Swedish Export Bank Warns Industry Giants Pose Economic Risk

The state-backed lender that funds Sweden’s exporters says the industry is dominated by super-sized companies as smaller rivals struggle to grow.

SEK, which argues export industry concerns about the exchange rate are exaggerated, is urging the largest Nordic economy to do more to support small and medium-sized companies.

“We are far too reliant on large exporters,” SEK Chief Executive Officer Peter Yngwe said in an interview in Stockholm. “There are not enough incentives for small companies to grow big and that’s something we need to work on.”

The home of Electrolux AB, Volvo AB and Ikea relies on exports to generate about half its $500 billion in annual economic output. Sweden’s 10 biggest companies make up a third of sales abroad, SEK estimates. While Swedish manufacturers have pleaded with policy makers to stem the krona’s appreciation, Yngwe argues the exchange rate isn’t as much of a threat to the economy as the nation’s lop-sided export industry.

Though krona strength is “tough” in the short term, it helps discipline exporters in the long run, Yngwe said.

The krona is the best-performer over the past 12 months, having gained 8.1 percent on a correlation-weighted basis against nine currencies tracked by Bloomberg. After rising about 3 percent against the euro this year, it traded 0.2 percent higher at 8.3427 as of 11:35 a.m. in Stockholm.

Biggest Companies

Sweden, which has about the same number of inhabitants as Michigan, boasts four companies in the Fortune 500 list of the planet’s largest corporations by revenue. It’s home to Ericsson AB, the world’s largest maker of mobile networks, SKF AB, the biggest maker of ball-bearings and Hennes & Mauritz AB, Europe’s second-largest clothing chain. Sweden’s 10 largest exporters are Ericsson, Volvo Cars, Volvo, Preem AB, AstraZeneca AB, SSAB, Sandvik AB, LKAB, Tetra Pak AB and Saab AB.

“What will happen if the large companies all of a sudden decide to leave Sweden?” Yngwe said. “We have a lot of large companies, very few medium-sized and a lot of small companies, so the structure looks a bit like an hour-glass.”

The government of Prime Minister Fredrik Reinfeldt is trying to keep companies in Sweden and attract international corporations by making it cheaper for them to do business. His administration agreed this year to cut the corporate tax rate to 22 percent from 26.3 percent. The coalition has also abolished Sweden’s wealth tax.

Business Friendly

While those measures are business friendly, they don’t do enough to help small and medium-sized companies, Yngwe said.

“Risk-reward aspects, which among other things include taxes, have improved somewhat, but we need to think about what else we can do,” he said. “It must pay to run companies and it must pay to take risk. The risk-reward relationship is not big enough; there are not enough incentives for small companies to grow big.”

Sweden’s gross domestic product will grow 1.2 percent this year from 0.8 percent in 2012, the central bank said on Feb. 13. Output growth will accelerate to 2.7 percent in 2014, it said. Swedbank AB forecast today the economy will grow 1.6 percent this year, prompting the central bank to raise its policy rate from 1 percent to 1.75 percent next year.

SEK, which is rated Aa1 at Moody’s and AA+ at Standard & Poor’s, last year lent 56.2 billion kronor ($8.8 billion) to Sweden’s exporters and their customers. Since 1990, SEK has generated about 2.4 billion kronor in profits for the state. Lending in 2012 was the second-highest on record, after exporters grew more reliant on alternative credit sources as stricter capital requirements prompted banks to retrench.

Credit Hurdles

“We see and hear from export companies that they find it difficult to borrow,” Yngwe said. “Banks have been wounded from the crisis, but most of all, the new regulatory frameworks have decreased banks’ lending incentive and therefore increased demand for our loans. The new rules, all else equal, make it much more expensive and less interesting for banks to lend.”

SEK’s loans, outstanding and agreed, reached 218.8 billion kronor at the end of last year, of which 23.3 percent was lent to western European companies and 10.3 percent to clients in Japan, Australia and New Zealand. Some 9.6 percent was lent to North America. SEK raises 37.2 percent of its funds in Europe, 22.7 percent in the U.S. and 22 percent in Japan.

“One challenge that we have in Sweden is to make sure that the large companies operate in an environment that makes them stay and can continue to prosper,” Yngwe said. “Another is to make sure that we create more export companies that can contribute to Swedish growth. We need more companies to become medium-sized and more medium-sized companies to get larger.”

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