Ultra-safe Sweden might be due a wobble


Jeremy Weltman
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The country is enjoying Goldilocks conditions, with strong growth, low inflation and no notable fiscal problems to concern investors, but with elections this year, and credit risk heightened, the goods times might not last.


Sweden is still a safe haven for investors, but maybe keep a lifebuoy within reach

Sweden, ranking fourth in Euromoney’s global risk rankings, on 85.8 from a possible 100 points, is one of the safest investor risks in the world – and it’s not hard to see why.

The economy has been growing at a brisk pace during the past three to four years, generating substantial employment and boosting tax revenue.

A combination of careful budgeting and the growth dividend mean the debt burden has fallen below 40% of GDP.

Consequently, with deflation slain, inflation remaining low and the current-account surplus maintained, there are few economic indicators to concern investors.

Which is why Sweden scores highly for economic risk in Euromoney’s survey, with four out of five indicators improving in 2017, and why its bond yield has fallen to 0.93%, narrowing the yield gap with Germany to less than 20 basis points.

Taking a rain check

However, such good fortunes have been partially driven by ultra-loose monetary policy as the Riksbank, Sweden’s central bank, applies pressure on the krona to avoid rapid appreciation and steer inflation in line with its 2% target rate.

That has fuelled a credit and housing boom, which has shown signs of faltering in the latter months of 2017 in response to new regulations putting a damper on high-risk lending to mortgage borrowers.

There are more regulations taking effect this year, which might cause the market to weaken again, and this in turn will soften residential construction.

There is no suggestion the economy is about to hit the rocks, with the credit boom bursting. Inflation is not a notable risk, and interest-rate hikes are not on the immediate horizon.

However, sooner or later, as capacity pressures intensify, and wage demands rise, the Riksbank will need to tighten monetary policy. Its six-member board is now not unanimously in favour of interest-rate inertia and the general feeling is that it will pre-empt higher inflation by tightening later this year, even if inflation is below the 2% target rate.

And that might occur as the global economy slows.

The latest forecasts from the European Commission suggest the depreciation of the krona and the upsurge in global growth will lift exports to ensure the economy grows at a similar pace this year as in 2017 (2.7%), but economic forecasts are often wrong.

An analysis of predictions by independent experts in Nordic Barometer, a monthly survey by MJEconomics, shows the average forecast for GDP growth in 2017 climbing from 1.6% in January of that year to 2.5% by October.

Unfortunately for forecasters, conditions can rapidly change, with similar examples of large downgrades to forecasts as economic activity deteriorates.

That might not happen with continued support from economic policy stimulus, but there is no guarantee, signalling confidence in Sweden might be exaggerated, driven by recent experience rather than fully discounting future conditions.

Political risk

Besides, uncertainty over the economic outlook is coinciding with the next general election due on September 9, heightening political risk.

Current polling shows the ruling centre-left Social Democrats in the lead, on up to 28% of the vote, with the centre-right Moderate Party gaining ground, on almost 25%.

Yet neither party is guaranteed to be able to form a majority coalition without including or relying on the far-right Sweden Democrats to pass legislation, polling 16%.

“The election in Sweden in September is wide open,” says one of Euromoney’s survey contributors for the Nordic area, Stein Gjerding, director and chief economist at the Norwegian employers’ organization Arbeidsgiverforeningen Spekter.

The new government will likely have an economic policy much the same as the sitting government he believes, but all the same “a stronger right-wing party can of course make things more unpredictable… and a more expansive fiscal policy is always a risk”.

The prospect of another hung parliament and difficult coalition negotiations could dominate during the autumn, raising Sweden’s political risk premium.

The country will still be a remarkably safe country to invest in, a triple-A credit risk with favourable macro-fiscal metrics compared with many countries in Europe, but with the good times factored in, the prospect of further gains is diminishing.