IMF Executive Board Concludes 2008 Article IV Consultation with Switzerland

Public Information Notice (PIN) No. 08/61
May 29, 2008

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2008 Article IV Consultation with Switzerland is also available.

On May, 23, 2008, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Switzerland.1


The economy has performed impressively. Growth has exceeded the euro area average in each of the past four years, employment has surged and inflation has remained relatively muted. This favorable outcome can be traced to a strong external environment that has led to an increase in high value-added manufacturing, and in financial sector income flows which reinforced Switzerland's role as a major global financial center.

Global credit strains, however, have had an impact on the financial sector. While Credit Suisse and Swiss Re have reported losses, UBS has been particularly hard hit, reflecting its high exposure to U.S. subprime assets. Subprime losses at UBS have amounted to US$38 billion, and have led to writedowns by the main rating agencies, as well as two capital injections of about US$28 billion. Still, while deleveraging at the big banks is ongoing, domestic lending has remained on a surprisingly steady pace.

The economy gathered speed in 2006 and into the first half of 2007, resulting in a positive output gap of about 1 percent. GDP growth accelerated to 3.1 percent in 2007, as private consumption was supported by a very favorable labor market, and investment was underpinned by strong corporate profitability and tightening capacity constraints. So far, leading indicators have remained surprisingly positive. Demand of manufactured goods from Europe and Asia is steady and consumer-related industries, such as retail trade and tourism, have performed particularly well. Economic growth, however, is expected to moderate to 1.4 percent in 2008 as the worsening external environment takes its toll on goods exports and financial sector inflows, and financial tensions lower consumer confidence, gradually weakening consumption.

Headline inflation averaged 0.7 percent in 2007, while core inflation was 0.6 percent. CPI inflation has recently picked up due to fuel and food price increases but is expected to moderate by the end of the year. For 2008, inflation is projected to average 2 percent and fall to 1.4 percent in 2009. Foreign labor, in particular, has helped to keep wage pressures in check, and has bolstered competitiveness.

The Swiss National Bank (SNB) continued to normalize interest rates in the first half of 2007, but has since relaxed monetary policy when necessary. The SNB's target range for the 3-month Libor has been increased by 200 basis points since mid-2005 (to 2.25-3.25 percent) as the Swiss franc weakened. Since September, however, repo rates have been reduced to accommodate emerging credit strains which placed upward pressure on Libor rates.

The state of public finances continued to improve in 2007. The general government achieved a surplus of 2.2 percent of GDP aided by strong cyclical revenues and surpluses at lower levels of government. Debt to GDP ratios have fallen below 45 percent but aging-related expenditures are expected to reverse this trend in the medium-term.

Executive Board Assessment

Executive Directors welcomed Switzerland's impressive growth performance over the last four years, and commended the authorities on their strong macroeconomic policies and structural reform efforts. Directors noted that the financial turbulence of the past year—and the continued tensions, especially in the interbank markets—have generated risks for the Swiss financial sector. Although the economy has weathered well these challenges, Directors considered that, along with the slowdown in U.S. activity and the prospect of slower growth in Europe, these developments are projected to decelerate Swiss growth in the period ahead.

Against this background, Directors observed that the key policy priority is to maintain domestic financial stability, which, given Switzerland's strong international linkages, would contribute also to international stability. They commended the authorities for their vigorous response to date to limit the fallout from the financial turbulence. In particular, Directors welcomed the authorities' well-timed injections of liquidity into the banking system in concert with other major central banks, and their enhanced oversight of the major banks and insurance companies. They also praised the authorities for their proactive sharing of information and lessons learned with other regulators, and their smooth coordination of supervisory activities, while calling for continued work on measures that will further enhance financial sector stability. This work should focus on the following four areas: better risk assessment and risk management; increased capital buffers; more liquidity; and greater disclosure.

Looking ahead, Directors noted the importance of stronger buffers to protect the financial system. They noted that recent developments will likely lead to higher capital requirements under the Basel II framework, and that additional capital may be needed to cushion against unforeseen risks. In this regard, most Directors considered that a leverage ratio approach envisaged by the authorities could serve as a useful complement to the existing regime, if implemented alongside Basel II and with appropriate safeguards. Directors also welcomed Switzerland's development of a stronger stress testing framework to improve liquidity risk management and a more active review of banks' contingency plans and liquidity management policies. In the insurance sector, Directors noted progress in implementing the Swiss Solvency Test for insurance companies, and welcomed the strengthened on-site supervision and international supervisory cooperation.

Directors welcomed the recent appointment of the board and senior management of the new financial regulator (FINMA), and emphasized the need to ensure that the agency has the appropriate level of supervisory capabilities and resources. Directors recommended further strengthening of on-site supervision capabilities, with appropriate reliance on external auditors to monitor regulatory compliance. They also stressed the importance of building on existing cross-border supervisory arrangements for global groups, and securing more active support of host supervisors in maintaining the stability of global operations.

Directors agreed that the calibration of monetary policy has correctly balanced the risks to inflation and economic growth. They indicated that the effective easing of monetary policy has been appropriate given the potentially serious downside risks to the economy and the projected decline of inflation. Looking ahead, Directors welcomed the authorities' commitment to continue to monitor developments carefully. A number of Directors considered that the relatively contained inflation outlook provides some scope for further easing. A number of other Directors believed that the current monetary stance remains appropriate at the present juncture. Regarding the operational framework, Directors noted that its flexibility has served the economy well, and looked forward to further analysis of its signaling and substantive effects.

Directors commended the authorities for the strong fiscal performance. They emphasized that, following the small fiscal stimulus anticipated in 2008, further progress toward long-term fiscal sustainability will require continued fiscal prudence and structural reforms. In this regard, Directors welcomed the Long-Term Sustainability Report as an important step in raising awareness of the needed actions, and looked forward to the early formulation of specific policy measures. Directors noted that savings could be achieved through a consolidation of governmental responsibilities as outlined in the Task Evaluation Program. They also welcomed the proposal to extend the debt-brake rule to incorporate "extraordinary" expenditures.

In reviewing the factors behind Switzerland's large external current account surplus, Directors considered that the surplus largely reflects structural factors, notably the country's high per capita income, its aging population, and its position as a major financial center. They also noted that accounting norms and the specificities of the investment flows tend to overstate the surplus relative to other countries. Taking into account these considerations, Directors generally agreed that the exchange rate appears to be broadly in line with fundamentals.

Switzerland: Selected Economic Indicators
  2004 2005 2006 2007 1/ 2008 1/

Real economy


Real GDP

2.3 2.5 3.2 3.1 1.4

Real total domestic demand

1.6 1.9 1.4 0.2 2.2

CPI (year average)

0.8 1.2 1.0 0.7 2.0

Unemployment rate (in percent of labor force)

3.5 3.4 3.3 3.1 3.1

Gross national saving (percent of GDP)

34.0 34.9 36.9 38.6 36.6

Gross national investment (percent of GDP)

21.0 21.4 22.2 21.8 22.5

Public finances (percent of GDP)


Confederation budget balance 2/

-0.6 -0.2 0.5 0.9 -0.4

General government balance 2/ 3/

-1.0 -0.2 1.9 2.2 0.8

Gross public debt

53.4 50.5 45.9 44.0 42.3

Balance of payments


Trade balance (in percent of GDP)

1.5 0.6 1.0 1.9 1.4

Current account (in percent of GDP)

14.0 13.5 14.7 16.9 14.1

Official reserves (end of year, US$ billion) 4/

55.5 36.3 38.1 42.7 ...

Money and interest rates


Domestic credit (annual average)

2.3 4.0 5.5 7.5 ...

M3 (annual average)

3.2 4.2 2.5 2.0 ...

Three-month Libor rate (in percent)

0.5 1.5 1.6 2.2 ...

Government bond yield (in percent)

2.6 2.1 2.5 2.9 ...

Exchange rate


Exchange rate regime


Managed float

Present rate (May 14, 2008)


SwF 1.05 per US$1

Nominal effective exchange rate (1990=100)

110.4 109.8 108.4 106.0 ...

Real effective exchange rate (1990=100) 5/

105.6 104.0 101.7 98.0 ...

Sources: IMF, International Financial Statistics; IMF, World Economic Outlook; and IMF staff projections.

1/ Staff estimates and projections.

2/ Including privatization revenue.

3/ Including Confederation, cantons, communes, and social security.

4/ Excluding gold.

5/ Based on consumer prices.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.


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