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Fitch Affirms Sweden at 'AAA'; Outlook Stable
February 10, 2017 / 9:08 PM / 7 months ago

Fitch Affirms Sweden at 'AAA'; Outlook Stable

(The following statement was released by the rating agency) LONDON, February 10 (Fitch) Fitch Ratings has affirmed Sweden's Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at 'AAA' with a Stable Outlook. The issue ratings on Sweden's senior unsecured foreign and local currency bonds have also been affirmed at 'AAA'. The Country Ceiling has been affirmed at 'AAA' and the Short-Term Foreign and Local Currency IDRs and Commercial Paper have been affirmed at 'F1+'. KEY RATING DRIVERS Sweden's 'AAA' ratings reflect a high level of income per capita, strong governance and human development indicators, and a track record of sound economic policy and public finances management. The Swedish government introduced a mildly expansionary budget, on the basis of an agreement between the government coalition (Social Democrats and Green Party) and the Left Party. The overall impact of discretionary measures is expected to be around SEK16bn in 2017 (around 0.4% of GDP). We estimate that the government budget balance was broadly unchanged in 2016, at 0.3% of GDP, and expect small deficits this year and next (-0.3% and -0.2% of GDP). Fitch estimates that the government debt to GDP ratio was 42.5% of GDP at end-2016 (in line with the AAA median). Our public finance projections would be consistent with the debt ratio falling to 40% by 2018. In the Spring Fiscal Policy bill later this year, the government will publish responses to the parliamentary report on the new fiscal policy framework. The new framework (a new surplus target of 0.33% and a debt anchor of 35% of GDP) is expected to be approved by this autumn's budget decision and take effect in 2019. We estimate that the Swedish economy expanded by over 3% in 2016 -more than double the pace of 'AAA' rated peers - with investment and consumption (both private and public) the main drivers of growth. This follows growth of just over 4% in 2015. We expect this pattern of growth to persist over the next two years, albeit at a slightly slower pace, with GDP growth expected to be 2.6% this year and 2.3% in 2018. Even with strong domestic demand growth, Sweden retains a structural surplus in both its trade balance and current account (CA). We estimate that the CA surplus in 2016 was 4.2% of GDP (lower than the estimated AAA median of 6.1%). Improving net exports will boost the current account and we expect the surplus to increase to 5.4% of GDP by 2018. Labour market developments reflect the positive growth outlook. Employment growth averaged 1.5% in 2016. Rising working-age population means that the fall in unemployment was more moderate, from 7.4% in 2015 to 6.9% (higher than the estimated AAA median of 5.7%). At the same time, vacancy rates increased over 2016, pointing to a degree of tightening in the labour market, and resource utilisation indicators are positive. Despite this, monetary policy remains loose. The policy interest rate is at -0.50%, and in December the Riksbank indicated that interest rates are not expected to rise until 2Q18, and that it would extend government bond purchases in 1H17. We expect inflation (on the HICP measure) to average 1.7% this year and 2.1% in 2018. A major downside risk to inflation projections stems from the exchange rate. A stronger than expected krona would push down on import process pressures and inflation. Low interest rates are one factor encouraging households to take on more debt. In our view, high household indebtedness and house prices pose risks to macroeconomic stability in Sweden. At the same time, households' high wealth levels and savings ratios serve as buffers to this risk. Corrections in households' debt-servicing ability (through higher interest rates) or perception of wealth (through a fall in prices) may lead to a retrenchment in domestic demand. Household debt as a share of disposable income reached 179.2% in 3Q16. House price annual inflation averaged 9.4% in 2016, with a slowdown in the growth rate between 1Q and 3Q. It may be that the amortisation requirement that came into effect in June has had a dampening effect on prices. However, since the requirement only applies to new mortgages it will take time to have an impact on the overall debt ratio. The Swedish banking sector is large relative to the size of the economy (with total assets, including overseas operations, at around 340% of GDP). This partly reflects the extent of banks' operations in the Nordic region. The banking sector is also concentrated, and closely interlinked. At the same time, Swedish banks' risk-weighted capital ratios are very high, and their profitability and asset quality compares well with European peers. The Swedish banking system has a Fitch Banking System Indicator of 'aa' (the weighted average of Viability Ratings). SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns Sweden a score equivalent to a rating of 'AA' on the Long-Term FC IDR scale. Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to rated peers, as follows: - Public Finances: +1 notch, to reflect our assumption that the downward path of Sweden's gross general government debt will continue beyond the SRM forecast horizon - External Finances: +1 notch, to reflect that Sweden has a structural account surplus, pointing to resilience to external shocks. Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM. RATING SENSITIVITIES The Outlook is Stable, which means that Fitch does not expect developments with a high likelihood of leading to a rating change. However, future developments that could, individually or collectively, result in downward pressure on the ratings include: -A severe macroeconomic shock - potentially originating in the household sector - leading to a sharp deterioration in the public finances through higher deficits and lower GDP growth. -A sizeable systemic shock to funding conditions in the financial system, given the size of the banking sector. KEY ASSUMPTIONS In its debt sensitivity analysis, Fitch assumes over the next 10 years an average primary balance of 0.8% of GDP, real GDP growth of 2.2%, an average effective interest rate of 1.2%, and whole-economy inflation of 1.6%. On the basis of these assumptions, we project that the government debt to GDP ratio would fall to 27% by 2025. Contact: Primary Analyst Alex Muscatelli Director +44 20 3530 1695 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Douglas Winslow Director +44 20 3530 1721 Committee Chairperson James McCormack Managing Director +44 20 3530 1286 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Country Ceilings (pub. 16 Aug 2016) here Sovereign Rating Criteria (pub. 18 Jul 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1018877 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. 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