Swedish central bank stays further rate hikes as gov’t debt increases

Continued global financial uncertainty has forced Sweden’s central bank (Riksbank) to postpone interest rate hikes, according to a statement issued this morning.

The news comes as the Swedish National Debt Office reported a slight worsening of the country’s public sector net debt position in August.

The Riksbank said: “The concern over public finances abroad has increased and global growth prospects have deteriorated. The slowdown in the Swedish economy is thus expected to be more pronounced than was forecast in July. The Executive Board of the Riksbank has therefore decided to now hold the repo rate unchanged at 2 per cent and to postpone continued increases slightly.”

Concerns about the economy were highlighted recently in economic outlook documents recently published by the country’s banks, such as Swedbank, Nordea and SEB.

The Riksbank highlights this threat to Swedish economic growth thus: “The poorer world prospects now contribute to reinforcing the slowdown. Both households and companies are more cautious and the labour market is slowing down. But next year Swedish growth is expected to rise again. However, this is on condition that decisions on fiscal policy measures programmes are made abroad and that consumer and household confidence returns.”

The bank admits that there is little inflationary pressure in the economy.

Minutes from the Executive Board’s monetary policy discussion will be published on 20 September 2011. The decision on the repo rate will apply with effect from 14 September

Government debt

The impact of the slowdown on Sweden’s public finances is not yet fully apparent, latest data from the Swedish National Debt Office (Riksgälden) suggests.

For example, while central government net debt increased by SEK24.3bn (€2.7bn) to SEK1,058bn (€118bn) in August, the payments surplus stood at SEK8.8bn (€980m).

Foreign currency debt was the biggest single factor in the increase reported, rising SEK13.8bn month-on-month, while the amount of debt held in interest rate and currency swaps fell by SEK12.1bn, the Office said.

Tax income through August was some SEK3.7bn (€412m) lower than expected, with interest payment on government debt SEK3.9bn (€434m) higher than expected. The Office said that this was largely the result of exchange rate volatility.

“When debt in foreign currency is prolonged exchange rate differences occur and these are included in interest payments on central government debt. The turbulence on the currency markets affects interest payments certain months and this occurred in August in connection with rollovers.”

However, Sweden’s relatively solid public finances seem to be holding up. The Office says that net lending in August was SEK1.5bn lower than forecast. And, in the 12 months to the end of August, the surplus on government payments was SEK32bn (€3.5bn).

Also in the past month, other central banks around the world were big buyers of Swedish government debt, accounting for about half of a recent sale. The pricing of that debt was among the cheapest ever syndicated in the euro market.

Fund performance

The warnings about domestic economic growth and net debt positions come as concerns grow about the performances of some of Sweden’s key export markets.

For example, although Germany’s Constitutional Court has ruled that the government of chancellor Angela Merkel does indeed have the right to agree bailout terms to support Greece, recent analyst views suggests that Germany is facing a slowdown of its own.

Germany industry is a big user of exports such as ball bearings from maker SKF.

Some of the biggest Sweden domiciled funds have been shedding value in the past three months, according to FE data.

The €3.3bn Brummer & Partners Multi Strategy fund shed -2.8% in gross terms through the period to 2 September. But, long only funds focused on Swedish assets have fared much worse, such as the €476m Lannebo Sverige, which dropped -25% through the period.

The Carlson Sverige Koncis, a concentrated portfolio, dropped -28%. The Koncis portfolio holds just 15-20 Swedish stocks and is unfettered from any benchmark. Industrials account for 27% of its holdings according to the last published fund factsheet, with top-10 names including Volvo, Ericsson, Electrolux, Nordea, SKF, TeliaSonera, Atlas Copco, Swedbank, Autoliv and Lundin Mining.



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