Fitch Affirms Sweden at 'AAA'; Outlook Stable

Fri Jul 4, 2014 4:07pm EDT

(The following statement was released by the rating agency) LONDON, July 04 (Fitch) Fitch Ratings has affirmed Sweden's Long-term foreign and local currency Issuer Default Ratings (IDRs) 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. KEY RATING DRIVERS 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. RATING SENSITIVITIES As the Outlook is Stable 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 sharp correction in the housing market - from falling prices or higher interest rates - could lead to retrenchment in spending in the more leveraged households. This would translate into higher savings, falls in private consumption, and losses on banks' loan books, straining economic and financial stability -A sizeable systemic shock to funding conditions in the financial system could translate into pressure on the sovereign rating, given the relative size of the banking sector KEY ASSUMPTIONS Fitch assumes that the Swedish authorities remain committed to the current fiscal policy framework. The government debt-to-GDP ratio is expected to peak at 41.5% this year, before falling back to 40.5% in 2015. In its debt sensitivity analysis, Fitch assumes an average primary balance of 0.4% of GDP, trend GDP growth of 2.8%, GDP deflator growth of 1.5%, and a nominal effective interest rate of 2.4%. Under these assumptions, gross government debt as a share of GDP would decline to 30.5% of GDP by 2023. The gradual progress in deepening fiscal and financial integration at the eurozone level will continue; key economic imbalances within the currency union will be slowly unwound; and eurozone governments will tighten fiscal policy over the medium term. Contact: Primary Analyst Alex Muscatelli Director +44 20 3530 1695 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Michele Napolitano Director +44 20 3530 1536 Committee Chairperson Richard Fox Senior Director +44 20 3530 1444 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, 'Sovereign Rating Criteria' dated 13 August 2012 and 'Country Ceilings' dated 9 August 2013, are available at www.fitchratings.com. Applicable Criteria and Related Research: Sovereign Rating Criteria here Country Ceilings here Additional Disclosure Solicitation Status 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 WEBSITE '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. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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