IMF Executive Board Concludes 2010 Article IV Consultation with SwitzerlandPublic Information Notice (PIN) No. 10/61
May 21, 2010
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 2010 Article IV Consultation with Switzerland is also available.
On May, 14, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Switzerland.1
Although Switzerland was hard hit by the global crisis, the 1.5 percent contraction in 2009 compares favorably with most industrial countries. After a year long decline in real GDP, the economy exited the recession in mid-2009. While this resilience was unexpected given the origins of the global recession and structure of the Swiss economy, it can be linked to strong fundamentals and to supportive policies. In particular, households and firms were in a comfortable financial condition before the crisis; Switzerland did not experience a boom-bust credit and real estate cycle; and private consumption continued to be supported by immigration flows and dynamic revenues, in a context of negative inflation and muted adjustment on the labor market. Overall, export oriented and financial sectors were significantly impacted by the global downturn but most domestic oriented activities held up relatively well.
In response to the crisis, the authorities took a series of actions in a broad range of policy areas. The Swiss national Bank (SNB) continued to implement an expansionary monetary policy, leaving the 3-month Libor target range at 0 to 0.75 percent since March 2009 and actively pursuing quantitative easing measures, including foreign exchange intervention to limit upward pressure on the Swiss franc. In the fiscal area, the authorities allowed automatic stabilizers to fully play and enacted the last of three stimulus packages, focused on public infrastructure investment as well as labor market measures that increased short time work benefits.
Financial sector measures also helped to stabilize financial markets and reduce systemic risk. In 2008, the authorities strengthened capital requirements for the two largest banks, transferred illiquid assets of one large bank to a “bad bank”, and expanded deposit insurance coverage. In 2009, they tightened capital requirements for cantonal and regional banks, reduced by about one third the risk of the StabFund, and set new remuneration guidelines for large financial institutions. Moreover, the authorities created a “Too big to Fail” working group that is examining ways to address the moral hazard issue, and large contingent liabilities, associated with a financial sector with large institutions. It will produce a final report in the summer of 2010. Finally, guidelines for cooperation on financial stability issues between the SNB and the financial supervisor (FINMA) have been clarified in a revised memorandum of understanding.
The authorities are now contemplating how to exit from the current accommodative stance. Since December the SNB has only prevented excessive appreciation in the Swiss franc against the euro—and has signaled its intention to normalize rates over time. While the fiscal impulse should be positive in 2010, the government expects some consolidation in 2011–13 in line with the debt brake fiscal rule.
While leading indicators suggest that the recovery is ongoing and becoming broader based, uncertainty remains. Economic growth is expected to increase to 1.6 percent in 2010—and strengthen further to 1.8 percent in 2011, as exports and financial sector activity improve. Inflation has turned positive, but is expected to remain under 1 percent, given the effects of past appreciation of the currency, and the remaining slack in the economy. However, there are large uncertainties related to global developments.
Executive Board Assessment
Directors agreed with the thrust of the staff appraisal. They commended the authorities for Switzerland’s strong macroeconomic fundamentals and pro-active policy response which contributed to the resilience of the economy during the global crisis. Economic recovery is ongoing although uncertainties relating to external developments persist. In the absence of near-term threats to price and public finance stability, Directors supported a cautious exit from the current accommodative fiscal and monetary stance.
Directors considered the current expansionary monetary policy to be appropriate. They welcomed the liquidity support measures recently taken by the Swiss National Bank in response to renewed stress. Directors agreed that the main monetary policy challenge will be to normalize interest rates while exiting exchange rate interventions. Most Directors supported the view that the Swiss franc is not misaligned and that the current real appreciation pressure mostly reflects a strengthening of fundamentals. Directors endorsed the authorities’ intention to return to a free floating currency regime and most Directors stressed that any intervention should be limited to resisting disruptive pressures. Directors recommended that interest rates should not be raised prematurely and that prudential tools may be best suited to address any deterioration in lending standards.
Directors commended the authorities for their strong fiscal performance. They noted that prudent fiscal policies, which also result in low debt, should be maintained given the potential liabilities relating to the financial sector and the medium-term effects of population ageing. In light of the risks to growth, a few Directors considered that the fiscal consolidation envisaged by the authorities should be calibrated precisely to what is needed to respect the debt brake rule.
Directors commended the authorities for their financial stabilization measures and encouraged them to preserve the momentum to reinforce financial stability. Persistent sizable contingent liabilities and remaining risks to the financial system require continued close monitoring, and Directors welcomed the authorities’ efforts to strengthen supervision. Going forward, the effectiveness of the Financial Market Supervisory Authority (FINMA) could be further enhanced through an expansion of its in-house capabilities and measures to reinforce the independence of its auditors. Directors welcomed steps taken by the authorities to prevent the use of the financial system to avoid tax compliance and their commitment to implement internationally agreed standards.
Directors welcomed the authorities’ efforts to address the “too big to fail” (TBTF) problem as well as the preliminary report and recommendations of the TBTF working group. They broadly supported the recommendations to impose higher capital buffers and reinforce liquidity requirements for institutions posing a systemic risk. Directors encouraged the authorities to contemplate measures, including simplifications in the organization and legal structure of large banking institutions, to help improve crisis resolution.
Directors welcomed the new SNB/FINMA Memorandum of Understanding, which reinforces collaboration on financial stability issues. They saw scope for further clarification of responsibilities and stressed the need to align legal powers with respective mandates.