Scope Ratings GmbH (Scope) monitors and reviews its credit ratings on an ongoing basis and at least annually, or every six months in the case of sovereigns, sub-sovereigns, and supranational organisations.

Scope performs monitoring reviews to determine whether material changes and/or changes in macroeconomic or financial-market conditions could have an impact on the credit ratings. Scope considers all available and relevant information when undertaking the monitoring review.

Scope completed the monitoring review for the Kingdom of Sweden (long-term local- and foreign-currency issuer and senior unsecured debt ratings: AAA/Stable; short-term local- and foreign-currency issuer ratings: S-1+/Stable) on 27 March 2023.

This monitoring note does not constitute a credit rating action, nor does it indicate the likelihood that Scope will conduct a credit rating action in the short term. Information about the latest credit rating action connected with this monitoring note along with the associated rating history can be found on www.scoperatings.com. 

For the updated rating report accompanying this review, click here.

Key rating factors

The Kingdom of Sweden’s long-term AAA/Stable ratings are underpinned by the following credit strengths: i) the country’s wealthy and diversified economy; ii) a strong fiscal framework and low public debt; and iii) a robust external position driven by consistent current account surpluses, a net international creditor position and international reserves that shield the country from short-term shocks.

Challenges relate to: i) financial stability risks, including from high household and corporate debt levels; and ii) the risk of a severe, persistent correction in the housing market.

Sweden’s economy rebounded quickly from the Covid-19 crisis, growing by 4.8% in 2021. By early 2021, economic output reached pre-pandemic levels on the back of a strong recovery in private consumption, investment and in-person services. The momentum has slowed significantly since mid-2022 due to the fallout from the Russia-Ukraine war, as wider inflationary pressures and the close interconnection with European electricity markets caused energy prices to surge. This has resulted in tightening financial conditions, a sharp contraction in the housing market and falling real incomes. While economic output still increased by 2.8% in 2022, Scope expects GDP to decline by 1.0% in 2023. The recession is expected to be short-lived, with GDP growing again in 2024 by 1.3% before returning to Sweden’s medium-term annual growth potential of around 1.8%.

The Riksbank faces a difficult balancing act of tightening monetary policy to slow inflation, while avoiding a more severe economic downturn and the materialisation of financial stability risks. Systemic risks are now elevated but remain manageable. A major macro-financial shock, however, could still put banks’ healthy capital levels under pressure. Real estate prices in some regions are expected to fall by around 20%, reflecting a broad correction following the rapid rise in interest rates. As of February 2023, house and apartment prices are around 17% and 10% below their peaks. High private debt in combination with typically short rate fixation has led to a high sensitivity to interest rate changes. The interconnectedness of Sweden’s financial system could amplify this risk in the event of a severe macro-financial shock. Large banks tend to finance mortgage loans using covered bonds held by insurance companies, pension funds and other banks.

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

The rating/Outlook could be downgraded if, individually or collectively: i) the fiscal outlook deteriorated, resulting in a significant increase in public debt; and/or ii) there is a significant deterioration in the economic outlook, for example, due to a sharp correction in the housing market.

The methodology applicable for the reviewed ratings and/or rating Outlooks (Sovereign Rating Methodology, 27 September 2022) is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
This monitoring note is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst: Eiko Sievert, Director.

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