Scope Ratings AG has today confirmed the Kingdom of Sweden’s long-term local-currency rating of AAA, following the release of its revised sovereign rating methodology, and has converted its status from subscription to public. The agency has also assigned a long-term foreign-currency issuer rating of AAA, along with a short-term issuer rating of S-1+ in both local and foreign currency. The sovereign’s senior unsecured debt in local and foreign currency was also rated at AAA. All Outlooks are Stable.

Rating drivers

The AAA ratings are supported by Sweden’s wealthy and diversified economy, strong economic growth – one of the highest among EU countries post-crisis, and solid public finances with low public debt and strong budgetary performance. These indicate a high resilience to potential economic downturns. Sweden also benefits from a strong fiscal framework and credible monetary policy.

After real GDP growth averaged 2.6% from 2010 to 2015, Sweden’s economy continued its robust performance in 2016, expanding by 3.1%, supported by strong private and public consumption and solid investment growth. Despite a slight slowdown compared to in 2016, Sweden is still expected to grow higher than the EU average with growth of 2.7% and 2.4% in 2017 and 2018, respectively. This will be supported by net exports, thanks to recovery in Sweden’s main trading partners and thus, improving external demand. GDP growth will also be underpinned by strong domestic demand benefitting from employment growth, counterbalanced by the effects of moderate real wage increases on private consumption and weaker housing investment.

Sweden runs healthy budget balances and enjoys moderate levels of public debt, which is expected to gradually decline thanks to projected balanced budgets and buoyant GDP growth. Following an initial post-crisis period of small fiscal deficits, the general government budget was balanced in 2015 and showed a surplus of 0.9% of GDP in 2016, supported by strong tax revenues, lower expenditures tied to the integration of refugees, and a one-off EU rebate. In 2017, the general government surplus is expected to drop to 0.3% of GDP due to a more expansionary policy. Going forward, the general government balance is expected to remain broadly balanced with some incremental welfare spending, but supported by the effects of a robust economy on the fiscal balance.

Public debt stood at a relatively low 41% of GDP in 2016, and is projected to fall gradually in coming years thanks both to balanced budgets and a growing economy. In the short and medium term, Sweden faces low risks to fiscal sustainability. However, in the long term, public finances may come under pressure due to increases in long-term care spending, which according to the European Commission could increase by 41% – from 3.6% of GDP in 2013 to 5.1% by 2060, driven by an ageing population.

In Scope’s view, Sweden benefits from a credible fiscal policy framework, which was introduced in the 1990s and contributed to a significant fall in the general government debt ratio from around 70% of GDP at the end of the 1990s to 41% in 2016. There are plans to reform the framework, taking into account improvements in the country’s public finances and medium-to-long term risks related to demographic ageing. These reform measures include a slight relaxation of the budget surplus target, the introduction of a debt anchor and the strengthening of the Fiscal Policy Council, an independent evaluator of the government’s fiscal policy.

Sweden benefits from a strong external position. As a net creditor country with almost two decades of current account surpluses averaging 5.1% of GDP, Sweden has limited dependence on foreign capital inflows. The current account balance is expected to remain at around 5% of GDP in 2017 and 2018, supported by a gradual recovery in Sweden’s main trading partners (and thus, higher import demand) as well as by positive effects from a weak krona.

Financial stability risks represent a key challenge. Though fundamentals of the banking sector are strong, macro-financial weaknesses related to an overleveraged household sector and rising house prices are core concerns. In comparison with other EU countries, Swedish banks are highly profitable, well capitalised and have higher quality assets. Despite these strengths, Swedish banks exhibit vulnerabilities due to a high reliance on foreign wholesale funding and strong interconnectedness with the banking sectors of neighbouring Nordic countries. The former exposes the banks to foreign investors’ perceptions on risks in the banking sector, a deterioration of which could result in sudden increases in funding costs. The latter exposes the Swedish banking system to the rapid transmission of shocks emanating from neighbouring countries. These vulnerabilities are amplified by the size of the banking sector, with assets at almost three times Sweden’s GDP. Recent conversion of Nordea’s Nordic subsidiaries into branches and, associated with this, the movement of a large share of bank assets and liabilities to Sweden will increase the nominal size of the domestic banking system by 70% of GDP according to the Riksbank.

Swedish households are highly indebted, exposing them to risk should interest rates suddenly rise. At the end of 2016, household debt, largely reflecting mortgage loans, amounted to 89% of GDP and 182% of disposable income, placing Sweden firmly within a group of EU countries with the highest levels of household indebtedness. Unlike other European countries, many of which went through a significant adjustment in real estate markets over the last decade, Swedish house prices have continued increases and by the end of 2016 were around 40% higher than 2010 levels.

Should interest risks rise or housing prices face a sudden correction, this could have a material adverse impact on private consumption, one of the main drivers of economic growth, and eventually on the banking sector. House prices are increasing due to a combination of demand- and supply-driven factors. Government measures to slow house price inflation include the introduction of a new mortgage amortisation requirement for new loans with a loan-to-value ratio above 50% and a reform of the capital-gains-tax deferral rules for housing transactions. In addition, there are plans to enhance the legal mandate of the macroprudential authority and to put forward a 22-point plan including a range of proposals to increase developable land availability, reduce construction costs, shorten the process of obtaining planning permissions, and reform the rental market.

Sovereign rating scorecard (CVS) and Qualitative Scorecard (QS)

Scope’s Core Variable Scorecard (CVS), which is based on relative rankings of key sovereign credit fundamentals, signals an indicative “AAA” (“aaa”) rating range for the Kingdom of Sweden. This indicative rating range can be adjusted by the Qualitative Scorecard (QS) by up to three notches depending on the size of relative credit strengths or weaknesses versus peers based on qualitative analysis. For the Kingdom of Sweden, the following relative credit strengths have been identified: 1) growth potential of the economy, 2) economic policy framework, 3) debt sustainability, 4) market access and funding sources, and 5) financial sector performance. Relative credit weakness is signalled for 1) macro-financial vulnerabilities and fragility. The combined relative credit strengths and weaknesses indicate a sovereign rating of AAA for Sweden. A rating committee has discussed and confirmed these results.

For further details, please see Appendix 2 of the rating report.

Outlook and rating-change drivers

The confirmation of the Stable trend reflects Scope’s view that risks to the ratings remain broadly balanced.

The ratings/outlook could be downgraded if: i) a sharp correction in the housing market significantly damages the resilience of the economy and banking system; and/or ii) a significant economic shock were to take hold centred around excessive household debt.

For the detailed research report, please click HERE.

Rating committee

The main points discussed were: i) Sweden’s economic outlook; ii) fiscal performance; iii) banking sector strengths and vulnerabilities; iv) overleveraged private sector and rising house prices; v) recent political developments and vi) peers comparison.

Methodology

The methodology applicable for this rating and/or rating outlook ‘Public Finance Sovereign Ratings’ is available on www.scoperatings.com.

The historical default rates used by Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/governance-and-policies/regulatory/esma-registration. Please also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s definition of default and definitions of rating notations can be found in Scope’s public credit rating methodologies at www.scoperatings.com.

The rating outlook indicates the most likely direction in which a rating may change within the next 12 to 18 months. A rating change is, however, not automatically a certainty.

Regulatory disclosures

This credit rating and/or rating outlook is issued by Scope Ratings AG.

Rating prepared by Ilona Dmitrieva, Lead Analyst

Person responsible for approval of the rating: Dr Stefan Bund, Chief Analytical Officer

The ratings/outlook were first assigned by Scope as a subscription rating in January 2003. The subscription ratings/outlooks were last updated on 05.05.2017.

The senior unsecured debt ratings as well as the short term issuer ratings were assigned by Scope for the first time.

As a "sovereign rating" (as defined in EU CRA Regulation 1060/2009 "EU CRA Regulation"), the ratings on the Kingdom of Sweden are subject to certain publication restrictions set out in Art 8a of the EU CRA Regulation, including publication in accordance with a pre-established calendar (see "Sovereign Ratings Calendar of 2017" published on 21.07.2017 on www.scoperatings.com). Under the EU CRA Regulation, deviations from the announced calendar are allowed only in limited circumstances and must be accompanied by a detailed explanation of the reasons for the deviation. In this case, the deviation was due to the recent revision of Scope’s Sovereign Rating Methodology and the subsequent placement of the ratings under review, in order to conclude the review and disclose ratings in a timely manner, as required by Article 10(1) of the CRA Regulation.

Solicitation, key sources and quality of information

The rating was initiated by Scope and was not requested by the rated entity or its agents. The rated entity and/or its agents did not participate in the ratings process. Scope had no access to accounts, management and/or other relevant internal documents for the rated entity or related third party.

The following material sources of information were used to prepare the credit rating: public domain and third parties. Key sources of information for the rating include: the Ministry of Finance of Sweden, the Riksbank, European Commission, European Central Bank (ECB), Statistical Office of the European Communities (Eurostat), IMF, OECD, and Haver Analytics.

Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.

Prior to publication, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds upon which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.

Conditions of use / exclusion of liability

© 2017 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings AG, Scope Analysis, Scope Investor Services GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope cannot, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided “as is” without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or otherwise damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party, as opinions on relative credit risk and not as a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings AG at Lennéstraße 5, D-10785 Berlin.

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