Dagong Maintains the Sovereign Credit Ratings of the Kingdom of Sweden with Stable Outlook
Dagong Global Credit Rating Co., Ltd.
May 21, 2018
Dagong Global Credit Rating Co., Ltd. (thereafter referred to as “Dagong”) has decided to maintain local and foreign currency sovereign credit ratings of the Kingdom of Sweden (thereafter referred to as “Sweden”) at AAA and AA+ respectively, each with a stable outlook. Sweden's debt repayment environment is stable and despite a small slowdown in economic growth, sustained fiscal surplus, ample fiscal reserves and strong foreign exchange earning capacity render government solvency in local and foreign currency stable.
The main reasons for maintaining the sovereign credit ratings of Sweden are as follows:
First, the debt repayment environment is stable, but the the medium to long term stability of the credit system is facing challenges. Sweden's long-standing compromising political culture and cross-party cooperation mechanism will effectively regulate the political pressure brought by partisanship and the rapid rise of rightist nationalism. And the social Democrats are expected to win reelection for the 2018 election and then to form a minority government, political situation remained stable. In the short term, the loose monetary policy will continue to provide ample liquidity support for Swedish economy, and the banking system is basically sound. But there is a certain degree of financing structure mismatch risk. In addition, the household loans mainly occupied by the housing mortgage account for 60% of the total bank loans, and the continuous accumulation of the real estate bubble poses a certain threat to the stability of the medium and long-term financial system.
Second, the short-term economy growth shows a tendency of rising first and then declining gradually, The medium-and long-term economy faces challenges. Owing to weak domestic consumption, Swedish economic growth fell to 2.4% in 2017.In the short term, government support in areas such as employment, education and infrastructure has expanded, which supports consumption and investment growth. Exports have continued to improve under the recovery of external demand, thus the economy growth is expected to expand slightly to 2.8 % in 2018.However, with the gradual closing of the output gap, a gradual slowdown in wage growth and the real estate market restrains private consumption and investment growth, the economy growth is expected to fall to 2.2% in 2019.In the medium and long term, sustained economic reform and inherent industrial competitive advantages will help alleviate the downward pressure on the economy. But constrained by the aging population and high private-sector debt, Sweden's medium - and long-term average economic growth is expected to remain at about 2%.
Third, In the short term the sustainable fiscal surplus ensures the stability of security of government's repayment sources. Tax increase from corporate earnings and strong capital gains in 2017 make the Swedish government's fiscal surplus at 1.3%.In the short term, rising economy, higher tax rates and a sharp cut in immigration spending will nudge the fiscal surplus to a modest 1.4% in 2018. In 2019, owing to a slowdown in economic growth, corporate tax cuts and government spending expansion in sectors such as education, health care and environmental protection, general government’s fiscal surplus is projected to narrow to 0.7 %.However, low financing needs, sufficient government net financial assets and extremely low financing costs provide guarantees for the security of government repayment source.
Finally, government's debt continues to fall and the government solvency is stable. Given fiscal surpluses, general government debt is lower and getting lower and is expected to fall to 38.2% and 38.2% respectively in 2018 and 2019, the government currency solvency is in high stability. Strong foreign exchange earning capacity and powerful international exchange capacity of Swedish krona have kept the government's foreign currency solvency stable. But By the end of 2017, Sweden's total external debt was up to 178%, while the foreign exchange reserves had less than 7% of the total external debt, which made Sweden's foreign currency solvency slightly less than that of the local currency.
In the short term, the real estate market has less risk of hard landing supported by loose monetary policy and rigid demand for housing. Besides, inside and outside demands to support economic growth, fiscal surplus, low government debt which continues to decline, combined with powerful foreign exchange earning ability and a certain scale of reserve assets, keeps the government solvency stable. Therefore, Dagong has decided to maintain a stable outlook for both local and foreign currency sovereign credit ratings for Sweden for the next one to two years.