoF in its June 2025 Key Indicators Forecast projected real GDP to grow 0.9% in 2025, below the country's 2.0% trend growth over the last decade. Economic activity is likely to accelerate over the forecast period on the assumption of low and stable inflation, improved labour market conditions, and receding uncertainty. The MoF expects the economy to grow by 2.6% on average in 2026-2027.

Public Spending Pressures and Changes to Fiscal Rules will Likely Keep Fiscal Policy a Bit More Expansionary

The general government balance has widened in the last two years. Following the 1.0% of GDP fiscal surplus in 2022, the government reported 0.8% and 1.5% deficits in 2023 and 2024. Fiscal loosening was the result of weaker economic growth, supportive fiscal policy via lower taxes and higher transfers, a one-off capital injection to the Central Bank (Sveriges Riksbank) to restore its capital position, and higher defence spending. The EC projects the deficit to stay at 1.5% of GPD in 2025, as expansionary forces are likely to remain over the course of this year. The government's ability to narrow the deficit in the coming years is contingent on its compliance with fiscal rules, the amount of potential fiscal slippage related to the 2026 Parliamentary election, and the pace of increased defence spending. A change to the national fiscal framework now means authorities will aim as of 1 January 2027 for a balanced budget target, rather than the current surplus target equivalent to one-third of a percent of GDP. Defence spending is budgeted for 2.4% of GDP in 2025 and is expected to reach 3.5% by 2030. We consider the medium-term impact on public finances to be modest as Sweden has a long track record of complying with its fiscal rules. The EC projects the deficit to narrow in 2026 to 0.8%.

Public Debt to Remain Low and Consistent with the Debt Anchor

Sweden's public debt ratio at 33.5% in 2024 is among the lowest in the EU. This allows the country ample room to implement counter-cyclical fiscal policy if needed. The EC expects the ratio to remain relatively flat in the years to come and reach 33.3% in 2026, consistent with the medium-term debt anchor of 35% of GDP +/-5 percentage points. Risks to a more accelerated increase in debt stem from a macroeconomic shock or the materialisation of contingent liabilities, especially given Sweden's large public sector exposure to financial sector-related entities. Likewise, Sweden's high share of foreign currency denominated debt and short average maturities pose currency and duration risks. However, these risks are alleviated by the country's comparatively low level of debt, strong demand for Swedish government bonds, and effective debt management through the use of derivatives to hedge currency risk.

Swedish Financial System Well Positioned to Deal with Global Economic Turbulence

The Riksbank cut its policy rate by 0.25 percentage points to 2.0% in June 2025. The Executive Board made the downward adjustment to its main policy rate because harmonised consumer price inflation (HCPI) at 2.3% as of May 2025 was near the inflation target and the economic output gap is still negative. Furthermore, rates can come down as risks stemming from the real estate sector are now more subdued. Property price growth declined by 8.4% from December 2021 to December 2024 when including houses and flats, according to the MoF. Household debt to GDP to end 2024 has also declined considerably relative to the peak in 2020, and growth in commercial real estate prices contracted in recent years and asset quality in that sector is strong. Riksbank's medium-term projections are only slightly dissimilar from the current situation, with forecasts from its June 2025 Monetary Policy report for HCPI at 2.0% and for the policy rate at 1.9% by 2027.

The Swedish banking system is large and with deep links to international capital markets. Swedish households, insurers, and pension companies have large holdings of foreign assets, often in U.S. dollars, which increases their sensitivity to large swings in stock market valuation and exchange rates. Furthermore, the high debt levels of Swedish households and commercial property companies makes them sensitive to rising interest rates or property price corrections. These vulnerabilities support the negative qualitative adjustment for the "Monetary Policy and Financial Stability" building block assessment. That said, Swedish banks are in a good position to confront global economic turbulence. Banks are highly profitable and meet capital and liquidity requirements by large margins. Strong solvency positions, in addition to the Finansinspektionen's 2% countercyclical buffer, puts the banking system in a stable position to absorb losses and maintain lending activities if confronted with a deterioration in economic conditions.

High Savings and Sound Competitiveness Underpin Sweden's Strong External Position

Sweden's small and open economy is commercially and financially integrated with the rest of the world. This interconnectivity exposes Sweden to shifts in global demand, changes in financial conditions, and potential swings in investor confidence. Sweden's goods and services trade with the U.S. is meaningful, and specific sectors are directly exposed to potential U.S. tariffs. This includes the automotive industry where one-quarter of the Swedish exports to the U.S. are vehicles. Against this background, Sweden's large external savings position, its economy's large export diversification, and the flexible exchange rate help mitigate against the potential direct impact of the U.S. tariffs. Sweden consistently runs a large current account surpluses and a positive net international investment position (NIIP). The current account averaged 5.2% of GDP over the past two decades, illustrating the high private sectors savings rate and competitive positioning of Sweden's private sector. The country's ample net lending position--along with an improvement in the investment portfolio balance and relative changes to the exchange rate--resulted in a rapid increase in the NIIP, which stood at 66.0% of GDP in 2024 and up from 38.5% in 2023, according to the IMF.

Despite Political Fragmentation, Stable Political Institutions Advance Predictable Macroeconomic Policies

Sweden's political environment is fragmented. The current minority government--which includes the Moderate Party, the Christian Democrats, and the Liberals--also requires external support from the far-right Sweden Democrats. While this fragmentation might translate into government instability, there is no evidence of deterioration of the country's robust institutional quality. Sweden is accustomed to minority governments that require the support of parties outside of the government to pass laws. This promotes political compromise and consensual policymaking. Sweden performs favourably on the World Bank's Worldwide Governance Indicators, and there is broad political consensus behind Sweden's fiscal framework and predictable macroeconomic policies. Russia's invasion of Ukraine resulted in a historic change in Sweden's defence policy, ending its historical neutrality and leading to cross-party support for NATO membership.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

There were no Environmental, Social, or Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (16 May 2025) https://dbrs.morningstar.com/research/454196

For more information on the Rating Committee decision, please see the Scorecard Indicators and Building Block Assessments: https://dbrs.morningstar.com/research/458563.

Notes:
All figures are in Swedish krona 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 (15 July 2024) https://dbrs.morningstar.com/research/436000. In addition Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings https://dbrs.morningstar.com/research/454196 in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The sources of information used for these credit ratings include Ministry of Finance (Key Indicators Forecast - June 2025; Budget bill for 2025), Swedish National Debt Office, Sveriges Riksbank (Financial Stability Report 2025:1 - June 2025; Monetary Policy Report - June 2025), Statistics Sweden (SCB), National Institute of Economic Research (NIER, The Swedish Economy - June 2025), European Commission (Spring Forecast - May 2025), Eurostat, Swedish Environmental Protection Agency (Sweden's Climate Act and Climate Policy Framework), Organisation for Economic Co-operation and Development (OECD), Bank for International Settlements (BIS), International Monetary Fund (IMF), World Bank (WB), and Macrobond. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, these are unsolicited credit ratings. These credit ratings were 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

Morningstar DBRS does not audit the information it receives in connection with the credit rating process, and it does not and cannot independently verify that information in every instance.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and credit ratings are under regular surveillance.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://dbrs.morningstar.com/research/458562/.

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Jason Graffam, Senior Vice President, Global Sovereign & Financial Institution Ratings
Rating Committee Chair: Nichola James, Managing Director, Global Sovereign Ratings
Initial Rating Date: 17 April 2012
Last Rating Date: 10 January 2025

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