Sweden's Strong Sovereign Credit Position Outside the Eurozone

2 2012-05-07 Investor presentation

Kingdom of Sweden
Swedish National Debt Office
STRONG CREDIT OUTSIDE EUROLAND

Bo Lundgren, Director General
Tokyo, May, 2012


Our assignments
We are a public authority responsible to the Ministry of
Finance. The Government appoints our board and our
Director General. The Debt Office was established in 1789.

•  Providing banking services for the central government
•  Raising loans and managing central government debt
both in the institutional and the retail market
•  Providing state guarantees and loans
•  Being responsible for the deposit insurance and
investor protection schemes
•  Managing government support for banks.


Objective of our debt management

The overall objective of the Debt
Office is to minimize the long-term
costs of central government
financial management without
taking excessive risks. Our work
helps to ensure that taxpayers’
money is used as efficiently as
possible and that the financial
system remains stable.


Swedish debt in brief


A safe haven for government bonds
•  Government finances among the strongest in the world and will remain so
•  Growth one of the strongest in Europe 2009 and 2010. For 2012 and 2013
we assess a growth of around 1 and 3 per cent respectively
•  Debt to GDP close to 30 per cent
•  Budget will remain in surplus in spite of the more gloomy global outlook
•  Dollar and euro bonds issued, but only for on-lending to the central bank’s
foreign exchange reserve
•  New investors continuously entering the Swedish government bond market
•  Effects of future regulations uncertain but could likely increase bank demand
for bonds


A safe haven for government bonds cont’
•  Liquidity in the government bond market is extraordinary compared to its size
•  Open market even during the crisis
•  Liquidity is supported by the Debt Office security lending commitment
(repo facility)
•  The Debt Office gives priority to bonds over other instruments to support
liquidity
•  The Swedish currency is among the top 10 most traded
•  So far the krona has been surprisingly strong compared with historical
turbulences
•  Gradual increase of longer bonds. A new 20 year bond was syndicated
through a switch in March 2012


Governance of debt management
•  The Debt Office decides inde-
pendently on debt
management policy and
funding within yearly guidelines
from the Government
•  Guidelines are basically
general and set targets for
allocation of the debt between
different debt classes and time
to maturity for each class
•  Guidelines are based on a
proposal from the Debt Office
•  Management and Guidelines
are evaluated every second
year by the Parliament


Reforms to increase stability and growth
Reforms on monetary and fiscal policy frameworks together with deregulations
and pension reforms have created a stable economic and budgetary enviroment.

•  Medium-term budgetary framework
– Budgetary framework established in 1997 and strengthened in 2011 …
– ...targeting an average surplus of 1 per cent of GDP for the general Government
over the business cycle with close monitoring of spending ...
– ... ceiling for government spending decided each year in advance by the Parliament

•  The Swedish central bank – The Riksbank – has
an independent standing with a price stability objective


Reforms to increase stability and growth cont’

•  Pension reform established
– Pensions now linked to life-long income
– Defined contributions as a complement
– The new system is robust to changes in overall income growth and demographics

•  Deregulation of product markets
– Telecom
– Transportation
– Electricity
– Labour market reform


Future financing projections
In addition to our proposal for Guidelines for Central Government debt
manage-ment, we presented an analysis on the implications of declining
government debt:

•  On liquiditiy, infrastructure and readiness to borrow in a crisis scenario
•  Priorities between our different debt classes and instruments
•  Funding in excess of our borrowing requirement to support market presence
Despite weaker growth, the central government budget will largely be in balance
in 2012 and 2013. No austerity packages needed and monetary policy can be
adjusted to domestic conditions


Funding plans

•  Focus on 10 year nominal bonds to defend liquidity and infrastructure
•  Gradual increase of long-dated bonds
•  Issues in foreign currency to rollover on-lending to the central bank’s foreign
exchange reserve
•  Symbolic presence in the inflation-linked market
•  T-bill borrowing increases somewhat within the liquidity management
framework


Debt around 30 per cent of GDP
Central Government Debt SEK 1,143 bn at the close of 2012 or 32.8 per cent
of GDP. Including on-lending to the central bank, the debt would be SEK 1,024 bn
or some 29.4 per cent of GDP.

SEK billion Per cent of GDP

1 400 60

1 300 50

1 200 40

1 100 30

1 000 20

900 10

800 0

Central Govt Debt Incl. assets Central Govt debt, % Incl. assets, %


Debt portfolio structure, SEK mn

•  Bonds are the core of our Government bonds 558,510
government debt, close to 80 %
–  Government bonds 191,833

–  Inflation-linked bonds Public bonds, foreign currencies 108,593
–  Foreign currency bonds
T-bills 83,066
•  T-bills are partly long-term funding
Retail market 56,790
and partly liquidity management
•  Commercial paper are used Collateral 30,129

occasionally as substitute to T-bills Liquidity management 24,477

•  Retail market debt, around 5 % Commercial paper 13,805
•  On-lending to boost the central
Other capital market debt 4,219
bank foreign exchange reserve
Foreign exchange derivatives –13,626

On-lending –91,349

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17
2012-05-07 Investor presentation
10
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9.5
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Government bonds

82.8

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10 Au
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10 3% 15
60.5

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22
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67.1

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ar
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41.3

Inflation-linked government bonds
SEK bn

60

50.1
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42.7
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Foreign currency bonds

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0


Maturity profile, capital market
SEK bn

160

140

120

100

80

60

40

20

0
2012 2013 2014 2015 2016 2017 2019 2020 2022 2026 2028 2032 2039

Bonds in foreign currencies Government bonds


Increased bond borrowing
All borrowing, apart from on-lending in foreign currencies to the central bank,
will be focused on nominal government bonds.

SEK billion 2008 2009 2010 2011 2012 2013
Net borrowing requirement ‐135 176 1 ‐68 11 ‐3
Discrepancy between business and payment date ‐20 ‐20 25 11 ‐9 4
Retail market, collateral etc., net ‐19 4 2 ‐9 3 7
Money market, redempBons 245 111 209 178 159 188
Capital market, redempBons, switches and buy‐backs 90 181 38 126 127 42
Gross borrowing requirement 161 452 275 238 291 238

Money market, gross borrowing 111 209 178 159 188 148
Capital market, gross borrowing 50 243 97 79 103 90
     Government bonds 47 110 58 41 50 53
     InﬂaBon‐linked bonds 3 3 8 6 6 6
     Bonds in foreign currencies 0 130 31 31 47 32
Borrowing, gross 161 452 275 238 291 238

Note: 1 % of GDP is SEK 35 bn.


Unchanged debt
Debt will be more or less stable as Sweden will have a budget balance the
upcoming two years. Debt is approaching 30 per cent.

SEK billion 2008 2009 2010 2011 2012 2013

Net borrowing, business day = Change of debt, nominal amounts ‐155 156 26 ‐56 2 1
A. Nominal amount including money market assets 976 1 131 1 157 1 101 1 103 1 104
     InflaBon compensaBon 33 30 31 34 32 35
     Exchange rate effects 30 0 ‐26 ‐19 ‐17 ‐16
B. Nominal amount to current exchange rate incl. inflaNon compensaNon
     and money market assets 1 038 1 161 1 162 1 116 1 118 1 122
     Money market assets 91 37 26 42 25 25
C. Central government debt 1 129 1 197 1 188 1 158 1 143 1 147
     Money market assets ‐91 ‐37 ‐26 ‐42 ‐25 ‐25
     On‐lending ‐94 ‐86 ‐91 ‐94 ‐95
D. Central government debt incl. on‐lending and money market assets 1 038 1 067 1 075 1 025 1 024 1 028

Nominal GDP 3 204 3 089 3 306 3 474 3 486 3 589
C. Central government debt, % of GDP 35,2 38,8 35,9 33,3 32,8 32,0
D. Central government debt incl. on‐lending and money market
     assets, % of GDP 32,4 34,5 32,5 29,5 29,4 28,6


Investment case Sweden


Strong public finances
•  According to the OECD, the General Government net lending will be –0.6 per cent of GDP compared
to –4.6 per cent average for the Euro Zone in 2011
•  Our own assessment of General Government net lending for 2011 is a surplus of 0.6 per cent of GDP
or some SEK 20 bn. General Government debt will be around 35 per cent of GDP
•  Medium-term budgetary framework
–  … targeting an average surplus of 1per cent of GDP for the general Government over the business cycle and a ceiling
for government spending decided each year in advance by the Parliament
–  commitment from both the current government and the Social Democrats

General Government Debt, % of GDP 2011 General Government Net Lending, % of GDP 2011


Broad investor base

•  Around 40 % of government Percent
60
(nominal and inflation-linked)
bonds are owned by foreign 50

investors
40
•  About 40 % of total
government debt is owned by 30

foreign investors assuming
that foreign currency debt is 20

owned solely by foreigners
10
•  The Kingdom of Sweden’s
investor base has a core of 0
2006 2008 2010 2012
some 25 domestic investors,
but is essentially international - T-bills, %

comprising investors in UK,
Euroland, Asia and US


Swedish yields reflect scarcity and AAA quality

•  Swedish government bonds Yield spreads to German 10-year bonds
are benchmarks in the SEK
Percent
fixed income market 500

•  Sweden has its own currency
400
and central bank; gaining by
the turbulence as a safe haven 300

•  Limited supply of bonds
200
advantageous for Swedish
yields 100

•  In February 2012 our central
bank cut the repo rate by 25 0

bp to 1.50 per cent. The
–100
market expects the Riksbank Jan May Sep Jan May Sep Jan May Sep Jan May Sep Jan May Sep Jan May

to continue lowering rates. 2007 2008 2009 2010 2011 2012


Unemployment rising and becoming entrenched
The NIER assessment:

•  “Through increased uncertainty GDP growth, quarterly figures, Sweden
and weak exports, Sweden is
being negatively affected by the
government debt crisis in
Europe. The year 2012 will thus
be one of lackluster growth.
Absence of progress toward
solutions for the crisis-ridden
countries of the euro area is
unnecessarily delaying
recovery. There will be lasting
negative effects on the Swedish
economy as well, partly from
many years of high GDP growth, seasonally adjusted, q/q
GDP growth, calendar adjusted, y/y
unemployment.”


Swedish exports – regional distribution
Export is geografically concentrated
to northen Europe – the economic strongholds.
Norway 10%
•  Our main export countries are All other countries 19%

•  Norway Germany 10%
•  Germany
Brazil 1%
•  UK Saudi Arabia 1%
India 1%
•  United States Turkey 1%
Japan 1%
United Kingdom 7%

•  Denmark Australia 1%
Russia 2%
•  Finland Spain 2%
Poland 3% United States 7%
•  Netherlands
Italy 3%
•  France
China 3% Denmark 7%
•  … exports to these countries are Belgium 4%
Finland 6%
close to 60 per cent of the total France 5%
Netherlands 5%
•  Europe receives almost 70 per cent of our export


Underlying inflation around 1 per cent
The headline inflation is around 2 per cent and the underlying inflation measured
with fixed interest rates is around 1 per cent.
Swedish inflation


Labour market

•  Faster than expected reduction in unemployment until now,
but could be leveling out going forward

Unemployment Employment
Percent Person, millions


Surprisingly strong Krona during this turmoil

•  A ”normal” exchange rate versus the
euro has historically been 8.90-9.40
•  During global financial turbulence and
lack of export demand, the krona
typically weakens
•  The tensions in the Euro area, strong
budget outlook and signals of
monetary tightening supports the
krona
•  Pick up in exports provides krona
support
•  SNDO reduces costs by taking
positions in currencies. The SEK 50
billion position for a stronger krona vs. EURSEK USDSEK

the Euro generated a profit of SEK 8
billion


Business confidence
Diffusion index Net balance


Economic tendency indicator
Summary of business and consumer economic sentiment
Net balance


Retail sales
Retail sales, constant proces, 12 months change
Percent
12,5

10,0

7,5

5,0

2,5

0

–2,5

–5,0


Consumer confidence

Net balances


Turnover in the Government bond market

SEK bn

•  Customer turnover in nominal bonds 45

average around SEK 30 bn per day 40

•  SEK 10 bn spot 35
•  Bond stock turned over 5 times a year
30
•  Around 50 per cent of spot turnover
comes from foreign investors 25

•  Derivative trading (forwards) has 20

trended upwards 15

10

5

0
2004 2005 2006 2007 2008 2009 2010 2011 2012

Forward Spot


Primary dealers
•  Barclays Capital +44 207 773 8275
Nominal bonds

•  Danske Markets +46 8 568 808 44
Nominal bonds, T-bills, Inflation-linked

•  Handelsbanken Markets +46 8 463 46 50

•  Nordea +45 33 33 17 58

•  Nykredit Markets +46 8 557 67 400

•  RBS +46 8 506 198 76

•  SEB +46 8 506 231 51

•  Swedbank +46 8 700 99 00


Telephone: +46 8 613 45 00
E-mail: riksgalden@riksgalden.se
Visitors address: Jakobsbergsgatan 13
Postal address: Riksgälden, SE-103 74 Stockholm, Sweden
Web: www.riksgalden.se

Debt Management:
Thomas Olofsson, Head of Debt management
Phone: +46 613 47 82, thomas.olofsson@riksgalden.se
www.twitter.com/olofssonthomas
Bo Lundgren
Director General Maria Norström, Head of Funding
Phone: +46 8 613 46 35, maria.norstrom@riksgalden.se
Magdalena Belin, Head of Analysis
Phone: +46 8 613 52 28, magdalena.belin@riksgalden.se
Front office: + 46 8 613 47 80 or +46 8 613 47 90


The National Debt Office plays a key role in the Swedish
economy and in the financial market. Our operations contribute towards taxpayers’ money
being used as efficiently as possible and the financial system remaining stable.

Visiting address: Jakobsbergsgatan 13 • Postal address: SE-103 74 Stockholm, Sweden
Telephone: +46 8 613 45 00 • Fax: +46 8 21 21 63 • Email: riksgalden@riksgalden.se • www.riksgalden.se


Sweden's Strong Sovereign Credit Position Outside the Eurozone

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