IMF Executive Board Concludes 2012 Article IV Consultation with Switzerland

Public Information Notice (PIN) No. 12/45
May 8, 2012

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 2012 Article IV Consultation with Switzerland is also available

On May 2, 2012, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Switzerland.1


Faced with headwinds from the euro area debt crisis and a strong currency, the economy slowed down in late 2011, and inflation turned negative as exchange rate appreciation was passed through to import prices. While export growth has weakened, the external sector continues to perform relatively well, thanks to specific sectoral strengths and high investment income flows. The outlook for 2012 is of a gradual recovery, as foreign demand picks up, the economy adapts to the higher level of the exchange rate, and monetary policy remains accommodative. However, downside risks, especially from external developments, are significant.

Monetary policy had to contend with severe exchange rate appreciation pressures in the summer, when safe haven flows from the euro area crisis intensified and the Swiss franc reached close to parity vis-à-vis the euro (a real effective appreciation of over 30 percent since end-2007). After bringing the policy rate to zero and effecting a massive liquidity expansion, in early September the Swiss National Bank committed to defend an exchange rate floor of 1.20 Swiss francs per euro, moving away from the floating regime. The exchange rate has since traded closely to the floor, and the negative inflation differential with trading partners is helping undo the real appreciation.

With loose monetary conditions, domestic mortgage credit and real estate prices continue to rise briskly, and concern is growing that a bubble may be forming, endangering exposed domestically-oriented banks and insurance companies. To address this risk, a government working group has recommended strengthening the macroprudential toolkit by introducing the Basel III counter-cyclical capital buffer (CCB), improving the classification of risk weights in mortgage lending, and broadening the SNB’s power to request information from banks.

The financial sector is adapting to the new, more stringent regulatory environment, including the recently approved “too big to fail” legislation requiring systemically important banks to hold more capital than Basel III. After a marked improvement in 2010, the performance of the two large banks worsened in 2011, with income generation lagging other global peers. Although they comfortably fulfill current regulatory capital requirements, these banks still have a relatively thin layer of high quality capital and, given their business model, rely heavily on wholesale funding.

The fiscal position is healthy and government debt low, with a broadly neutral stance projected for 2012. Fiscal rules at both the federal and cantonal level and well-designed inter-governmental fiscal arrangements provide a foundation for fiscal discipline. In the medium-term, however, pressures from population aging are building.

Executive Board Assessment

Executive Directors noted that, notwithstanding Switzerland’s strong economic fundamentals and policy frameworks, downside risks stemming mostly from the euro area crisis and vulnerabilities in the domestic financial sector clouded the near-term outlook. Against this background, Directors stressed the importance of pragmatic and flexible policy responses in the period ahead.

Directors considered the authorities’ decision to continue to defend an exchange rate floor appropriate in light of the slow pace of activity and remaining deflation risks. They encouraged, however, the Swiss National Bank to return to a freely floating exchange rate regime once the growth and inflation outlook normalizes. In this context, Directors noted the dual risks of removing the exchange rate floor too soon or maintaining it for too long in the face of persistent capital inflows, and encouraged the authorities to exit from the current arrangement with great care.

Directors considered the authorities’ fiscal plans appropriately calibrated to build buffers against contingent liabilities in the financial sector and the prospective budgetary impact of population aging. Nonetheless, should downside risks materialize, a number of Directors saw room for additional fiscal measures to support aggregate demand in line with existing fiscal rules. To better cope with the fiscal implications of population aging over the longer term, Directors advocated further reforms to the pension system, including measures to index benefits or the retirement age to life expectancy.

Directors commended the authorities for the passage of the “too-big-to-fail” legislation but emphasized the need for further progress in bolstering the loss-absorbing capital of systemically important banks. They noted that although these banks fulfill current capital requirements, there is scope to raise their high-quality capital. Directors recognized, however, that more capital alone cannot fully eliminate “too-big-to-fail” risks and supported continued efforts toward improving bank resolution mechanisms and strengthening financial oversight, including by broadening in-house supervisory capacity.

Directors supported the steps taken to contain risks in the mortgage market and the real estate sector. Given constraints on monetary policy, they viewed macroprudential measures as the appropriate instruments to address such risks, and encouraged the authorities to consider a broad toolkit, including Basel III countercyclical capital buffers, increased risk-weights for riskier mortgage loans, and other macroprudential and fiscal measures.

Switzerland: Selected Economic Indicators, 2008–13
  2008 2009 2010 2011 2012 2013

RGDP (percent change)

2.1 -1.9 2.7 1.9 0.8 1.7

Total domestic demand

0.5 0.6 1.6 0.9 0.9 2.0

Final domestic demand

1.3 0.0 3.0 1.8 1.2 1.7

Private consumption

1.4 1.4 1.7 1.0 1.1 1.5

Public consumption

2.7 3.3 0.8 1.7 1.0 0.7

Gross fixed investment

0.5 -5.5 7.8 4.0 1.5 2.6

Inventory accumulation 1/

-0.7 0.6 -1.3 -0.8 -0.3 0.2

Foreign balance 1/

1.6 -2.4 1.2 1.0 0.0 0.0

Nominal GDP (billions of Swiss francs)

545.0 535.6 550.6 564.8 570.5 583.9

Savings and investment (percent of GDP)


Gross national saving

23.3 30.3 34.3 34.6 34.1 34.3

Gross domestic investment

21.2 19.3 19.2 19.8 22.3 23.1

Current account balance

2.2 11.0 15.0 14.8 11.8 11.3

Prices and incomes (percent change)


GDP deflator

2.4 0.2 0.1 0.7 0.2 0.6

Consumer price index

2.4 -0.5 0.7 0.2 -0.5 0.5

Nominal wage growth

1.9 2.1 0.8 1.2 1.0 1.7

Unit labor costs (total economy)

2.9 4.5 -2.0 -0.6 0.2 0.0

Employment and slack measures


Unemployment rate (in percent)

2.6 3.7 3.8 3.1 3.4 3.6

Output gap (in percent of potential)

2.6 -0.6 0.4 0.6 -0.1 -0.1

Capacity utilization

86.9 78.2 81.1 84.3

Potential output growth

1.6 1.3 1.7 1.7 1.6 1.7

General government finances (percent of GDP)



34.5 34.9 34.3 35.2 34.9 34.8


32.6 34.4 34.0 34.7 34.7 34.6


1.9 0.5 0.2 0.4 0.2 0.2

Cyclically adjusted ordinary balance

0.9 0.7 0.1 0.2 0.2 0.3

Gross debt 2/

52.6 53.6 50.1 48.6 48.9 47.8

Monetary and credit (percent change, averages)


Broad money (M3)

4.9 2.6 2.2 2.2

Domestic credit, non-financial

3.2 3.7 2.1 3.7

Three-month SFr LIBOR

0.7 0.3 0.2 0.1

Yield on government bonds (7-year)

2.7 1.8 1.3 1.6

Exchange rates (levels)


Swiss francs per U.S. dollar (annual average)

1.1 1.1 1.0 0.9

Swiss francs per euro (annual average)

1.6 1.5 1.4 1.2

Nominal effective rate (avg., 2005=100)

101.4 105.9 113.1 127.3

Real effective rate (avg., 2005=100) 3/

97.9 101.6 107.5 118.0

Sources: Haver Analytics; IMF's Information Notice System; Swiss National Bank; and IMF Staff estimates.

1/ Contribution to growth.

2/ Reflects new GFSM 2001 methodology, which values debt at market prices.

3/ Based on relative 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. An explanation of any qualifiers used in summing up can be found here:


Public Affairs    Media Relations
E-mail: E-mail:
Fax: 202-623-6220 Phone: 202-623-7100