Swedish Current Account Surplus Widened To SEK 39.5 Billion In The Second Quarter Of 2017

|
Includes: EWD, FXS
by: Alan Longbon

Summary

Swedish current account surplus widened to US$4.93 billion in the second quarter of 2017.

Positive fiscal flows add to the stock of funds in the private sector and negative flows take them away.

Overall, the fiscal flows are moderate at 4% going forward but decelerating.

A positive macro picture for a land one is looking at investing in is a real prerequisite, and the purpose of this report is to assess if Sweden has a positive macro environment within which to invest.

One can summarize the national accounts in the following formulae:

Private Sector [P] = Government Sector [G] + External Sector [X]

and

GDP = Private Sector [P] + Government Sector [G] + External Sector [X]

These are accounting entities and are true by definition.

See the methodology section below for more detail on this formula.

The private sector is where the stock market is and we as investors want the stock market to go up. The stock market can only go up if the flows into it are positive. The private sector derives income from three sources:

  1. Credit creation from banks - Banks lend more than is repaid in loans.

  2. Externally from overseas commerce - Exports bring in more than imports cost.

  3. Government spending - More is spent than taxed.

In an ideal scenario, the private sector would receive large and growing income flows from all three sources, and at the very least, the overall impact should be a positive flow even if one or two of the three flows are negative.

The stock market in the private sector, as well as all other private financial assets, should rise if the overall income flow into the private sector is positive. Certainly, the stock market would be unlikely to rise if the income flows were negative. Even in a shrinking economy, some sectors can grow while the rest of the pie shrinks such as defensive sectors like consumer staples and utilities.

We will look at each inflow in turn and start with the private sector all the while updating our forecast result based on the latest data.

Private Sector

The chart below shows the level of private credit creation entering the private sector through commercial banks.

The overall picture is one of decelerating credit growth in 2017; in fact, in the first half of this year, credit growth overall has declined and removed money out of the circular flow of income. Repaid loans = destroyed money.

The household sector is still borrowing sharply at 7% PA to pay for their costly homes.

Business is probably not borrowing and instead paying for things out of cash flows given the strength of the external sector.

External Sector

The external sector captures trade and commerce with other countries and is best captured by the current account. The current account is exports minus imports, and it also captures capital flows in and out of the country from financial transactions and investments. A positive overall result is best.

The chart below shows the current account balance. Sweden has a strong current account balance that adds 4.7% to GDP alone. Growth has, however, flatlined after a decade of decline. Results are tracking to be the same in 2017 as they were for 2016 at this stage.

Government Sector

The government budget is shown in the chart below:

The government budget picture is mostly negative with a net extraction of funds out of the private sector. The trend appears stable with a steady drain occurring over the last two years after modest expansionary budgets between 2009 and 2014.

The Swedish government is a monetary currency sovereign with a freely floating exchange rate, and so there is no functional link between taxes, borrowing, and spending. It is the source of the money. With relatively high general unemployment at 6.6% and youth unemployment at 19.3%, there is room for more government spending to engage these idle resources the private sector has no use for.

Could it be that a stock of unemployed people is being used to control inflation by holding down wage growth?

A declining inflation rate of 2.2% shows that the economy can absorb new workers and more aggregate demand without inflation risk.

Sectoral Analysis Methodology

Each nation state is comprised of three essential components:

  1. The private sector

  2. The government sector

  3. The external sector

The private sector includes the people, business, and community, and most importantly for investors, the stock market. For the stock market to move upwards, this sector needs to be growing. This sector by itself is an engine for growth and innovation; however, it needs income from one or both of the other two sectors to grow.

The government through its Treasury also sets the prevailing interest rate and provides the medium of exchange. Too much is inflationary and too little is deflationary. It puts the oil in the economic engine and can put in as much as its target inflation rate allows. It is not financially constrained. For a sovereign government with a freely floating exchange rate, any financial constraint such as a matching bond issue is a self-imposed restriction. A debt ceiling is also a self-imposed restriction as is a fiscal brake.

The external sector is trade and commerce with other countries. This sector can provide income from a positive trade balance, or it can drain funds with a negative trade balance.

For the stock market in the private sector to prosper and keep moving upwards, income is required to flow in. Otherwise, the sector can only circulate existing funds or is losing funds and in decline.

The ideal situation is that the private sector has a net inflow of funds and is always growing, thus giving the stock market headroom within which to expand in value. For this to happen, one or both of the other sectors have to be adding funds to the circular flow of income.

The following formula can express this relationship:

Private Sector = Government Sector + External Sector

and

GDP = Private Sector + Government Sector + External Sector

These are accounting entities.

For the best investing outcome, one looks for countries with stock markets located in private sectors that are receiving positive income flows overall. Top marks come where private credit creation, the government sector, and external sector are all in plus and trending upwards.

Conclusion, Summary, And Recommendation

When we take our inputs and place them in our formula, we can calculate the following sectoral flow result based as a percentage of GDP.

Private Sector Credit Creation

[P]

Government Sector

[G]

External Sector

[X]

TOTAL

[P]+[X]+[G]

2016

0.7% -0.9% 4.7% 4.5%

NOW

-0.2%

-0.5%

4.7%

4%

(Source: Trading Economics and Author calculations based on same)

The Sweden macro fiscal flows are moderate at 4%. There is scope for financial assets such as stocks, bonds, and real estate to rise given that the private sector is receiving such an inflow of funds. On the downside, the flows are decelerating as the private credit market reverses and the government continues to spend less than it taxes.

An investor wishing to have exposure to the Swedish stock exchange and currency can do so via the following ETFs:

(NYSEARCA: EWD)

iShares MSCI Sweden Capped ETF

(NYSEARCA: FXS)

CurrencyShares Swedish Krona Trust ETF

I first looked at Sweden in this article in February 2017 and recommended it as a buy due to the strong fiscal flows. If one had invested in Sweden following the article, one would have seen 13% capital growth return, and a modest 2.18% dividend as the chart below shows. Not a bad effort where timing played a key role. The Swedish stock index has risen steadily since bottoming out in 2009, and one would have been well compensated over the period regarding income and growth.

The fiscal flows are now moderate, though, in decline. One can expect a weaker stock market performance going forward due to credit creation decay and the government spending less than it is taxing out. There is simply less wealth being generated to keep all asset prices moving up at the same velocity as before.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.