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Rating action

Scope Ratings GmbH (Scope) has today affirmed the Kingdom of Sweden’s long-term issuer and senior unsecured debt ratings at AAA in both local and foreign currency and maintained the Stable Outlook. The short-term issuer rating has been affirmed at S-1+ in both local and foreign currency with Stable Outlook.

Summary and Outlook

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 level of 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 levels of household and corporate debt; and ii) risk of a severe, persistent correction in the housing market.

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 resulting from a sharp correction in the housing market.

Rating rationale

The first driver supporting Sweden’s AAA ratings is the country’s wealthy and diversified economy. Sweden’s economy grew robustly by 2.6% in 2022, after 5.4% growth in 2021, supported by strong export and investment performance. While the positive growth momentum continued in Q1 2023, economic output declined by 0.8% in Q2 as persistent inflationary pressures combined with tight monetary policy curbed household consumption, corporate profit margins and private investments, particularly in the housing sector. In addition, weakening external demand is hindering exports as global demand for goods has fallen since consumption patterns normalised after the Covid-19 pandemic. Despite the recent slowdown, Sweden’s economy is still more than 5% larger than before the Covid-19 pandemic.

Scope expects the economic slowdown to result in a recession this year, with real GDP declining by 0.7%. High interest rates will continue to restrain investments and private consumption as households’ real disposable income falls. Subdued external demand will also weigh on exports, although the weakening krona can help partially offset the negative impact. Risks to the outlook remain tilted to the downside as inflationary pressures could persist for longer than expected, financial imbalances could also result in the materialisation of financial stability risks and thus contingent liabilities for the government, and finally, international geopolitical tensions could further intensify.

CPI inflation averaged 8.3% in 2022 and remained high at 9.3% in July 2023 after peaking at 12% in February. The gradual decline in inflation in recent months was mainly driven by falling electricity prices while other factors, such as sustained demand for services, are keeping inflationary pressures elevated. This is reflected by core inflation – as captured by the CPIF rate excluding energy and unprocessed food – which declined from its peak of 8.6% in February but remained high at 7.9% in July.

Inflation is projected to remain elevated this year, easing gradually, but not falling below the 2% inflation target until 2025. The Riksbank’s Executive Board decided to raise the policy rate by 0.25pp to 3.75% in June¹ and accelerate the pace of government bond sales from SEK 3.5bn to SEK 5bn per month. While the outlook remains highly uncertain, Scope expects up to two more hikes with the policy rate reaching 4.25% by the end of 2023 given the persistent high inflation and weak krona.

Sweden’s labour market has so far remained resilient despite the slowing economy. The employment rate stood at 70.5% in July, staying at its highest levels in more than a decade on the back of strong demand for labour and a rapid increase in employment among foreign born residents. Similarly, the unemployment rate fell to 7% in July after having averaged 7.5% in 2022, well below the highs during the Covid-19 pandemic of more than 9%, but still above levels of AAA-rated peers.

Wage growth has been muted so far which will support the expected decline in inflation. In April 2023, pay deals for more than 2 million wage earners (or more than 35% of the country’s total workforce) were renegotiated. The collective agreement will result in wage increases of 4.1% in the first year and 3.3% in the second year². Despite the weak economic outlook, Scope expects a relatively mild deterioration in the labour market with employment levels starting to decline in autumn and the unemployment rate averaging 7.4% in 2023 and around 8% in 2024.

The second driver supporting Sweden’s AAA rating is its strong fiscal framework and low public debt ratio. The surplus target for net lending to amount to 0.33% of GDP on average over a business cycle resulted in ample fiscal space and enabled the government to implement effective support during the Covid-19 pandemic with various forms of liquidity, loans and guarantees. It also places the government in a strong position to increase military spending to meet Nato’s 2% of GDP target, and to shield households from rising energy prices, including supporting the green transition.

The debt-to-GDP ratio declined to 31.7% in 2022, from a peak at 39.5% in 2020. Scope expects the debt-to-GDP ratio to increase slightly to 32.6% this year. Slower economic growth and rising spending pressure will result in a slight increase in debt levels to around 34% of GDP in 2025 before resuming a gradual downward trend. The debt level is therefore set to remain within the limit of the 35% (+/-5%) of GDP threshold specified in the fiscal framework. Sweden’s debt level remains one of the lowest among EU member states and AAA-rated peers.

Despite the ample available fiscal space, the government has signalled its intention to maintain a restrained fiscal policy to avoid fuelling inflationary pressures. The Ministry of Finance estimates support measures of around SEK 40bn (0.6% of GDP) in the forthcoming autumn budget focussed on vulnerable households and the welfare system³. Around SEK 15-20bn will be earmarked for additional resources to municipalities and regional authorities, tax cuts and subsidies to households. Scope expects budget deficits of 0.4% and 1.1% of GDP in 2023 and 2024 respectively, before a return to budget surpluses by 2026.

Sweden’s AAA rating is further supported by its robust external position. The country’s open, diversified economy has benefited from current account surpluses over the last two decades and has a net external creditor position. Paired with a stable level of reserves, the latter shields the country from short-term shocks. The current account surplus stood at 4.2% of GDP in 2022, declining from 6.5% in 2021 on the back of lower net exports of goods and higher imports of services following the economic recovery from Covid-19. A weak krona supported exports in the first half of 2023, resulting in a current account surplus of 4.3% of GDP in Q2 2023. Scope expects the wider domestic economic slowdown, combined with the economic downturn in Sweden’s major trading partners like Germany, to further decrease goods exports this year. The IMF projects the current account balance to stabilise at just under 4% in the medium term.

In addition, Sweden’s external debt stood at 180% of GDP in Q2 2023, up from 171% at end-2022, but significantly lower compared with 2009 debt levels of around 200% of GDP. External debt is mainly related to financial institutions (58% of total external debt), intercompany lending (22%) and non-financial corporates (15%), while the central bank and government account for the remaining 6%. Sweden’s international reserves, amounting to 10.3% of GDP in July 2023, provide a buffer against financial market volatility.

Official reserve assets averaged USD 43bn in 2022 (7.3% of GDP) and remained broadly stable at USD 41bn in July 2023. Given Swedish banks’ high dependence on wholesale funding in foreign currency and the disruptions that can occur to such funding in times of financial distress, it is important for Sweden to maintain adequate levels of foreign reserves. Sweden’s net international investment position continued to improve steadily, averaging 38.4% of GDP in 2022. It increased further to 44% of GDP in Q2 2023, reflecting continued current account surpluses and net valuation gains. As the Swedish stock market has seen greater declines than international stock markets, foreign-held assets in Sweden decreased more in value than Swedish assets held abroad.

Despite these key credit strengths, Sweden’s ratings face the following challenges:

First, there are growing financial stability risks, particularly from high levels of household and corporate indebtedness. Private sector debt stood at 268% of GDP in Q4 2022, near all-time highs and the highest among Nordic economies. Debt levels of Swedish households fell slightly during the pandemic from a peak of 94% in Q1 2021 to 88% in Q4 2022. However, their debt-to-income ratio has increased by almost 30pps in the past 10 years, exceeding 200% in early 2022, before declining slightly to 195% in Q4 2022.

Household debt mainly relates to mortgages, accounting for more than 80% of total lending to households. In addition, almost 90% of the loan value has refinancing terms of two years or less, putting pressures on household income as tighter monetary policy rapidly translates into higher mortgage costs. Coupled with measures introduced by the Financial Stability Authority to reduce credit risks, this has resulted in the annual growth rate of lending to households to fall to a historical low of 0.9% in July. Still, the high level of financial assets and the large savings accumulated during the pandemic have so far helped to cushion the impact.

Debt levels of non-financial corporations also remain at their highest level on record at 180% of GDP in Q4 2022, well above the euro area average (105%) and other Nordic economies such as Denmark (128%), Norway (115%) and Finland (113%). Corporate credit growth has slowed sharply this year, falling to 7% in July, following a period of significant credit growth during 2022. This mainly relates to an increase in bank loans as net bond issuance has turned negative in 2023. With real estate companies accounting for more than 40% of banks’ total loans, refinancing risks have particularly increased for some smaller and medium-sized companies that face falling interest coverage ratios which could result in breaching bank loan covenants. With 40% of the Swedish commercial real estate companies’ outstanding bonds maturing between 2024 and 2025, stress tests conducted by the Financial Supervisory Authority indicate that higher credit losses could materialise for the sector if financing costs remain elevated.

While financial stability risks are elevated, the Swedish banking sector maintains a relatively strong position amid rising interest rates and a slowing economy. The country’s banking sector is concentrated in five major banks that are highly interconnected and dependent upon global financial markets for funding. Banks have remained resilient during the recent crises, including during the turmoil in the global banking sector in March 2023 when a loss of confidence triggered several bank runs. Rising net interest income has supported profitability, while capital buffers have remained stable with the CET1 ratio at around 19% in Q1 2023, and non-performing loans still at all-time lows. The increased countercyclical capital buffer rate of 2% became effective as of June 2023 and, given the continued resilience in the banking sector, was left unchanged by the Swedish Financial Supervisory Authority on 13 September⁴.

Second, there remains a risk of a more severe correction in the housing market which could further amplify financial stability risks. The Booli index shows that real estate prices peaked in H1 2022. Prices in most regions have subsequently fallen by 10-15%, reflecting a broad correction following the rapid rise in interest rates. As of August 2023, house and apartment prices are around 13% and 9% below their respective peaks but are still well above pre-pandemic levels. While there are some signs of stabilisation, further declines are likely over the next months as the number of housing transactions remains low and houses for sale stay on the market for a long time. 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 as large banks tend to finance mortgage loans using covered bonds held by insurance companies, pension funds and other banks.

Recent stress tests of the banking sector demonstrate the banks’ resilience but also key vulnerabilities. The latest EBA stress test⁵ covers a macroeconomic scenario for the years 2023-25 including a severe recession, increasing interest rates and higher credit spreads. Under such a scenario, the major Swedish banks would see a maximum reduction in their CET1 ratio of between 2.0 and 4.5pp. This implies that banks could withstand the scenario without breaching minimum capital requirements. Stress testing performed under the IMF’s Financial Sector Assessment Program⁶ considers a de-anchoring of inflation expectations, continued shortages due to supply chain disruptions, persistently high energy and food prices, lower real estate prices, and a period of negative growth. Such a scenario could see sharp falls in interest coverage ratios of some CRE firms and could cause overall capital in the banking sector to decrease by more than 620bps. While banks have high levels of liquidity and high capital buffers, banks’ internal models do not fully capture feedback and amplification effects of CRE exposures in Sweden’s highly interconnected financial system.

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 a first indicative credit rating, which was approved by the rating committee, of ‘aaa’ for Sweden. The ‘aaa’ indicative ratings can thereafter 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 Sweden, the following relative credit strengths have been identified: i) macroeconomic stability and sustainability; ii) fiscal policy framework; iii) resilience to short-term shocks; and iv) environmental factors. Sweden’s relative credit weaknesses are: i) financial imbalances.

The combined relative credit weaknesses and strengths identified in the QS generate a one-notch positive adjustment to the ratings and indicate a sovereign credit 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 issues into its rating process via the sovereign methodology’s standalone ESG sovereign risk pillar, with a 25% weighting under the quantitative model (CVS) and 20% weighting in the qualitative scorecard (QS).

Environmental factors are explicitly considered in the rating process via the environment sub-category under the ESG risk pillar. Sweden receives high scores in the CVS indicators measuring CO2 emissions per GDP, the exposure and vulnerability to natural disaster risks, and the ecological footprint of consumption compared with available biocapacity. In line with other advanced economies, the country receives a lower score for the CVS indicator measuring greenhouse gas (GHG) emissions per capita. Scope assesses Sweden’s QS adjustment for ‘environmental factors’ as ‘strong’. The country is on track to meet its EU GHG emission reduction target of 63% by 2030 compared to 1990 levels. In addition, it aims to meet 100% of its electricity needs from renewable sources by 2040 and become a net-zero economy by 2045. According to the Climate Policy Council of Sweden, however, policies need to be further strengthened in order to achieve the ambitious neutrality target in 2045.

In 2022, around 26% of energy consumption came from fossil fuels, 20% from nuclear and 53% from renewable sources, in particular hydropower. The country has a low dependence on natural gas, accounting for just 1% of total energy consumption, but still an elevated dependency on oil (22%). Sweden was one of the first countries to implement a carbon tax (in 1991) and imposes SEK 1,330 (around EUR 122) per tonne in 2023, among the highest levels worldwide, although still applied to a limited share of emitting sectors.

Sweden benefits from favourable demographics with a working age population projected to remain stable over the medium term, and from an advanced social safety net that contributes to low-income inequality. The employment rate is among the highest in the EU and the gender-employment gap is among the lowest in the EU. The level of digital skills among the population is very high. The country has accepted a large number of refugees and has become more effective at integrating foreign born residents into the workforce as the employment gap to Sweden born residents has narrowed sharply in recent months. Organised crime has become an increasing concern and was a key topic during past elections.

Sweden benefits from the high quality of its institutions and a stable political environment despite past fragile government coalitions. The right-wing block including the Moderates, Sweden Democrats, Christian Democrats and Liberals secured a narrow majority in September 2022 general elections. The Moderates’ leader Ulf Kristersson subsequently formed a minority coalition government with the Christian Democrats and the Liberals. The anti-immigration Sweden Democrats, which emerged as the largest right-wing party, will not be an official member of the government, but the four parties will pursue a unified government policy. The coalition is expected to take a tougher stance on immigration and refugees, introduce criminal justice reforms and remain committed to climate change goals. Significant compromise among coalition partners will be needed to agree and implement some of these reforms.

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

Rating driver references 
1. Riksbank, Monetary Policy Report, June 2023 
2. Sweden’s convergence programme 2023
3. Government of Sweden press release: High inflation continues to impact Swedish economy
4. Finansinspektionen: Countercyclical capital buffer decisions 
5. EBA 2023 EU-wide stress test 
6. IMF Financial Sector Assessment Program–Technical Note on Stress Testing of the Financial Sector

Methodology
The methodology used for these Credit Ratings and/ Outlooks, (Sovereign Rating Methodology, 27 September 2022), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies. 
The model used for these Credit Ratings and Outlooks is (Sovereign CVS model version 2.1), available in Scope Ratings’ list of models, published under https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. 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-governance/definitions-and-scales. 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://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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   YES
With access to internal documents                                 NO
With access to management                                          YES
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity.
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 Outlooks and the principal grounds on which the Credit Ratings and Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and Outlooks are UK-endorsed.
Lead analyst: Eiko Sievert, Director
Person responsible for approval of the Credit Ratings: Alvise Lennkh-Yunus, Executive Director
The Credit Ratings/Outlooks were first released by Scope Ratings on January 2003. The Credit Ratings/Outlooks were last updated on 7 October 2022.

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

Conditions of use / exclusion of liability
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