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Rating Action:

Moody's Affirms Sweden's Aaa Rating; Maintains Stable Outlook

02 Mar 2018

London, 02 March 2018 -- Moody's Investors Service, ("Moody's") has today affirmed Sweden's Aaa long-term issuer and senior unsecured debt ratings. It has also affirmed Sweden's short-term Commercial Paper rating at P-1, and its short- and long-term programme ratings at (P)P-1 and (P)Aaa, respectively. The outlook remains stable.

The factors supporting the rating affirmation and the stable outlook are:

1. Sweden is a well-diversified, stable and wealthy economy with relatively strong growth potential.

2. Sweden has low government debt levels that are the product of decades of fiscal discipline.

3. Sweden's regulatory, monetary and public finance institutions are highly effective in executing their policy objectives and focus on long-term issues that extend well beyond the term of any one government.

Sweden's long-term local-currency bond and deposit ceilings and foreign-currency bond and deposit ceilings are unchanged at Aaa. The short-term foreign currency bond and deposit ceilings are also unchanged at P-1.

A full list of affected ratings is provided towards the end of this press release.

RATINGS RATIONALE

FIRST DRIVER—a well-diversified, stable and wealthy economy with robust growth potential

Sweden has very high standards of living, with low levels of inequality and a high life expectancy. Its GDP per capita — in terms of purchasing power parity (PPP) — of $49,759 in 2016 stands well above the majority of Moody's-rated countries and ranks the fourth-highest in the EU, after Luxembourg ($105,741, Aaa stable), Ireland ($69,276, A2 stable) and Netherlands ($51,249, Aaa stable).

Competitiveness is supported by a well-educated labour force and significant levels of technological advancement. The Swedish labour market is characterised by one of the highest employment rates in the EU. The economy is highly competitive, as reflected in Sweden's dominant position in the niche high-technology market and a record of posting sizeable current account surpluses. Sweden ranks high in technological readiness and business sophistication, and support for innovation and education has long been a key priority for the government, which in turn supports the development of sectors contributing to the high end of the global value chain.

Sweden's economy also exhibits a high level of diversification, based largely on services, which accounted for 66.8% of gross value added in 2017, and has represented the largest contributors to growth over the past several years. The country has developed innovative and high-value added services, leveraging on its high-skilled labour force and technological advancement. In particular, information and communications technology, science and technology, education, health and social work have constituted the fastest-growing sectors in the economy — along with computer and optical products manufacturing.

While Swedish households are highly indebted in the aggregate, they also have a very substantial net asset position. If there were a substantial house price correction, the Swedish banks' substantial financial strength, as well as the supply shortages that have given rise to the prolonged run-up in prices, would probably cause a macroeconomic downturn, but would be unlikely to cause a more severe and sustained deterioration in Sweden's credit profile.

SECOND DRIVER—low government debt reflecting a track record of fiscal discipline

Even among its Aaa-rated peers, Sweden's public finance indicators are very robust. A strong fiscal framework and a good record of adherence to the rules, as well as healthy nominal GDP growth, have helped to place Sweden's general government debt-to-GDP on a declining trajectory since the mid-1990s. General government debt levels, expected to fall to around 36% of GDP by end-2018 will remain well below the Maastricht threshold of 60%, providing fiscal space for stimulus measures in the event of an adverse shock without incurring a serious deterioration in public finances.

Strong government finances have enabled Sweden to establish its safe-haven status, which has in turn kept its debt-servicing costs consistently low since 2008. In this respect, debt affordability — as measured by the ratio of interest payments to government revenue — is very low, at slightly below 1% (in 2017).

The Swedish public sector is large, with general government expenditures accounting for around 50% of GDP. In fact, Sweden demonstrates one of the highest total expenditures relative to GDP when compared to other European countries, due to its generous social welfare system. To ensure a strong medium-term fiscal framework, the Swedish social welfare system is largely counterbalanced by high tax levels of around 44% of GDP, versus 39% of GDP for the EU (average 2010-2016), and an overall general government revenue/GDP level in excess of 50%.

In 2017 the general government balance was higher than expected, with a surplus of 1.0% of GDP due to a lower-than-expected expenditures and slightly higher revenues. A further budget surplus of 0.9% of GDP is expected in 2018 despite the government's more expansionary fiscal stance, which is focusing on labour market participation, maintaining service levels at the local government level, and managing demographic cost pressures. Having said that, Sweden faces only fairly modest aging population cost increases over the coming decades. According to European Commission data, Swedish pension costs will actually fall over between now and 2060, while health care expenditure will only rise by 0.4 percentage points.

THIRD DRIVER—highly effective institutions addressing long-term challenges

Sweden has some of the strongest institutions in the sovereign rated universe. It has a long-standing consensus on fiscal discipline. A surplus target for general government finances over a business cycle was introduced in 2000. Due to the now-low debt level, the target is set to be changed to 0.33% of GDP from 1% of GDP over the business cycle from 1 January 2019 onwards and supplemented by a new debt anchor of 35% of GDP, with the government required to explain deviations of more than 5 percent of GDP from this anchor. This rule is more stringent than required by the EU.

Moreover, under the Budget Act, the government must propose a ceiling for central government and pension system expenditures for the next three years. By determining the ceiling, the government sets the framework for revenues and expenditures that will comply with the surplus target. To strengthen the budget process at the local level, local governments (each municipality and county council) must meet a minimum requirement according to which any deficit has to be corrected within three years.

Sweden's other macroeconomic institutions are also strong. The Riksbank is an independent central bank with deep bench strength of monetary policy expertise. While the macroprudential issues associated with high household indebtedness are a challenge for the authorities, the banks and their regulators have taken precautionary measures, albeit at a very late stage in the cycle, and we see Swedish banks as broadly resilient to elevated debt and housing price declines.

RATIONALE FOR THE STABLE OUTLOOK

The outlook on Sweden's Aaa rating is stable, given the unchanged very strong macroeconomic and institutional fundamentals and Moody's expectations that those strengths will be maintained over the medium term. Moreover, government debt is expected to remain quite low, particularly given the new 35% of GDP debt anchor.

FACTORS THAT COULD CAUSE THE RATING TO MOVE DOWN

While currently unlikely given the stable rating outlook, Sweden's Aaa rating would come under pressure if the country's economic strength or government financial strength suffered a lasting impairment relative to Aaa-rated peers. Such a scenario could occur as a result of a sharp and sustained fall in economic activity and a corresponding shock to the government's balance sheet, most likely associated with a sharp housing market correction compounded by the high degree of household indebtedness. A significant departure from current prudent budgetary practices, which results in a material deterioration in the public finances and a rising debt trend would also be credit negative.

GDP per capita (PPP basis, US$): 49,759 (2016 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 3.2% (2016 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 1.7% (2016 Actual)

Gen. Gov. Financial Balance/GDP: 1.2% (2016 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: 4.4% (2016 Actual) (also known as External Balance)

External debt/GDP: [not available]

Level of economic development: Very High level of economic resilience

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 27 February 2018, a rating committee was called to discuss the ratings of Sweden, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's institutional strength/ framework, have not materially changed. The issuer's governance and/or management, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. The systemic risk in which the issuer operates has not materially changed.

The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

LIST OF AFFECTED RATINGS

Issuer: Sweden, Government of

..Affirmations:

....Long-term Issuer Ratings, affirmed Aaa

....Senior Unsecured Regular Bond/Debenture, affirmed Aaa

....Senior Unsecured Medium-Term Note Program, affirmed (P)Aaa

....Senior Unsecured Shelf, affirmed (P)Aaa

....Commercial Paper, affirmed P-1

....Other Short Term, affirmed (P)P-1

..Outlook Action:

....Outlook remains Stable

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Sarah Carlson
Senior Vice President
Sovereign Risk Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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