Facts: Pros and cons of a weak krona
According to the school book, a weak krona can mean both advantages and disadvantages for Swedish households and companies. How it affects ultimately depends on what and where you consume or produce.
For the foreign tourist, a weak krona is obviously negative, as the travel fund in foreign currency shrinks when the krona exchange rate falls. The same applies to companies that import foreign goods and services – which, calculated in kroner, have to pay more for the same thing when the kroner loses value. Households that consume these goods and services are also negatively affected.
At the same time, exporting Swedish companies can benefit from a weak krone, as their competitiveness on the world market is strengthened by the fact that the price of goods and services priced in kroner falls for buyers with foreign currency in the cash register. But economists see this as long-term unsustainable, as it slows down the adjustment pressure in the economy in the longer term.
Next fall, it will be 20 years since a majority of Swedish voters said no to introducing the euro as currency in a referendum. Since then, the crown has taken quite a beating.
Since the referendum on September 14, 2003, the Swedish currency has lost 22 percent against the euro and almost 30 percent against the dollar. And going back to the 1970s, the price of a dollar has more than doubled.
Concerns among foreign investors
The exchange rate turbulence has been dramatic at times, through the financial crisis, the euro crisis and the pandemic – and now this year in the shadow of the Ukraine war, where, via the energy crisis and pandemic effects, we have ended up in a historic inflation and interest rate shock with new historic rock bottoms for the krona in the autumn.
— AB Sweden should have a higher share price, that is, a stronger krona. But we don’t have that, says Robert Bergqvist, senior economist at the major bank SEB.
He describes the krona as undervalued, by approximately 10 percent, if you do an analysis of Sweden’s economic conditions, the public finances and how the country’s business with the rest of the world is going.
Robert Bergqvist, SEB’s senior economist, warns of negative effects of a weakened krona. Archive image
What weighs is the geopolitical unrest with a war in the immediate area and an energy crisis that hits the whole of Europe hard, according to Bergqvist. Reduced risk appetite in the wake of the stock market crash and a protracted drop in housing prices in Sweden are other factors he links to the krona’s problems.
— There is concern among foreign investors about the Swedish housing market, the entire property market. High indebtedness among both households and commercial real estate companies becomes a problem when we are on the way up with interest rates. The market wants to have a grasp of what is happening on the property market in Sweden before they go in and buy kroner, he says.
Bergqvist played a decisive role as head of monetary and currency policy analysis at the Riksbank 1988–1997, when the Swedish central bank, in a last ditch effort to defend a fixed exchange rate, raised the marginal interest rate to 500 percent. Since then, he has continued to closely monitor and analyze the krona as an economist at SEB.
TT: How much is the Riksbank responsible for it looking the way it does?
— If you want to find scapegoats, you should look at the driving forces behind inflation. Then you should primarily look for financial policy globally, says Bergqvist.
— During the pandemic years, fiscal stimulus globally amounted to 18 percent of GDP. It’s extreme. And it went on for a long time, even when the economy was picking up, he adds.
“A serious misjudgment”
As far as the Riksbank is concerned, the situation may have worsened for the krona because Stefan Ingves and his management were late out of the starting blocks with the interest rate increases, according to Bergqvist.
The Riksbank delayed until April 28 this year in raising the key interest rate from zero. By then, Swedish inflation according to the CPIF measure – where mortgage interest is excluded – had risen to over 6 percent and was clearly above the Riksbank’s target of 2 percent for nine months.
CPIF inflation has since continued upward to almost 10 percent and is not expected to turn downward until a little into next year.
— The Riksbank made an incorrect analysis of inflation. That’s what many did, but this is the task of the central banks. That’s where the competence and knowledge should be, says Bergqvist.
— They obviously have not had an understanding of inflation and its driving forces and dynamics. It has been a serious misjudgment.
Bergqvist is also critical of what he describes as “casual” support purchases of securities.
– That should have been stopped earlier.
“Not good for the Swedish economy”
According to Bergqvist, the benefits of a weakening of the krona are currently limited.
— That the krona is weakening further now does not give much help to the Swedish export industry. However, it exacerbates the inflation problem. On top of high energy prices and higher interest rates, imported goods become more expensive in kroner.
— This weak krona is not good for the Swedish economy.
He also sees serious long-term problems with a weak krona, as it can act as doping for the Swedish export industry.
— An undervalued krona puts the Swedish export industry in some type of protective bubble. Then they don’t feel the pressure and the need for structural changes, which are out there. Then there is the risk that we lose competitiveness, especially when the krona eventually returns to normal levels.
— It could be a rude awakening.