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Fitch Ratings affirmed Sweden's 'AAA' rating saying it reflects its high per capita income, persistent budget surpluses, declining public debt, strong governance and human development indicators, and a track record of sound economic policy.

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Fitch's Key Rating Drivers 

Sweden's 'AAA' rating reflects its high per capita income, persistent budget surpluses, declining public debt, strong governance and human development indicators, and a track record of sound economic policy.

Political uncertainty has lessened after the formation of a new government on 11 January put an end to four months of political impasse following the September general elections. Social Democrat leader Stefan Lofven has been re-elected for a second term as prime minister, and will lead a minority government with previous coalition partner, Green Party. The centre-left government also has the parliamentary support of centre-right parties, Liberal and Centre Party.

However, their backing has meant Lofven's government will compromise in key policy areas (including tax, immigration and labour market laws) outlined in a 73-point agreement. Fitch does not expect a material deviation from Sweden's track record of strong macroeconomic policy making.

  • Governance indicators, as measured by the World Bank, are amongst the strongest of 'AAA' rated sovereigns.
  • Economic growth is stronger than rating peers.
  • Sweden's five-year average real GDP growth, at 2.8%, is higher than the current 2.2% median for 'AAA' sovereigns.
  • Fitch estimates the Swedish economy to have grown 2.3% in 2018, above the EU average.
  • Employment growth, low inflation and still accommodative financing conditions support domestic demand.
  • In 2019-2020, Fitch expects momentum in the economy to slow, weighed down by weaker investment activity in housing and industry.
  • The agency forecasts average real GDP growth of 1.8% in 2019-2020. Potential growth is around 2.0%.

Underlying inflation pressure remains subdued and wage growth is expected to pick up only gradually, despite the tighter labour market. Inflation expectations remain well anchored around the Riksbank's target of 2% over the forecast horizon.

Despite an increase in the main repo rate of the central bank by 25bp in December 2018, the monetary policy stance remains expansionary and the Riksbank has kept its commitment to reinvest redemptions and coupon payments from its SEK350 billion (equivalent to 7.3% of GDP) government bond portfolio. Public finances remain a strong support to Sweden's 'AAA' rating.

Sweden's general government fiscal surplus is estimated by Fitch to have reached 1.0% of GDP in 2018, compared with an estimated current median deficit of 0.3% of GDP across 'AAA' rated peers. Gross general government debt is also on a firm downward trajectory as a result of sound economic growth, primary surpluses and low and declining interest expenditure.

At 37.2% of GDP at end- 2018, Sweden's debt ratio is below the current 44.3% median debt ratio of 'AAA' peers. Fitch forecasts general government debt to decline towards 24.9% of GDP by 2027. Under a temporary caretaker government after September elections, the 2019 budget was exceptionally based on the 2018 budget, with some adjustments for tax changes (including raising the taxable threshold at the lower income level and tax cuts for pensioners). Fitch expects a supplementary budget in spring with new fiscal measures from the new government.

A strong surplus leaves sufficient fiscal space to ensure the revised budget will not deviate from the existing fiscal framework, which targets an average surplus 0.3% of GDP over a business cycle. For 2019 and 2020, Fitch forecasts fiscal surpluses of 0.7% and 0.4% of GDP, respectively.

The Swedish banking sector is large relative to the size of the domestic economy.

Total assets, including overseas operations, are around 3x GDP. This partly reflects Swedish banks' operations across the Nordic and Baltic regions. Risk-weighted capital ratios are high, and profitability, costs and asset quality compare favourably with European peers despite the negative interest rate environment. The Swedish banking sector has a Banking System Indicator of 'aa' (the weighted average of Viability Ratings of the larger rated banks), the strongest in Europe.

The private sector has a sound net financial position. However, high and rising household indebtedness continue to pose a key financial stability risk, particularly if house prices show signs of a second correction, having somewhat stabilised in 2H18. The Riksbank estimates aggregate household debt-to-disposable income ratio over 185%, and forecasts it will trend towards 190% in the next few years.

Sweden has a structural current account surplus, which has averaged 4.0% in the past five years. The surplus reflects both the high level of savings in the non-financial private sector and the government budget surplus. Sweden's net external debt, at an estimated 39.5% of GDP at end-2018, is higher than the current median ratio (18.6%) of 'AAA' peers.

The large ratio mainly accounts for sizeable liabilities held by the banking sector. The government is a large net external creditor. Sweden's net IIP is positive (12% of GDP at end-2017)

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:

- Macroeconomic factors: +1 notch, to reflect the track record of strong macroeconomic policymaking and robust performance.

- External finances: +1 notch, to reflect Sweden's track record of structural current account surpluses, pointing to resilience to external shocks, and positive net international investment position (IIP) 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 main factor that could lead to negative rating action is:

  • A severe macroeconomic shock - potentially originating in the housing sector
  • leading to a sharp deterioration in the public finances through budget deficits and lower GDP growth

KEY ASSUMPTIONS

Our long-run debt sustainability calculations are based on the assumption of 1.5% medium-term GDP growth potential, 2.0% GDP deflator, 0.7% of GDP primary surplus over the forecast period and a gradual increase in marginal interest rate to 2.6%. Under these assumptions the GGGD would decline to 24.9% of GDP by 2027. The global economy performs in line with Fitch's Global Economic Outlook, which projects eurozone growth at 1.7% in 2019 and 1.6% in 2020.

The full list of rating actions is as follows:

Long-Term Foreign-Currency IDR affirmed at 'AAA'; Outlook Stable Long-Term Local-Currency IDR affirmed at 'AAA'; Outlook Stable Short-Term Foreign-Currency IDR affirmed at 'F1+' Short-Term Local-Currency IDR affirmed at 'F1+' Country Ceiling affirmed at 'AAA' Issue ratings on long-term senior unsecured foreign-currency bonds affirmed at 'AAA' Issue ratings on long-term senior unsecured local-currency bonds affirmed at 'AAA' Issue ratings on short-term senior unsecured bonds affirmed at 'F1+'

Source: Fitch Ratings

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