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Rating action

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

Summary and Outlook

Sweden’s long-term ratings of AAA/Stable are underpinned by the following credit strengths: i) the country’s wealthy and diversified economy; ii) a robust fiscal framework and low level of public debt; iii) a strong external position driven by consistent current-account surpluses; and iv) a strong institutional framework and stable governance. These factors increase the country’s resilience to economic shocks, including from the Covid-19 pandemic, and provide the government with fiscal space for countercyclical fiscal policies. Challenges relate to: i) financial stability risks, including from high and rising levels of household and corporate debt, and ii) an elevated risk of a market correction in the housing market.

The Stable Outlook reflects Scope’s view that risks to the ratings over the next 12 to 18 months are balanced.

The ratings/Outlooks could be downgraded if, individually or collectively: i) a global or regional economic crisis and/or a sharp correction in the Swedish housing market significantly damaged household and banking system balance sheets; and/or ii) the fiscal outlook deteriorated, resulting in a significant increase in the public debt.

Rating rationale

The first driver for the affirmation of Sweden’s AAA ratings is the country’s wealthy and diversified economy, which recovered quickly from the impact of the Covid-19 pandemic. GDP contracted by 2.8% in 2020, slightly below the peer group’s average decline of around 3% and well below the EU average of around 6%. The second wave of the pandemic led to a slight fall in GDP during the last quarter of 2020, but economic output exceeded its pre-pandemic level by early 2021. The recovery has been driven by increases in goods exports and manufacturing, while the phasing out of Covid-19 related restrictions since June 2021 is leading to stronger private consumption supported by increased household savings accumulated during the pandemic.

Sweden’s continued recovery is facing some headwinds including capacity constraints and rising energy costs. While exports are expected to benefit from the continued global recovery in 2021 and 2022, growth is likely to moderate as the shortage of semiconductors and other intermediate goods has limited the production capacity of several industries, including machinery and road vehicles, which represent the highest percentages of Swedish exports. Labour shortages are also an increasing challenge across multiple industries, reflecting some frictions in the labour market as the unemployment rate remains elevated at 8.8% in September. The tripling of gas prices in Europe is pushing up energy prices more broadly and rising costs may dampen consumption growth over the winter. Despite these challenges, Scope expects economic growth of 4.0% in 2021 and 3.3% in 2022 before moderating towards Sweden’s medium-term growth potential estimated at around 1.75%. This relatively favourable medium-term growth outlook is supported by expected increases in the working-age population of 0.4% (according to UN estimates), steady labour force participation and annual labour productivity growth of around 1.0%.

Scope believes that rising electricity prices are likely to push CPIF inflation to around 3% towards the end of the year. However, longer-term inflation expectations remain anchored and the Riksbank (central bank) expects underlying inflation to rise more permanently towards its target of 2% over the coming years from around 0.7% in 2020, as the broad economic recovery results in higher wage growth and inflation abroad¹. Still, the current accommodative monetary policy stance is seen as a prerequisite for inflation near the target policy rate and there are concerns that premature policy tightening could lead to affordability challenges in mortgage lending. Scope therefore expects the repo rate to remain at 0% over the next year as the Riksbank’s future path of the repo rate indicates no policy rate increase for the forecast period until Q3 2024. In addition, no changes are expected regarding the planned purchases of securities by the central bank in 2021 and 2022.

The second driver supporting Sweden’s AAA rating is its robust fiscal framework and low public debt ratio. The credible fiscal policy framework was introduced in the 1990s and includes a surplus target for the entire general government sector, a debt anchor, an expenditure ceiling, a balanced budget requirement for local governments and a fiscal policy council. It has anchored a significant fall in general government debt from around 60% of GDP at the end of the 1990s to 34.9% in 2019. This has provided Sweden with ample fiscal space, allowing the government to undertake support measures in response to the Covid-19 pandemic amounting to almost SEK 400bn (8% of 2020 GDP) in 2020 and 2021 in addition to SEK 1trn (20% of 2020 GDP) made available in various forms of loans and guarantees². Fiscal policy continues to support the recovery with a particular focus on the green transition and inclusion objectives. In the Budget Bill 2022, announced in September, the Riksdag (Swedish parliament) presented reforms amounting to SEK 74bn in 2022 (1.5% of 2020 GDP), mainly focused on investments in the transition towards a low carbon economy, improving labour market conditions and strengthening the welfare system. The supportive fiscal measures increased the debt-to-GDP ratio to 39.9% in 2020, which Scope expects to remain stable at 39.4% in 2021 before declining towards 34% by 2026. This favourable debt trajectory is based on Scope’s expectation of sustained economic growth and a return to primary balances by 2024 as Covid-related measures are withdrawn.

The government support measures caused Sweden’s fiscal balance to shift from a surplus of 0.5% of GDP in 2019 to a 3.1% deficit in 2020. Sweden’s relatively rapid recovery from the macroeconomic shock resulted in lower fiscal deficits than its peer countries, averaging 4.5% in 2020. The budget balance has been more favourable than expected and the faster recovery of the economy is likely to further strengthen government finances through higher tax revenues. The Debt Office expects the central government budget balance to be positive this year and is therefore cancelling the remaining bond issuance in foreign currency that was planned for 2021, while reducing the supply of nominal government bonds in the regular auctions³. Scope expects the headline fiscal balance to remain in deficit, narrowing to 2.4% in 2021 and 0.4% in 2022. Under the fiscal framework, the surplus target for general government net lending was cut from 1% to 0.33% of GDP over the economic cycle from 2019 onwards and a gradual return to this target is expected in subsequent years. Considering Sweden’s low debt level and significant spending and investment needs, Scope believes the lower target under the framework remains justified if it can deliver necessary public and private sector investments to support higher long-term growth and employment, while bolstering the country’s green transition.

Declines in debt are also supported by continued low financing rates with Sweden’s 10-year yield at 0.36% at the time of writing. An average public debt maturity of 5.2 years is, however, below that of most governments in Sweden’s sovereign peer group. Risks posed by Sweden’s debt composition have declined in recent years, with foreign currency shares of central government debt falling from 25% at end-2019 to 19% in September, although the share of government debt held by the non-resident sector remains at around 30%. Scope believes that Sweden’s low level of government debt, stable demand for government bonds and the effective hedging of currency risk using derivatives, help to reduce risks from the relatively short average debt maturity.

Sweden’s AAA rating is further supported by its robust external position. While exports declined sharply at the onset of the pandemic, Sweden’s small, open and diversified economy is benefiting from the broad recovery in key export markets. As a country with net international assets (of 19.0% of GDP as of Q2 2021, with this ratio having improved from -4.2% as of Q2 2016), Sweden has enjoyed over two decades of current account surpluses. Sweden’s current account surplus totalled 5.7% of GDP in the year to Q2 2021 – unchanged from the previous year and above levels before the pandemic. The IMF forecasts the current account surplus at 4.3% of GDP in 2022, gradually stabilising at around 3% of GDP by 2026. Sweden’s gross external debt totalled 181% of GDP as of Q2 2021, remaining below a peak of 200% in Q1 2015. Liquid currency and international reserves amounted to 9.9% of GDP in 2020, providing a buffer against financial market volatility.

Finally, Sweden benefits from a very strong institutional framework and stable political environment. Sweden ranks among the top countries globally in governance indicators and has a strong track record implementing structural reforms to balance the country’s economic competitiveness and favourable business environment with its progressive and comprehensive social welfare system. Despite the fragile government coalition that emerged following the 2018 elections, Scope expects the proposed budget for 2022 to be ultimately approved by the Riksdag, allowing for policy continuity, and the next elections to take place as scheduled in September 2022.

Despite these credit strengths, Sweden’s ratings face important medium-term credit challenges.

First, risks to financial stability are the key medium-term challenge facing Sweden.

The Riksbank has warned on multiple occasions of the risks from high household indebtedness and banks’ exposure to the property sector⁴. The Swedish banking system is large, concentrated, interconnected, cross-border and dependent on global financial markets for funding. Banks also have significant exposures to the Swedish housing market and commercial property market. Due to the unprecedented fiscal response to the pandemic, there is little evidence of any stresses in the banking sector so far and non-performing loan ratios have fallen during the crisis from 0.6% at the end of 2019 to 0.5% by Q2 2021. However, household indebtedness has continued to rise to historically high levels of around 200% of household disposable income, while property prices⁵ have increased sharply, climbing by 12.4% over the past year.

Still, Scope notes positively that Swedish authorities reacted quickly to the economic shock resulting from the pandemic through an effective policy mix, including lowering the countercyclical capital buffer rate to 0%, allowing banks to temporarily breach liquidity coverage ratios, suspending amortisation requirements, and extending the phase-in period for banks to comply with MREL to 2024. These support measures helped to ensure that the credit supply to households and companies was maintained throughout the crisis. Stricter global and national requirements for banks’ capital and liquidity since the global financial crisis meant that the five major banks in Sweden entered the pandemic in a strong position, with low levels of non-performing loans and CET1 ratios averaging more than 20%. In Q2 2021, CET1 ratios were close to their pre-pandemic levels and above the EU average of 15.5%.

Second, and related, there remains an elevated risk of a market correction in the housing market. Scope thus welcomes the announcement by the financial supervisory authority, Finansinspektionen, that it plans to raise the countercyclical capital buffer and the decision not to extend the temporary exemption from the amortisation requirements. Scope believes the reintroduction of these requirements should help to moderate price growth somewhat. The high level of indebtedness makes households particularly vulnerable to unexpected shocks such as a loss of income, a fall in house prices, or rising interest rates as almost half of all mortgages are at variable interest rates. In addition, approximately half of Swedish banks’ corporate loan book is exposed to the commercial real estate sector and an accelerated shift towards teleworking, e-commerce and reduced travel could result in a market correction. The eventual impact of the pandemic on household and companies’ finances will become more evident once all government support measures have been phased out.

Core Variable Scorecard (CVS) and Qualitative Scorecard (QS)

Scope’s Core Variable Scorecard (CVS), which is based on the relative rankings of key sovereign credit fundamentals, provides an indicative rating of ‘aaa’ for the Kingdom of Sweden. This indicative rating can be adjusted by the Qualitative Scorecard (QS) by up to three notches depending on the size of relative qualitative credit strengths or weaknesses against a peer group of countries.

For the Kingdom of Sweden, the following relative credit strengths have been identified: i) macroeconomic stability and sustainability; ii) fiscal policy framework; iii) debt sustainability; iv) strong resilience to short-term external shocks; v) low environmental risks; and vi) low institutional and political risks. Relative credit weaknesses are: i) macro-financial vulnerabilities and fragility due to financial imbalances.

The combined relative credit strengths and weaknesses indicate a sovereign rating of AAA for Sweden.

A rating committee has discussed and confirmed these results.

Factoring of Environment, Social and Governance (ESG)

Scope explicitly factors in ESG sustainability issues during its rating process via the sovereign methodology’s stand-alone ESG sovereign risk pillar, with a 20% weighting under the quantitative model (CVS) as well as in the qualitative overlay (QS).

With respect to environmental risks, Sweden receives high scores in all CVS indicators. These include carbon emissions per unit of GDP, exposure and vulnerability to natural disaster risks, and the ecological footprint of consumption compared with available biocapacity. Scope assesses Sweden’s QS adjustment for ‘environmental risks’ as ‘strong’. Sweden aims to reduce transport emissions by 70% from 2010 to 2030, generate electricity consisting of 100% renewables by 2040, and become a net-zero carbon economy by 2045⁶. It was one of the first countries to implement a carbon tax in 1991 and currently imposes it at about USD 135 per ton, which is the highest level in the world. The country is on track to meet its EU greenhouse gas emission reduction target of 50% in 2030. Several energy-intensive sectors including steel, cement and mining have presented roadmaps for becoming carbon neutral, while discussions are ongoing concerning comprehensive tax reform for increasing environmental taxes. The government has introduced tools to finance climate-oriented investment, including green bond issuance and guarantees on credit for green investment. Assessments by the IMF suggest that investment needs for climate adaptation are large relative to peers, including in coastal protection as well as in upgrading and retrofitting exposed assets⁷.

Sweden benefits from favourable demographics and from an advanced social safety net, contributing to lower income inequality. The country performs well on the Social Scoreboard supporting the European Pillar of Social Rights. The nation’s employment rate is among the highest in the EU and the gender-employment gap is among the lowest in the bloc. The level of digital skills among the population is very high. The country has accepted a very large number of refugees, but integration has proved challenging. Organised crime is becoming an increasing concern, leading to more support for right-wing political parties.

Sweden benefits from the high quality of its institutions and a stable political environment despite the fragile government coalition that emerged following the 2018 elections. Following a vote of no confidence in June 2021, Prime Minister Stefan Löfven announced his resignation as leader of the Social Democratic Party and Prime Minister in August, effective from November 2021, ahead of the general election due in September 2022. Sweden’s Finance Minister Magdalena Andersson agreed to replace him as party leader, and she is likely to become the next Prime Minister.

Rating Committee
The main points discussed by the rating committee were: i) domestic economic risk, including growth potential and resilience; ii) public finance risks, including fiscal framework and debt dynamics; iii) external risks; iv) financial stability risks, including housing market and household debt; v) ESG considerations; and vi) peer developments.

Rating driver references
1. Riksbank Monetary Policy Report, September 2021
2. Ministry of Finance, Economic measures on account of the pandemic 2020–2021, September 2021
3. Riksgälden, Swedish Debt Office, Central Government Borrowing – Forecast and analysis, October 2021
4. Riksbank, Financial Stability Report, May 2021
5. Nasdaq OMX Valueguard-KTH Housing Index (HOX)
6. Swedish Climate Policy Council, 2021 Report of the Swedish Climate Policy Council, March 2021
7. IMF, Sweden: 2021 Article IV Country Report 2021/061, March 2021

Methodology
The methodology used for these Credit Ratings and/or Outlooks, (Rating Methodology: Sovereign Ratings, 8 October 2021), is available on https://www.scoperatings.com/#!methodology/list.
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. 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 Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Credit Ratings were not requested by the Rated Entity or its Related Third Parties. The Credit Rating process was conducted:
With Rated Entity or Related Third Party participation     NO
With access to internal documents                                  NO
With access to management                                           NO
The following substantially material sources of information were used to prepare the Credit Ratings: public domain.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Eiko Sievert, Director
Person responsible for approval of the Credit Ratings: Alvise Lennkh, Executive Director
The Credit Ratings/Outlooks were first released by Scope Ratings on January 2003. The Credit Ratings/Outlooks were last updated on 26 July 2019.

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.

Conditions of use / exclusion of liability
© 2021 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Analysis GmbH, Scope Investor Services GmbH, and Scope ESG Analysis 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 does not, 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 other 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 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 GmbH at Lennéstraße 5 D-10785 Berlin.