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Sweden Country Risk Report Q2 2016

Sweden Country Risk Report Q2 2016

Core Views Sweden will remain a growth outperformer among developed states, with domestic demand remaining strong in 2016-2017. The surge in migrant inflows in 2015-2016 will lead to higher economic growth over the medium term, but will present challenges to the fiscal accounts, the labour market and domestic political stability. Interest rates will remain low through 2017 as the central bank (Riksbank) will maintain a negative policy rate and disinflationary conditions will persist. However, there is an increasing chance of a policy reversal in 2016, as extraordinarily easy monetary measures are inappropriate given strong economic growth, incipient inflation and rising private sector debt. Major Forecast Changes With higher-than-expected real GDP growth in 2015 of 4.1%, and leading indicators looking strong, we have raised our 2016 forecast to 3.6% from 2.9%. Due to strong economic growth and accelerated tax payments by businesses seeking to avoid negative deposit rates, we have seen fit to revise our overall budget deficit forecast for 2016 to 0.8% of GDP from 1.3% previously, following an estimated balance of 1.1% for 2015.


Executive Summary
Core Views
Major Forecast Changes
Key Risks
Chapter 1: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Growth Outlook
Sweet Spot Could Turn Sour Beyond 2016
The Swedish economy is in a 'sweet spot', with real GDP growth soaring and inflation remaining low. However, the ultra-easy monetary
policy that has underpinned recent expansion is building up problems for the future, and will put the economy at risk of a shock beyond
GDP By Expenditure Outlook
TABLE: GDP GROWTH FORECASTS
TABLE: PRIVATE CONSUMPTION FORECASTS
TABLE: GOVERNMENT CONSUMPTION FORECASTS
TABLE: FIXED INVESTMENT FORECASTS
TABLE: NET EXPORTS FORECASTS
Monetary Policy
Riksbank Risks Falling Behing The Curve
The Riksbank's aggressive monetary easing policy may be putting it behind the inflation curve. A sudden, unexpected rise in inflation
means that policy would need to be tightened quickly and aggressively, putting the highly-leveraged economy at significant risk.
Monetary Policy Framework
Fiscal Policy And Public Debt Outlook
Deficit To Widen Beyond 2016
Strong economic growth and idiosyncratic factors will result in the smallest Swedish general government fiscal deficit in five years
in 2016. However, the shortfall will widen in 2017 and 2018 amid political pressure to increase spending without accompanying tax
hikes.
Structural Fiscal Position
TABLE: GENERAL GOVERNMENT EXPENDITURE AND REVENUE BREAKDOWN
Outlook On External Position
Financial Sector Debt Presents Key Risks
Although Sweden has a negative net international investment position, we believe that net foreign assets are understated by the official
accounts, and that the country has one of the strongest external positions in the world. The main vulnerability stems from Swedish
banks' borrowing from overseas, which puts the balance of payments at risk from a sudden bout of global risk aversion or a renewed
'credit crunch'.
TABLE: TOP 5 EXPORT DESTINATIONS AND GOODS EXPORTS
TABLE: TOP 5 IMPORT SOURCES AND GOODS IMPORTS
TABLE: CAPITAL & FINANCIAL ACCOUNT BALANCE
Chapter 2: 10-Year Forecast
The Swedish Economy To 2025
Well-Positioned For The Long Term
Sweden is among the most strategically well-positioned economies in the developed world, and this is reflected in our 10-year growth
forecasts, which expect steady expansion through to 2025.
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Chapter 3: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
Sweden Democrats' Popularity May Have Peaked
Swedish politics will continues to be dominated by the issue of mass immigration. However, the mainstream parties' increasingly harsh
stance on asylum seekers is pushing the populist far-right Sweden Democrats further to the margins, and makes it increasingly likely
that the opposition centre-right Alliance will win the 2018 parliamentary elections.
TABLE: POLITICAL OVERVIEW
Long-Term Political Outlook
Strong Institutions Underpin Stability
With a long-term political risk score of 94.5, Sweden is among the most structurally stable countries in the world. Benefiting from
an advanced level of institutional development, a long history of democratic governance and an established foreign policy based
on neutrality, the country faces limited underlying risks to political stability over the long term. However, the rise of a populist
anti-immigration movement amid a quickly growing foreign-born population poses risks to both governance and Swedish civil
society.
Chapter 4: Operational Risk
SWOT Analysis
Operational Risk Index
Operational Risk
TABLE: DEVELOPED STATES – LABOUR MARKET RISK
TABLE: DEVELOPED STATES – LOGISTICS RISK
TABLE: DEVELOPED STATES – CRIME AND SECURITY RISK
TABLE: DEVELOPED STATES – TRADE AND INVESTMENT RISK
Chapter 5: BMI Global Macro Outlook
Global Macro Outlook
Tail Risks Mounting Amid Sub-Par Growth
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, 2015 AND 2016 (%)
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %
TABLE: MACROECONOMIC DATA & FORECASTS

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