Scope Ratings GmbH (Scope) monitors and reviews its credit ratings on an ongoing basis and at least annually, or every six months in the case of sovereigns, sub-sovereigns and supranational organisations.

Scope performs monitoring reviews to determine whether material changes and/or changes in macroeconomic or financial market conditions could have an impact on the credit ratings. Scope considers all available and relevant information when undertaking the monitoring review.

Monitoring reviews are conducted by performing a peer comparison, benchmarking against the rating-change drivers, and/or reviewing the credit ratings’ performance over time, as deemed appropriate by the Lead Analyst or Analytical Team Head, in addition to an assessment of all aspects of the relevant methodology/ies, including key rating assumptions and model(s). Scope publicly announces the completion of each monitoring review on its website.

Scope completed the monitoring review for the Kingdom of Sweden (long-term local- and foreign-currency issuer and senior unsecured debt ratings: AAA/Stable; short-term local- and foreign-currency issuer ratings: S-1+/Stable) on 4 March 2024.

This monitoring note does not constitute a credit rating action, nor does it indicate the likelihood that Scope will conduct a credit rating action in the short term. Information about the latest credit rating action connected with this monitoring note along with the associated rating history can be found on www.scoperatings.com.

For the updated rating report accompanying this review, click here.

Key rating factors

The Kingdom of Sweden’s long-term AAA/Stable ratings are underpinned by the following credit strengths: i) the country’s wealthy, diversified and competitive economy; ii) a strong fiscal framework and low public debt; and iii) a robust external position driven by consistent current account surpluses, a net international creditor position and international reserves that shield the country from short-term shocks.

Challenges relate to: i) financial stability risks, including from high household and corporate debt levels; and ii) the risk of a severe, persistent correction in the housing market.

After Sweden’s economy rebounded quickly from the Covid-19 crisis, growth slowed to around 0% in 2023. The slowdown is mainly driven by the interest-sensitive parts of the economy, including household consumption and housing investment. However, despite economic output contracting for the last three quarters of 2023, economic performance was more resilient than initially expected due to robust performance in the manufacturing sector and a resilient labour market. Scope expects economic output to gradually improve as inflation continues to ease, interest rates decline by the second half of this year and the housing market begins to recover. GDP growth is still expected to stagnate in 2024, growing by 0.1%, before returning to the country’s medium-term potential of 1.8% in 2025.

The government continues to show fiscal restraint to limit inflationary pressures. The 2024 budget bill includes appropriately targeted measures to support vulnerable households of around SEK 40bn (0.6% of GDP) in addition to a capital injection for the Riksbank of a further SEK 40bn. Even with an expected headline fiscal deficit of around 1.5% of GDP in 2024 and 0.9% in 2025, public debt remains low. Scope expects the debt-to-GDP ratio to rise slightly to 33.6% in 2024, remaining well below the recent peak of 39.8% in 2020, and staying broadly stable over the forecast horizon until 2028.

The sharp increase in interest rates has resulted in a correction in the Swedish real estate market with house prices still around 16% and apartment prices 9% below their peaks. High private debt in combination with typically short rate fixation has led to a high sensitivity to interest rate changes. While prices stabilised in 2023 and have shown early signs of recovery, housing construction remains low. The expected decline in interest rates this year and a gradual economic recovery is likely to support the real estate market from mid-2024. However, property companies continue to be affected by low property values and high funding costs. The impact varies across firms depending on their capital structure, earning capacity, ownership structure and asset portfolio. As such, weaker firms have faced significantly higher interest rates in bond market. Overall, bond issuance of the sector has started to increase, indicating that overall funding conditions are improving. Stress tests conducted by the Riksbank indicate that banks have sufficient capital to deal with a severe shock in the housing sector, though confidence shocks could result in worsening credit conditions in such scenarios. The interconnectedness of Sweden’s financial system remains a vulnerability as it could amplify risk in the event of a severe macro-financial shock. Large banks tend to finance mortgage loans using covered bonds held by insurance companies, pension funds and other banks.

The Stable Outlook reflects Scope’s view that the risks Sweden faces over the next 12 to 18 months are well balanced.

The rating/Outlook could be downgraded if, individually or collectively: i) the fiscal outlook deteriorated, resulting in a significant increase in public debt; and/or ii) there is a significant deterioration in the economic outlook, for example resulting from a sharp correction in the housing market.

The methodology applicable for the reviewed ratings and/or rating Outlooks (Sovereign Rating Methodology, 29 January 2024) is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
This monitoring note is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst Eiko Sievert, Director

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