Analyst
Liu Shuang
liushuang@dagongcredit.com

Sovereign Credit Rating
 
Local Currency/Outlook AAA/Stable

Foreign Currency/Outlook AA+/Stable
Rating time October 2010

Rationale

Dagong assigns “AAA” to local currency long term sovereign credit ratings on Sweden based on such factors as its strong national governance capacity, favorable economic fundamentals, well-developed financial system and sound fiscal basis. Due to the high level of national external debt and the risk of currency fluctuations, foreign currency long term sovereign credit rating is assigned “AA+”, which is a bit lower than the local currency rating.

The fiscal situation of Swedish government is fairly good and the volume of government debt is moderate. With the years’ fiscal surpluses and the declining of government debt burden, the ratio of central government debt to GDP decreased from 47.9% in 2004 to 35.4% in 2008. After the global financial crisis, in order to make up the deficit and stimulate economic growth, the government’s borrowing requirement increased and the debt to GDP ratio rose to 38.9%, which is still moderate. Furthermore, the size of external debt of Swedish government is moderately small: as of July 2010, the foreign debt of central government only accounted for 29.2% of total government debt, or 10% of the GDP. It is expected that the Swedish central government will manage to realize fiscal balance in the next two years, and the financing demand would remain at a low level. The volume of government debt would be about 100 billion kronor in the 1-2 years to come, representing 37% of the GDP.

The Swedish local currency solvency is strong, but that of the foreign currency is lower due to the problems of foreign debt and uncertainty of exchange rate fluctuation. The main reasons are as follows:

The governance capacity of Swedish government remains at high level and the ability of coping with the economic crisis is relatively prominent. In September 2010, the center-right ruling coalition won the election again in the Swedish parliamentary election. The reappointment is conducive to future economic policy’s continuation and stability, but the political situation will be more diversified and the leverage of small parties will be strengthened as the center-right coalition fell short of an absolute majority in the parliament;

As an export-oriented economy, the Swedish economy was once in recession because of the financial crisis, but sound economic fundamentals supported the economic recovery since 2010. It is expected that the economic growth rate in 2010 will rise to 4.2%;

The financial sector is well-developed and financial system is very sound. After the financial crisis, the central bank’s financial policy was effective in stabilizing the market confidence, improving liquidity of the banking system and promoting economic growth;

Fiscal balance is in good condition and fiscal basis remains solid;

Current account keeps surplus for many years and there is room for some further appreciation of the SEK, but the currency exchange rate fluctuates sharply and the potential exchange rate risk remains. Although the official foreign assets could cover the government debt, the foreign debt burden of government is still heavy.

Outlook

Sweden will continue to maintain a stable political situation in the next two years. Owing to its outstanding performance in the economic crisis, the center-right ruling coalition won the election again in the Swedish parliamentary election. The reappointment is conducive to future economic policy’s continuation and stability, but the government's policy will be subject to certain constraints as the small parties play an more important role. Complete infrastructure, superior research and innovation capacity and competitive well-known multinational companies will help further stimulate the economic growth potential. In the next two years the economy will gradually recover and return to the economic development of the upward channel to achieve cyclical balance. Financial system remains sound and the central bank's monetary policy will be in the interest-rate rise cycle along with the economic improvement, but the interest rate will not rise too much. Personal income tax, corporate income tax and other tax revenues will continue to grow, while unemployment benefit expenditure will gradually decline, and the government is expected to maintain fiscal balance in the next two years. Current account will continue to maintain high surplus. The Swedish Krona will be in the trend of appreciation and country's external debt burden will not be further increased. Generally, Dagong keeps the stable outlook for Sweden government’s local and foreign currency credit rating in the next 1-2 years.