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.

The affirmation of Sweden’s credit ratings reflects the country’s wealthy and diversified economy which has proven resilient during recent crises. The low level of public debt and a strong fiscal framework, including a general government surplus target and debt anchor at 35% of GDP, are additional credit strengths. Moreover, Sweden’s robust external position driven by consistent current account surpluses, a net international creditor position and international reserves shield the country from short-term shocks.

The main credit 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.

For the updated rating report, click here.

Key rating drivers

Wealthy, diversified and competitive economy proved resilient during recent crises. Sweden’s economy proved resilient during the Covid-19 pandemic and energy crisis, though the sharp rise in interest rates following the inflationary pressures magnified by the Russia-Ukraine war dampened economic growth in 2023. GDP contracted by 0.2% as investment slowed and consumption weakened due to a fall in households’ disposable income as wage increases remained muted and mortgage costs increased. Swedish households are more sensitive to interest rate rises than in the US or euro area. They tend to have higher debt levels as just over half of Swedish households have mortgages (27% in euro area; 40% in US), of which 70% are on variable rates (16% in euro area; 8% in US¹). Still, the economic contraction was less than expected due to a resilient labour market with the average unemployment rate only increasing marginally from 7.5% in 2022 to 7.7% in 2023, while the employment rate increased from 68.8% to 69.5%. The unemployment rate will continue to increase in 2024 to around 8.4%, although this reflects large inflows of people joining the labour force, rather than large-scale redundancies, indicating some spare capacity. Scope expects that rising consumer confidence will support household spending as interest rates gradually decline, which together with the turnaround in the global manufacturing cycle should lead to economic growth of 0.4% in 2024, before accelerating to 2.0% in 2025.

CPI inflation has fallen rapidly from its high of 12.3% in December 2022 to 2.6% in July 2024, while core CPI inflation (which excludes mortgage interest cost, energy and unprocessed food) has also declined to 2.3%. The decline in inflationary pressures has been supported by restrained fiscal policy and low wage growth averaging 2.7% in 2022 and 3.7% in 2023. Scope expects CPI inflation to average 3.0% in 2024, before falling below target at 1.5% in 2025. This could allow for additional monetary stimulus in the form of further interest rate cuts and increased investments given Sweden’s large fiscal space.

Strong fiscal framework, low public debt ratio and ample fiscal space. The AAA rating is further supported by Sweden’s strong fiscal framework which includes a surplus target for net lending of 0.33% of GDP on average over a business cycle, as well as a debt anchor of 35% of GDP (+/-5%). In Scope’s view, the ongoing review of the surplus target is unlikely to significantly weaken the tight fiscal framework, while potentially freeing up some of Sweden’s significant fiscal space to fund investments.

Scope expects budget deficits of 1.1% and 0.6% of GDP in 2024 and 2025 respectively, resulting in the debt-to-GDP ratio to increase slightly to 36.4% in 2024 on the back of lower tax receipts amid slow economic growth, and a capital contribution of SEK 25bn (0.4% of GDP) to the Riksbank. The agreed capital contribution is lower than the SEK 44bn requested by the Riksbank under the new January 2023 Riskbank Act which sets a target level, base level and minimum level for the amount of equity the Riksbank should have². From 2026, the budget balance is forecast to return to a surplus, driving a gradual reduction in debt-to-GDP to 32.7% in 2029. Sweden’s public debt level will therefore remain one of the lowest among EU member states and AAA-rated peers.

Robust external position including consistent current account surpluses, lower external debt and high official reserves. Sweden’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 6.6% of GDP in Q1 2024, supported by a strengthening trade balance. The IMF projects the current account balance to stabilise at just above 4% in the medium term, remaining higher than the pre-Covid level of around 3.2% in 2015-19.

Sweden’s external debt stood at 182% of GDP in Q1 2024, broadly unchanged from the previous year, but significantly lower compared with 2009 debt levels of around 200% of GDP. External debt is mainly related to financial institutions (61% of total external debt), intercompany lending (20%) and non-financial corporates (14%), while the central bank and government account for the remaining 5%. Sweden’s international reserves, amounting to 10.1% of GDP in June 2024, and the Krona’s regional safe haven status, provide a buffer against financial market volatility.

Official reserve assets averaged USD 41bn during the first half of 2024 (6.6% of GDP), remaining unchanged from 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, reaching 45% of GDP in Q1 2024, up from 35% in 2023, reflecting continued current account surpluses and net valuation gains³.

Rating challenges: financial stability risks from high levels of household and corporate debt and risk of a severe, persistent correction in the housing market

Financial stability risks in Sweden have declined over the past year as the interest rate hiking cycle started to turn, although there remain significant uncertainties concerning rates remaining higher for longer or a renewed macroeconomic shock from rising geopolitical tensions. Vulnerabilities mainly stem from high levels of household and corporate indebtedness. Private sector debt stood at 238% of GDP in Q4 2023, down from all-time highs of 270% in Q4 2021, but still the highest among Nordic economies. Non-financial corporates account for around two-thirds of the private sector debt. Financing conditions for property companies investing in commercial real estate (CRE) have improved and some have been able to return to the bond market. Still, highly-leveraged property companies with low credit ratings remain vulnerable. While CRE rents are set to rise as they are indexed to inflation, office vacancy rates remain elevated and financing costs for many property firms are set to rise as debt is rolled over. Household debt primarily relates to mortgage debt as the short interest-rate fixation periods result in a relatively fast transmission of monetary policy, reflected by declines in consumption over the past year. Previously introduced macroprudential measures, the high level of financial assets held by households and a strong labour market have supported resilience during the recent economic slowdown. Finally, major Swedish banks have remained resilient during the recent crises with historically high profitability and comfortable capital buffers. While banks have significant exposure to property companies, recent stress tests indicate that banks can manage a scenario of substantial deterioration in CRE markets⁴. In contrast, smaller consumer credit banks have faced rising loan losses in recent years and withdrawals of consumer deposits pose an additional challenge for the sector.

Risks of a more severe house price correction have subsided in recent months as prices have remained relatively stable in 2023 according to the Booli index after significant declines in 2022. Prices have started to recover during the first half of 2024 and further increases are expected due to the gradual decline in interest rates. Prices for apartments are up around 3.7% in June 2024 compared with the previous year and house prices are up around 2.5%. Still, the high sensitivity of household mortgages to interest rates and high leverage in some property companies investing in CRE remain vulnerabilities. The interconnectedness of Sweden’s financial system could amplify risks 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. Some of these vulnerabilities could be reduced through structural reforms including a broad review of housing and tax policy, as well as improved transparency around property valuations.

Outlook and rating sensitivities

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

Downside scenarios for the rating and Outlooks are if (individually or collectively):

1. The fiscal outlook deteriorated significantly, resulting in a sharp increase in public debt; and/or
    
2. There is a significant deterioration in the economic outlook, for example resulting from a sharp correction in the housing market.

Sovereign Quantitative Model (SQM) and Qualitative Scorecard (QS)

Scope’s SQM, which assesses core sovereign credit fundamentals, signals a first indicative credit rating of ‘aaa’ for Sweden. Under Scope’s methodology, this initial indicative rating receives: i) no further adjustment from the methodological reserve-currency adjustment; and ii) no negative adjustment from the methodological political-risk quantitative adjustment. On such a basis, a final SQM quantitative rating of ‘aaa’ is assigned for Sweden and reviewed by the Qualitative Scorecard (QS) where this rating can be adjusted by up to three notches up or down depending on the significance of Sweden’s qualitative credit strengths or weaknesses compared against an SQM-assigned peer group of sovereigns.

Scope identified the following relative credit strengths of Sweden via the QS: i) macroeconomic stability and sustainability; ii) fiscal policy framework; iii) resilience to short-term shocks; and iv) environmental factors. Conversely, the following QS relative credit weakness of Sweden was identified against the sovereign’s peer group: i) financial imbalances. On aggregate, the QS generates a one-notch positive adjustment for Sweden’s credit rating, concluding in final AAA long-term issuer ratings.

A rating committee has discussed and confirmed these results.

Environment, social and governance (ESG) factors

Scope explicitly factors in ESG issues in its ratings process via the sovereign-rating methodology’s stand-alone ESG sovereign-risk pillar, which holds a significant 25% weighting under the quantitative model (SQM) and 20% weight under the methodology’s qualitative overlay (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 SQM 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 SQM indicator measuring greenhouse gas (GHG) emissions per capita, although this is still one of the highest scores among highly-rated peers. Scope assesses Sweden’s QS adjustment for ‘environmental factors’ as ‘strong’. The country aims to meet 100% of its electricity needs from renewable sources by 2040 and become a net-zero economy by 2045, ahead of the EU’s 2050 target. According to the Climate Policy Council of Sweden⁵, however, policies need to be further strengthened in order to achieve the ambitious neutrality target in 2045. In 2023, around 26% of energy consumption came from fossil fuels, 20% from nuclear and 54% from renewable sources, in particular hydropower. Sweden was one of the first countries to implement a carbon tax (in 1991) and imposed 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, although the government has since introduced tougher immigration policies. 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, are not an official member of the government, but are backing the government in return for a tougher immigration stance.

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. Federal Reserve Bank of St Louis, Which Households Prefer ARMs vs Fixed-Rate Mortgages?, February 2024
2. Sveriges Riksbank, Why the Riksbank is requesting SEK 43.7bn as a capital injection, May 2024
3. IMF External Sector Report
4. Riksbank – Financial Stability Report
5. Swedish Climate Policy Council, Report 2024

Methodology
The methodology used for these Credit Ratings and/or Outlooks, (Sovereign Rating Methodology, 29 January 2024), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for these Credit Ratings and/or Outlooks is (Sovereign Quantitative Model Version 3.0), 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/or Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings and/or Outlooks 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, Senior Director
Person responsible for approval of the Credit Ratings: Alvise Lennkh-Yunus, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on January 2003. The Credit Ratings/Outlooks were last updated on 15 September 2023.
 
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, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use / exclusion of liability
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