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Fitch Affirms Sweden at 'AAA'; Outlook Stable
August 4, 2017 / 8:12 PM / in 4 months

Fitch Affirms Sweden at 'AAA'; Outlook Stable

(The following statement was released by the rating agency) LONDON, August 04 (Fitch) Fitch Ratings has affirmed Sweden's Long-Term Foreign- and Local-Currency IDRs 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-Currency and Local-Currency IDRs at 'F1+'. The issue ratings on short-term debt have also been affirmed at 'F1+'. KEY RATING DRIVERS Sweden's 'AAA' IDRs reflect strong governance and human development indicators, a high level of income per capita, and a track record of sound economic policy and public finances management. Economic growth is faster than peers. Strong domestic demand - especially investment - is driving economic growth, which was 3.1% yoy in 1H17. Whole economy investment in 1H17 was up 7.7% yoy, with construction investment particularly strong (13.5%). As a result, Fitch has revised up its GDP growth estimate for this year to 3.0%, from 2.6% at the time of the last review. Some of the factors that are sustaining growth will unwind to a degree over the next two years, slowing growth to 2.2% in 2018 and 2019, slightly higher forecasts compared to the 'AAA' median (around 2%). Strong real activity is translating to robust employment growth, although a growing labour force means the unemployment rate is not decreasing at a corresponding pace. The unemployment rate fell from 6.9% in December last year to 6.4% in June this year. We expect unemployment to average 6.4% this year, before edging down to 6.1% by 2019. This would still leave unemployment above the peer median (2019 forecast: 4.6%).There are indications of tightness in the labour market. At the same time, growth in labour cost indices have been stable so far this year. Monetary policy remains loose despite the continuing strength in economic activity. In April, the Riksbank, assessing that it would take longer than expected to get inflation back to target, expanded its purchases of government bonds (totalling SEK290 billion, around 6.3% of GDP). The central bank policy rate remains at -0.50%. Current Riksbank projections assume that the repo rate would not increase before mid-2018. Inflation is in line with the peer median, averaging 1.7% this year (harmonised HICP), compared with 1.1% in 2016. We expect inflation to continue to drift upward, reflecting the impact of above-trend growth and relatively weaker exchange rate since the start of 2016. On the assumption of unchanged exchange rates from end-July, we expect HICP inflation to average 1.7% this year, 1.9% next year and 2.0% in 2019. High private savings and low public deficits translate to a structural current account surplus, despite strong domestic demand. We expect the current account surplus to fall from 4.5% in 2016 to 3.3% this year, due to higher import prices worsening the trade balance in nominal terms. We then expect the relative strength of import prices to unwind, and the current account surplus to improve to 4% of GDP by 2019. Net external debt is currently higher than 'AAA' peers (18% at end-16, compared with a peer median of -7.5%). The net external debtor position is driven by the large external liabilities of the banking sector across the Nordic-Baltic region. Public sector indebtedness is in line with rating peers. The general government sector recorded a surplus of 0.9% in 2016, thanks to higher than expected tax receipts. We expect lower surpluses 2017 and 2018, and a balance in 2019, as public expenditure as a share of GDP edges up while revenue/GDP ratio remains stable. General government debt was 41.6% of GDP in 2016 (in line with the 'AAA' median). Our public finance projections are consistent with the debt ratio falling to 36.0% by 2019. High household indebtedness and house prices pose risks to macroeconomic stability. Annual house price inflation has decreased from the double-digit growth rates in 2015 and 1H16 to an average of 8.7% in 1H17. Household debt as a share of disposable income reached 182% in 1Q17. At the same time, households' high net wealth and savings ratios serve as buffers to this risk. A correction in debt-servicing ability (through higher interest rates) or a perception of wealth (through falling house prices) may lead to an adjustment in domestic demand, affecting growth prospects for the whole economy. The Swedish Financial Supervisory Authority (FSA) has proposed that from next year the amortisation requirement for households with a loan-to-income ratio of 4.5x pre-tax income is tightened, implying that mortgage holders pay down 1% more every year of their mortgage than under the current requirement. If the proposal were approved, affected households would have to amortise their mortgage by at least 2% per year if their loan-to-value (LTV) were greater than 50%, and by 3% for LTVs over 70%. The FSA estimate this would impact approximately 14% of mortgage holders, mainly in the major cities. The Swedish banking sector is large relative to the size of economy (total assets, including overseas operations, are around 400% of GDP). This partly reflects Swedish banks' operations across the Nordic and Baltic regions. The banking sector is also concentrated and closely interlinked. At the same time, risk-weighted capital ratios are very high, and profitability, costs and asset quality compare well with European peers. The Swedish banking sector has a Banking System Indicator of 'aa' (the weighted average of Viability Ratings of rated banks). 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 a track record of strong macroeconomic policymaking and robust medium-term growth prospects - External finances: +1 notch, to reflect that Sweden has a structural current 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 0.7% of GDP, real GDP growth of 2.1%, an average interest rate of 1.4%, and whole-economy inflation of 2.0%. On the basis of these assumptions, we project that the government debt to GDP ratio would fall to 25% by 2026. 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 Paul Gamble Senior Director +44 20 3530 1623 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 Criteria (pub. 21 Jul 2017) here Sovereign Rating Criteria (pub. 21 Jul 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation 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. 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