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Sweden mulls sovereign wealth fund as government debt keeps falling

[STOCKHOLM] Sweden could set up a sovereign wealth fund as a way of solving its illiquid bond market problem, Finance Minister Magdalena Andersson said in a Reuters interview.

The idea is to issue more government bonds - to increase the market supply - and put the money into the fund because it is not needed for the general coffers.

Ms Andersson would not specify any trigger level for the state debt, but said that Sweden's next door neighbour Norway, despite having the world's largest wealth fund, has a debt level of 30 per cent of gross domestic product (GDP).

Swedish government projects debt falling to around 31 per cent of GDP by 2020 thanks to a surging economy.

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A plan to cut the currency reserve in half over the next few years will knock roughly 5 per cent off that figure.

With euro zone countries struggling with debt levels close to 90 per cent of output on average, Sweden's situation may seem enviable. But it brings with it problems.

With so little debt, there is a liquidity premium to hold Swedish bonds. The concern is that investors may stay away, making it more costly and more difficult to borrow, for example if the government needed to bail out the banks during a future crash.

"If state debt is so low that we get a problem with liquidity in government bonds, then the Norwegian solution is a possibility," Ms Andersson told Reuters. "Combining a fund with debt, so there is liquidity in government bonds, that is absolutely a possibility."

Norway's US$915 billion wealth fund, the world's biggest, invests the proceeds of Norway's vast offshore oil and gas production and owns about 1.3 per cent of all stocks listed globally.

Any fund created by the Swedish government, which recently set a target of having debt of 35 per cent of GDP, would be considerably smaller than that of its Nordic neighbour.

Were the government to borrow 5 per cent of GDP, taking debt from 30 per cent to the target 35 per cent, that would equal about 200 billion Swedish crowns (S$30.9 billion) that Sweden could put into a rainy-day fund.

When it took power in 2014, the Social Democrat-led coalition government complained that tax cuts by its centre-right predecessor had emptied state coffers. But rapid growth and falling unemployment have reversed the situation.

Finances are expected to show a healthy surplus of 0.3 per cent of GDP this year and 0.5 per cent next year, according to fiscal watchdog ESV, with Sweden enjoying a Goldilocks period where the centre-left can increase spending and still meet its target of running a surplus.

The centre-left government has ruled out borrowing to finance new spending measures, but now looks likely to open the spending taps ahead an election in 2018. "As long as we have a surplus target in the fiscal framework, state debt is going decline during the coming years," Ms Andersson said. "But it is also the case that we will use the surplus we see now for spending measures."