IMF Executive Board Concludes 2011 Article IV Consultation with SwitzerlandPublic Information Notice (PIN) No. 11/62
May 26, 2011
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 2011 Article IV Consultation with Switzerland is also available.
On May 18, 2011, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Switzerland.1
The economy has experienced a strong, broad-based recovery. After falling by 1.9 percent in 2009, output grew by 2.6 percent in 2010. Domestic demand was underpinned by sound balance sheets, low interest rates, and a rebound in employment and immigration. Exports increased more strongly than expected, on the back of robust external demand and in spite of a 10-percent appreciation in the real effective exchange rate. Trade and current account surpluses have continued to expand. Capacity utilization, particularly in construction, is now above its long-term average while the unemployment rate has gradually declined. Despite the surge in oil prices and declining slack in the economy, inflationary pressures, so far, remain muted. House prices have accelerated but there is so far no evidence of a widespread misalignment.
Monetary policy has supported a swift exit from the recession. The Swiss National Bank (SNB) continues to implement an expansionary monetary policy, with the 3-month Libor target range at zero to 0.75 percent since March 2009. From that date until mid-2010, the SNB pursued foreign exchange interventions to limit upward pressure on the Swiss franc. Fiscal policy provided limited stimulus during the crisis given small automatic stabilizers, a moderate package of policy measures, and conservative application of the debt brake fiscal rule. Thus, overall fiscal balances were little affected by the downturn.
The global market recovery, and favorable financing conditions, together with financial sector measures have contributed to improving banks’ profitability, and capital and liquidity positions in 2010. However, there is evidence of increased risk taking in mortgage lending, in the context of persistently low interest rates and high competition among banks.
Recommendations from the “too big to fail” commission, now under discussion in Parliament, include supplementing minimum Basel common equity requirements with loss-absorbing buffers in the form of contingent convertible capital, which may be lowered depending on measures to reduce inter-connectedness and complexity. Regarding supervision, the Financial Market Supervisory Authority (FINMA) has developed a new risk-based approach, increased on-site inspections, hired more personnel, and taken steps to improve the effectiveness of external auditors. Inter-agency cooperation has been strengthened with a new tripartite Memorandum of Understanding on collaboration, information exchange, and crisis management.
With the recovery firmly established, the authorities are contemplating an exit from their expansionary monetary policy. Fiscal policy is projected to be broadly neutral. The recovery is expected to gradually moderate in the near-term. Growth is projected to slow to 2.4 percent in 2011 and to 1.8 percent in 2012. While domestic demand should remain resilient, the delayed effects of currency appreciation and a weaker external environment will slow exports and reduce the trade surplus. Headline and core inflation should remain muted at around 1 percent in 2011–12. However, there are large uncertainties related mainly to global developments.
Executive Board Assessment
Executive Directors commended the authorities for their pro-active policy response, which contributed to a swift and broad-based economic recovery. Directors noted that uncertainties relating to external developments are likely to persist, weighing on the near-term growth outlook. In the medium term, continued financial sector reforms will be key to reducing vulnerabilities.
Most Directors supported a prompt withdrawal of the monetary stimulus, absent new shocks, and concurred that interventions on the foreign exchange market should be limited to reducing excessive exchange rate volatility. Directors took note of the differences between staff and authorities on the assessment of the exchange rate misalignment, with many stressing the uncertainties surrounding the assessment. Directors noted that, while the normalization of the monetary policy stance will contribute to reducing macro-financial concerns, it may not suffice to address loosening lending standards in the mortgage market. They recommended, therefore, that macro-prudential measures also be considered, unless system-wide self-regulation is sufficiently stepped up.
Directors welcomed Switzerland’s comparatively strong fiscal position. In view of the prospective tightening of monetary policy, they agreed that a neutral fiscal stance is appropriate. Directors supported continued adherence to the “debt brake” rule and, in light of the large financial sector and ageing pressures, encouraged further efforts to buttress fiscal sustainability, including a parametric reform of the old age insurance system.
Directors noted that banks’ performance has improved, but vulnerabilities remain. They commended the authorities for their efforts to promote “too big to fail” legislation aimed at reducing the risks posed by the two largest banks, and looked forward to a swift adoption of the law. Directors encouraged further progress in micro-prudential supervision, including on a cross-border basis, by increasing on-site inspections and strengthening the independence of external auditors from banks. Directors stressed the importance of continuing to monitor risks in the insurance sector, where reduced profitability prospects and the need to strengthen reserves could hinder recapitalization efforts.
Directors encouraged a strengthening of the macro-prudential framework, clarifying roles and responsibilities of the SNB and FINMA, where necessary by revising relevant legislation, and establishing the legal basis for system-wide policies to address macro financial stability issues.