Sweden: Risk Assessment
Country Risk Rating
|A1||The political and economic situation is very good. A quality business environment has a positive influence on corporate payment behavior. Corporate default probability is very low on average.|
Business Climate Rating
|A1||The business environment is very good. Corporate financial information is available and reliable. Debt collection is efficient. Institutional quality is very good. Intercompany transactions run smoothly in environments rated A1.|
Growth buoyed by Riksbank's very accommodative policy
After accelerating rapidly in 2015, the economy is likely to slow in 2016, but will remain firm. As in 2015, domestic demand will be the main driver of growth. The Swedish Central Bank's very accommodative monetary policy (negative key rate, quantitative easing) will support household consumption and investment, especially residential, by cutting borrowing costs. The decline in unemployment (6.2% of the labor force at end November 2015) will provide additional support to private consumption. Exports will benefit from the improved (although still modest) economic picture in the euro zone and more broadly across Europe. With regard to the industrial sectors, automotives and pharmaceuticals are performing better, while construction is showing signs of overheating. Meanwhile, following a strategic partnership deal between Sweden's Ericsson group and the US company Cisco Systems, the latter may end up buying the former. Such a transaction would have a very negative impact on private research and development in Sweden, insofar as Ericsson finances about 40% of the country's R&D. Nevertheless, Sweden's stated commitment to abandon fossil fuels by 2030 is a likely new source of investment in renewable energy. It should be noted that the share of renewable energy in energy supply is among the highest in the OECD.
The worsening property market picture is one of the main downside risks to the economy, given the very high levels of household debt (175% of gross disposable income). The risk of appreciation pressures on the krona vis-a-vis the euro, which is keeping inflation from returning close to its target (2%), could also affect the economy through lower exports, which could in turn prompt the Riksbank to further ease its monetary policy. In contrast, the strong increase in the population expected by 2020 is expected to sustain activity in the medium term through an increase in domestic demand. Sweden expects to receive between 100,000 and 170,000 refugees in 2016 (190,000 in 2015), mainly from Syria and Eritrea, according to the Swedish migration agency.
Healthy public finances and current account surplus
The 2016 budget will focus on particularly education and on the construction sector so as to reduce the tensions on the property market, as well as on simplifying the procedure for creating a start-up business (Stockholm is very active in this area). However, the impact on the public accounts balance is likely to be limited, insofar as the rise in public spending will be partially offset by the increase in public revenues (sustained economic growth) and by higher taxes on fuel and vehicles. The public deficit therefore looks set to remain stable in 2016, while public debt will decline slightly.
The current account balance should stabilize in 2016. The financial account surplus and the trade balance surplus will be stable, while import growth will be more dynamic (strong domestic demand) than that of exports.
The Swedish banking sector is well capitalized but very concentrated: the country's four main banks held about 86% of assets in 2014, representing 326% of GDP. The banking system thus presents a significant systemic risk, especially as household debt levels are high and property prices are rising fast, especially in Stockholm and Gutenberg.
Extreme right climbing in the polls
The next parliamentary elections will be held in September 2018. Despite Sweden's strong economic growth, the center-left coalition (led by Stefan Löfven), composed of the social democrats and the ecologists, lost votes at the last surveys to the anti-immigration party, Sweden Democrats, which is, however, still in third place when it comes to voting intentions. This party and the main opposition party, the (center-right) Moderate Party, could move closer to each other in the run-up to the next elections, even though there are sharp differences at the moment.
Sweden's business climate has improved thanks to a much-simplified process for setting up a business, according to the latest Doing Business report from the World Bank.