Scope Ratings GmbH has today affirmed the Kingdom of Sweden’s long-term issuer rating at AAA and short-term issuer rating at S-1+. The sovereign’s senior unsecured debt is also affirmed at AAA. All ratings are expressed in both local and foreign currency. All Outlooks are Stable.

For the detailed rating report, click here.

Rating drivers

The AAA ratings are supported by Sweden’s wealthy and diversified economy, strong economic growth, low external risk, and solid public finances with low public debt and strong budgetary performance, which when taken together point to a high degree of resilience to potential economic downturns. Sweden also benefits from a strong and credible fiscal framework and monetary policy.

The Swedish economy continues to grow among the strongest in the Nordic region, with growth in 2017 expected to reach 3.1% (after a strong 2016 growth rate of 3.3%) fuelled by strong private and public consumption and solid investment growth. Scope expects the growth to continue above the EU average, but at a slower pace of 2.7% and 2.4% in 2018 and 2019 as capacity constraints kick in. Growth will be supported by net exports, thanks to the recovery in Sweden’s main trading partners and strengthened 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 are 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 has been balanced since 2015 and showed a higher than expected surplus of 1.0% of GDP in 2017, supported by strong tax revenues, lower expenditures tied to the integration of refugees, and a one-off EU rebate. In 2018, the general government surplus is expected to drop to 0.7% of GDP due to a more expansionary policy measures that are aimed in support of the welfare and health care system, as well as strengthening police, defence and environmental protection. 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.

Sweden’s gross debt has been on a declining trend over the last few years, a trend that is set to continue with the debt-to-GDP ratio projected to fall from 38.4% in 2017 to 34.4% in 2019 thanks both to balanced budgets and a growing economy. Scope believes that Sweden faces low medium-term risks to fiscal sustainability, and, going forward, expects public finances to continue to be characterised by healthy budget balances and moderate levels of public debt. 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 from 3.6% of GDP in 2013 to 5.1% by 2060, an increase of 41% driven mainly by an ageing population.

In Scope’s view, Sweden benefits from a credible fiscal policy framework, introduced in the 1990s, which has led to a significant fall in general government debt from around 70% of GDP at the end of the 1990s to 38.4% in 2017. There are plans to further reform the framework, taking into account improvements in the country’s public finances and the 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. While Scope does not consider price developments in the Swedish housing market to be necessarily excessive, high household leveraging and long-term, sustained increases in housing prices (reflecting a long lag for supply to meet demand) do raise concerns over developing vulnerabilities for the Swedish banking sector. The Swedish House Price Index, despite a 2.5% fall in December 2017, has increased by 121% since January 2005. A heavy reliance on wholesale funding, largely foreign, as well as the deep intertwining of Swedish banks with both Nordic and Baltic banking sectors, may expose Swedish banks to foreign investor sentiment and transmission of shocks from the region. Scope considers this a problem due to the Swedish banking sector’s size, whose assets (including Nordea) exceed GDP threefold.

These risks are tied to the high indebtedness among Swedish households, which would be exacerbated by a sudden increase in interest rates or a sharp fall in housing prices. In July 2017, the Swedish household debt-to-GDP ratio was 85.9% and the ratio of household debt to income at the end of 2016 was 156.87%, placing Sweden firmly among EU countries with the highest levels of household indebtedness. The Swedish household debt service ratio, i.e. the actual debt servicing of private households from their current income, is also a relatively high 10%. Given these debt levels and a large debt service ratio, Scope recognises the risk to economic growth if high debt levels were to discourage private consumption during a crisis. At the same time, Scope believes these risks are somewhat mitigated by recent regulatory actions and macro-prudential measures, such as mortgage amortisation requirements for new loans with a loan-to-value ratio of over 50%, the reform of capital-gains-tax deferral rules for housing transactions, an enhancement of legal mandates, and a 22-point plan to address the imbalances in the Swedish residential investment market.

The decision of Nordea, Europe’s ninth-largest bank by market value, to move headquarters from Sweden to Finland in 2018 will bring significant changes to the large Swedish banking sector, but the overall diversity of the economy will be largely unaffected. The move was largely driven by Nordea’s decision to position itself on par with European peers, as Finland is a member of the EMU, but also by the bank’s previous conflict with the government over proposed tax increases and regulations.

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: i) growth potential of the economy, ii) economic policy framework, iii) debt sustainability, iv) market access and funding sources, and v) financial sector performance. Relative credit weakness is signalled for 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 could be downgraded if: i) a sharp correction in the housing market significantly damaged the resilience of the economy and banking system; and/or ii) economic or banking crises in the Nordic and Baltic region were to spill over into the Swedish economy.

Rating committee

The main points discussed during the rating committee were: i) moving of Nordea to Finland and its consequences for Swedish banking sector, ii) fiscal performance and debt sustainability, iii) housing market developments, and iv) demographic constraints.

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. 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 GmbH.
Rating prepared by John F. Opie, Lead Analyst
Person responsible for approval of the rating: Dr Giacomo Barisone, Head of Public Finance
The ratings/outlook were first assigned by Scope as a subscription rating in January 2003. The ratings/outlooks were last updated on 18.08.2017.
The senior unsecured debt ratings as well as the short-term issuer ratings were last updated by Scope on 18.08.2017.

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 Sveriges Riksbank, the Riksgälden, 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
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