Sweden Laments ‘Crazy’ Devaluations Amid Krona Strength

Sweden Laments ‘Crazy’ Devaluations Amid Krona Strength

Sweden took another step to distance itself from policies targeting competitive devaluations as exporters were told a strong krona provides opportunities to make their businesses more efficient.

“It’s good for companies that they need to understand that they have to compete with real tools rather than the imaginary tool that the exchange rate is,” Financial Markets Minister Peter Norman said in a March 15 interview in the Swedish town of Karlstad, where his Moderate Party laid out the foundations for its 2014 election campaign.

While Swedish exporters have warned that continued krona appreciation will force them to cut jobs, the government and central bank have repeatedly rejected talk of boosting trade competitiveness through the exchange rate. And while policy makers from France to Japan argue in favor of weaker currencies, the Swedes have praised their krona’s strength. Central bank governor Stefan Ingves in an interview last month said he was “happy” with the currency’s gains.

Sweden didn’t always have such a hands-off approach. Between 1976 and 1981, when the krona was linked to the Deutschmark and later to a basket of currencies dominated by the U.S. dollar, it was devalued four times. In 1982, its value was again cut, by 16 percent. After the Riksbank was unable to defend the fixed exchange rate inside the European Exchange Rate Mechanism — even resorting to a 500 percent marginal interest rate in 1992 — the peg was scrapped and a free float was introduced.

‘That’s Crazy’

“From the middle of the 1960s until the beginning of the 1990s it was a returning theme in Swedish crisis fighting to devalue the currency, so we got used to that if we devalued the currency we could get an export-led growth, and that’s been part of our DNA,” Norman said. “That’s how we created wealth in Sweden, but I would like to argue that that’s crazy.”

On March 12, the krona reached its highest level against the British pound since the 1992 currency crisis. Since the height of the global financial crisis in March 2009, the krona has soared 40 percent against the euro, 46 percent against the dollar and 42 percent against Japan’s yen.

On Aug. 10 last year, the krona hit its strongest level against the euro, at 8.1821, since the European Central Bank began circulating euro coins and notes in 2002. The krona last month hit its highest level against the U.S. dollar, after gaining 14 percent since May last year. The krona is also the best-performing major currency in the world this year after rising 4.5 percent, according to the 10 developed-market Bloomberg Correlation-Weighted Index.

Krona Strengthening

The krona strengthened as much 0.4 percent against the euro to 8.3229 and appreciated 0.1 as of 9:39 a.m. local time.

Sweden’s trade surplus rose to 6 billion kronor ($939 million) in January from 400 million kronor a month earlier, Statistics Sweden said on Feb. 27. Since January 2012, the surplus has averaged 5.9 billion kronor, compared with an average of 10.2 billion kronor in the preceding decade, according to data compiled by Bloomberg. Exports make up half of Sweden’s gross domestic product.

Norman argues that any negative currency effect on Swedish exports is “cancelled out” by cheaper imports, which also support demand in the largest Nordic economy.

The “sometimes idealized picture that’s existed in Sweden for almost thirty years, that a weak exchange rate development is good for export activity, doesn’t hold in the long-term,” Norman said. “It’s good that we’ve moved away from that.”

Job Losses

Sweden’s exporters, who send about 70 percent of the goods they sell abroad to Europe, don’t agree. The strong krona “is a phenomenon that affects the entire Swedish export industry,” Jan Johansson, chief executive officer of Europe’s largest paper-tissue maker, Svenska Cellulosa AB (SCAA), said this month. “The consequence now is that we have to cut costs, decrease staff, cut as much as we can, so it’s directly affecting employment,” he said.

Of the 66,000 Swedes given notice last year, 40 percent worked in the export-reliant manufacturing industry, the Public Employment Service estimates. Some of Sweden’s biggest companies have cut thousands of jobs, including Ericsson AB (ERICB), the world’s largest maker of wireless networks, and truckmaker Volvo AB. Swedish unemployment rose to 8.5 percent in February from 8.4 percent a month earlier, the statistics office said on March 14.

A weaker krona won’t help Swedish industry hold on to jobs in the long run, Norman said. Their best option is to grow more efficient when the exchange rate presents hurdles, he said.

“When we get a rising krona, companies must become even better at rationalizing and developing products to keep market shares,” Norman said. “So, to keep companies on their toes it’s not good to have a constantly weak currency, but it should then rather be strong, or at least constant. The stronger the Swedish krona, the more money we get when we buy foreign goods.”

To contact the reporters on this story: Johan Carlstrom in Stockholm at jcarlstrom@bloomberg.net Niklas Magnusson in Stockholm at nmagnusson1@bloomberg.net

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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