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Rating Action:

Moody's affirms Sweden's Aaa/P-1 ratings; stable outlook

08 Apr 2016

London, 08 April 2016 -- Moody's Investors Service (Moody's) has today affirmed Sweden's Aaa long-term issuer and senior unsecured debt ratings. The outlook remains stable.

The factors supporting the rating affirmation are:

1. The ongoing resilience of Sweden's economy, as reflected in its higher expected growth in 2016 than most of its Aaa-rated peers.

2. Sweden's robust and transparent institutions, reflected in its strong governance indicators which safeguard the country's credit fundamentals through the economic cycle.

3. Moody's expectation that the Swedish government will continue its conservative fiscal management, keeping government debt levels well below the Maastricht threshold.

The stable outlook reflects Moody's expectation that Sweden's Aaa credit profile will remain resilient to risks associated with rising levels of household indebtedness and the potential costs and political implications of the recent sharp inflow of migrants. Overall, Moody's expects that Swedish households' large net asset positions and substantial social security nets will help support debt affordability in the event of economic stress; and that the higher public expenditures associated with increased migrant inflows to be manageable, with potential longer term benefits for potential growth.

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 unaffected by this rating action and remain Prime-1 (P-1).

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

RATINGS RATIONALE

RATIONALE FOR THE AFFIRMATION

FIRST FACTOR -- THE ONGOING RESILIENCE OF SWEDEN'S ECONOMY

Sweden's very high economic strength, reflecting both its high GDP per-capita and a resilient, highly diversified economy, will support robust growth of around 3.2% on average over the next two years, outperforming many of its Aaa-rated peers. This follows full year growth estimated in excess of 4% in 2015. A greater balance in growth drivers, with solid private consumption coupled with high growth in services-led exports, supports the resilience of Moody's forecast.

In particular, the country's dominant position in the niche high-technology market, leveraging its high-skilled labour force and technological advancement, will continue to support its strong competitive position (ranked 9th on the World Economic Forum's Global Competitiveness Index 2015-2016). The significant proportion of high and medium-high technology exports exhibit lower price elasticity and are therefore less susceptible to external shocks.

SECOND FACTOR -- STRONG INSTITUTIONS SAFEGUARD COUNTRY'S CREDIT FUNDAMENTALS

In line with other advanced economies, Sweden's very high policy credibility and effectiveness is well illustrated by the independence of the Riksbank and its inflation targeting framework which, since its inception in 1993, has been effective in providing an anchor for inflation expectations and reducing CPI volatility and, more recently, signalling its commitment to the inflation target by undertaking unconventional measures to safeguard price stability in the face of a deflationary trend driven mainly by external factors. Furthermore, according to the Worldwide Governance Indicators which support Moody's assessment of institutional frameworks, Sweden ranks in the 93rd percentile or above in Moody's rated universe for government effectiveness, rule of law and control of corruption, consistent with other sovereigns that carry Moody's highest government rating.

THIRD FACTOR -- CONTINUED CONSERVATIVE FISCAL MANAGEMENT

Sweden's very high fiscal strength is supported by general government debt levels, estimated at 43.4% of GDP in 2015, broadly in line with Aaa-rated peers coupled with a fiscal policy framework that supports a strict budget process, limiting the build-up of deficits at all levels of government. A stabilization in the deficit in 2016 and 2017 at around 1% of GDP, despite higher expenditure due to migrant inflows, will ensure that general government debt levels, which are expected to fall to around 42% of GDP by 2017, remain well below the Maastricht threshold of 60%. Furthermore, strong government finances will enable Sweden to maintain its safe-haven status and high debt affordability, with, according to data provided by Eurostat, interest expense to general government revenue in 2014 of 1.4%. This compares very favourably with other European Union (EU) peers, such as Denmark (2.7%, Aaa stable) and Germany (4.0%, Aaa stable).

Moody's considers that the proposed amendments to the budget rule, moving from a 1% surplus to a balanced budget which is still more stringent than required by the EU, together with the commitment to retain the central government expenditure ceiling and local government balanced budget rules, support Moody's view of a highly effective fiscal framework.

RATIONALE FOR STABLE OUTLOOK

In maintaining the stable outlook on Sweden's Aaa rating, Moody's has had regard to the resilience of Sweden's credit profile to two specific sets of risks. The first relate to the risks associated with rising levels of household indebtedness, and the second to the potential costs and political implications of the recent sharp inflow of migrants. Overall, Moody's expects that Swedish households' large net asset positions and substantial social security nets will help support debt affordability in the event of economic stress; and that the higher public expenditures associated with increased migrant inflows will be manageable, with potential longer term benefits for potential growth.

The sharp increases in household indebtedness make the economy more sensitive to changes in interest rates or other shocks, although Moody's notes that Sweden's household debt to disposable income ratio (171% in Q3 2015) is below that of similarly rated peers such as Denmark (Aaa stable, 253%), Netherlands (Aaa stable, 249%) and Norway (Aaa stable, 225%). In addition, Sweden's stronger cyclical position than many of its peers helps to mitigate the risk of a credit bubble, with mortgage loans as a share of GDP in Sweden far below that of Switzerland (Aaa stable) in Q3 2015. Sweden's material net financial asset position, in excess of 370% of income in Q3 2015, together with the strong culture of households servicing their debt, reduces the likelihood of borrowers being unable to fulfil their debt obligations even in times of economic stress. In addition, despite the significant links to the housing sector, the fundamentally strong health of the banking sector, reflected in Swedish banks' high asset quality and sound capitalisation levels, will help to limit the transmission of shocks to the real economy. Nevertheless, the banking sector's dependence on wholesale funding will keep funding at risk of changes in investor sentiment.

Furthermore, recent steps by the authorities to increase the countercyclical capital buffer to 2% (to take effect in 2017) as well as targeted measures to require the amortisation of new mortgages from mid-2016 may help to temper rising household indebtedness. Broad political agreement which allowed for the amortisation requirement to come into force bodes well for the adoption of future regulations, including the potential for a cap on debt-to-income levels which is currently under discussion. There is some evidence that banks' early adoption of these measures helped to moderate house price growth in the final quarter of 2015, which, if sustained, would reduce the risk of a dramatic house price correction.

Despite the sharp rise in 2015 of refugees seeking asylum in Sweden, around twice as many as in 2014, Moody's expects the fiscal impact to be manageable. The Swedish budget was amended in November 2015 to take account of additional public expenditure related to migrants, which is expected to total around 1% of 2015 GDP over the next two years. Higher government revenues, due to a combination of planned tax hikes and reduction in tax deductions as well as strong economic growth, will limit the impact on the overall fiscal deficit. Furthermore, the recent sharp positive revision to the 2015 budget deficit (improving by 1.4pp relative to Moody's December 2015 forecast on the back of stronger tax revenues) provides upside potential to Moody's average 1% deficit forecast in each of the next two years.

In addition, recent steps by the government to tighten border controls may limit the need for additional expenditure in future years. Moody's also expects the migration-adoption framework already in place in Sweden to help to overcome the challenges of integrating low-skilled workers into the Swedish labour market. If successful, this could increase Sweden's potential growth and strengthen its long-term fiscal sustainability by mitigating the negative economic effects of an ageing population.

Changes to the political landscape, with increasing fragmentation driven in part by the emergence of more extreme political parties benefitting from rising anti-immigration sentiment, have increased political uncertainty and heightened the risk of delays in policy formulation and implementation. However, despite recent disagreements between the Social Democratic Party-led ruling coalition and the mainstream Alliance Opposition, leading to difficulties in passing the 2015 budget, Moody's expects a greater willingness among these parties to work together going forward.

WHAT COULD MOVE THE RATING DOWN

Downward pressure on the rating would develop in the event of the country's economic strength and/or government financial strength suffering 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$): 46,219 (2014 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 4.1% (2015 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 0.1% (2015 Actual)

Gen. Gov. Financial Balance/GDP: 0% (2015 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: 5.9% (2015 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 06 April 2016, a rating committee was called to discuss the rating of the Government of Sweden. The main points raised during the discussion were: The issuer's economic fundamentals, including its very high economic strength, have not materially changed. The issuer's very high institutional strength/ framework, have not materially changed. The issuer's very high fiscal or financial strength, including its debt profile, has not materially changed. The issuer has become increasingly susceptible to political event risks.

The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2015. Please see the Ratings 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: Government of Sweden

..Affirmations:

....LT Issuer Rating, Affirmed Aaa

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

....Senior Unsecured MTN, Affirmed (P)Aaa

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

....Commercial Paper, Affirmed P-1

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

...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
SUBSCRIBERS: 44 20 7772 5454

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

Moody's affirms Sweden's Aaa/P-1 ratings; stable outlook
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