Looking ahead in times of uncertainty
We live in a period of considerable uncertainty, with a global economy that is influenced by experimentation in monetary policy, geopolitical tensions, war and major refugee migrations. Digitisation and urbanisation are changing the future. The impact will be considerable, even on Swedish society. Financial cooperation in the Swedish local government sector is gaining increasing importance.
Money has never been as cheap as it is today. Interest rates are actually so low that depositors may have to pay to have money in their accounts. In addition to the European Central Bank (ECB), the Riksbank (Swedish central bank) and its Japanese, Danish and Swiss counterparts have introduced negative interest rates.
Combined with quantitative support-buying programmes, negative interest rates constitute a monetary policy experiment that has distorted pricing in financial markets. The short-term and long-term consequences are highly uncertain. What is the actual value of money? Nobody knows.
Although the purpose of the policy varies, it is generally a matter of using non-traditional tools to boost the economy, and affect inflation and exchange rates.
In Sweden, the situation with low interest rates is contributing to continued rising debt primarily among households, but also to supporting domestic consumption and economic growth through relatively higher disposable income. The Swedish economy is doing well, employment is forecast to increase and unemployment is forecast to decrease. This also contributes to increased revenue for the local government sector.
Societal changes pose challenges and opportunities
The willingness to invest among Swedish local government authorities demonstrates their confidence in the future and that they have ideas and ambitions – the Swedish local government sector wants to continue developing its services and what it offers citizens. Sound finances represent a basic requirement in being able to cope with the huge need for investment in the sector, and the resulting increase in debt. Generally, however, investment occurs in the municipalities and county councils/regions with the most favourable economic conditions. Planning has now been made more difficult, with conditions changing substantially and quickly. Extensive immigration of asylum seekers is altering the population structure in all municipalities, bringing uncertainty regarding demand for local government services in both the short and long-term.
The fact that Sweden’s local government authorities have chosen to cooperate on funding represents a significant advantage as the volume of investment and funding needs grow. With Kommuninvest, the sector has established a financial institution with the ability to provide it with long-term financing solutions that safeguard both financial stability and tax revenues.
Kommuninvest is prepared
In 2015, the members of the Kommuninvest Cooperative Society showed once again that they want to secure Kommuninvest’s role as a supplier of sustainable and cost-effective financing solutions. Numerous municipalities and county councils/regions resolved to make additional member contributions. With their contributions to capital formation, the owners have expressed their confidence in Kommuninvest and their ambitions for the organisation. This is a signal to the external community that we on the Board of Directors value highly.
Today, Kommuninvest is Sweden’s best capitalised credit institution. This is reassuring, but it is not enough. Additional capital requirements, in the form of a minimum leverage ratio level will be imposed on the operations. At a fundamental level, these requirements are not designed for local government finance partnerships. The requirements have been known for a long time, but only this year will we know what the final levels are to be.
Visible and recognised issuer
Kommuninvest’s model is the same today as on its inception 30 years ago: to search worldwide for the most cost-efficient funding, so that members can be offered loans at attractive prices. Today, we assure this through large-scale international borrowing programmes, which form the basis of Kommuninvest’s borrowing. The largest groups of investors include the world’s central banks, large public institutions and other institutional investors. For me, the fact that qualified investors like these show such great interest is proof that Kommuninvest’s model works.
Customer needs decisive
Kommuninvest was founded based on a sound and simple idea. Orderliness, simplicity and transparency are watchwords well as theoperations develop. And they are constantly evolving to meet the needs of our members and customers.
In my view, two new areas may gain strategic importance. Today, 850 officials in the Swedish local government sector utilise a powerful tool, developed by Kommuninvest, for planning, following-up and analysing their debt management. This results in improved quality and better use of resources, with transparency and understanding increasing and time being freed up for further development of core operations. The service was launched in 2014 and at the end of the year, a total of 125 contracts had been signed with members.
In June 2015, the Municipality of Eskilstuna became the first borrower to secure a Green Loan from Kommuninvest, to finance a wind power investment. Interest has since risen, with an increasing number of municipalities seeking ecolabelled financing of their investments, knowing that the funds ultimately come from investors who specifically want to support projects that promote sustainability.
Both of these examples serve to illustrate solutions developed in close collaboration with Kommuninvest’s members and customers, and where our model and size enable us to offer solutions that are cheaper and better than the alternatives. The decisive factor is that we are responsive and deal with challenges with skill, quality and efficiency.
Kommuninvest i Sverige AB
Ellen Bramness Arvidsson