Fitch affirms Sweden at AAA
The issue ratings on Sweden's senior unsecured foreign and local currency bonds have also been affirmed at AAA. The Outlooks on the Long-term IDRs are Stable. The Short-term foreign currency IDR and the Country Ceiling are affirmed at 'F1+' and AAA respectively.
Sweden's AAA ratings reflect its solid governance and human development indicators, high income per capita, and track record of sound economic policy implementation.
Fairly low debt and a credible fiscal policy framework underpin healthy public finances, and allow the authorities the scope for implementing counter-cyclical fiscal policies when needed. Public debt was 40.5% of GDP at end-2013, around 5pp lower than the AAA median.
Parliamentary elections will be held in September, but Fitch does not envisage any significant departure from the strategy of a gradual fiscal consolidation over the coming years, even if there is a change in the governing coalition. Current government plans point to a budget balance by 2016.
Strong domestic demand will drive a pick-up in economic growth this year and next. We expect real GDP growth to average 2.5% this year and 3.3% in 2015. The acceleration in growth will bring about a gradual fall in unemployment - expected to average 7.5% in 2015 - and a pick-up in inflation. Stronger economic growth will also result in a slight easing in the current account surplus, to an average 6.2% of GDP over the next two years.
Rising house prices are leading to rising household debt, which is high from both a historical perspective and in international comparison. The household debt-to-income ratio surpassed 174% at end-2013 (the median for AAA countries was around 150% in 2012). There is the risk that rises in interest rates will affect households' debt servicing abilities. A rise in interest rates or a sudden sharp fall in house prices could also have an adverse economic impact through sudden rises in savings rates and falls in private consumption.
The Swedish banking sector is fairly large, with assets for the major banking groups amounting to 380% of GDP. Swedish banks are well-capitalised - the core Equity Tier 1 capital ratio of the four major banking groups is 18.4% - and have lower funding costs than their European peers. On the other hand, they are heavily reliant on wholesale funding, leaving them vulnerable to market funding shocks, and are closely interlinked through similar exposures and the crossholding of covered bonds.
In recent years the Swedish authorities have introduced a number of measures to mitigate the economic and financial stability risks stemming from high and rising household debt, and to increase the resilience of the financial sector. In addition, in June the Swedish Financial Supervisory Authority proposed that a 1% counter-cyclical capital buffer should apply to Swedish banks.
Further measures, both on the credit-supply and credit-demand side, are being considered to stem the rise in household indebtedness. ■