## SWEDEN: STAFF REPORT FOR THE 2017 ARTICLE IV CONSULTATION ## Source details **Canonical URL:** [SWEDEN: STAFF REPORT FOR THE 2017 ARTICLE IV CONSULTATION](https://www.imf.org/-/media/files/publications/cr/2017/cr17350.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2017/cr17350.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2017/cr17350.pdf.json) --- ### Recent developments and macro outlook - Growth and employment - Real GDP growth: "just over 3 percent" expected in 2017; GDP grew 2.6 percent y/y in the first half of 2017, down from 3.3 percent in 2016. - Employment growth: "over 2 percent" in 2017; employment growth firmed to "2¼ percent y/y" in 2017 H1. - Employment rate: "over 81 percent" (highest in the EU). - Unemployment rate: 6.6 percent (Table: 2017); unemployment reached 6.8 percent in Q3 2017, or just 4.5 percent excluding full-time students. - Output gap: 0.9 percent of potential in 2017 (Table). - Demand and investment - Domestic demand growth (2017): 3.1 percent (Table). - Gross fixed investment growth (2017): 7.0 percent; residential construction accounted for the majority of the investment surge with starts hitting 25-year highs in H1 2017 and residential construction rising 21 percent y/y. - Exports of G&S growth (2017): 3.8 percent; Imports of G&S growth (2017): 4.2 percent. - External sector and savings - Current account (2017): 3.9 percent of GDP. - Gross national saving (2017): 29.9 percent of GDP. - Net international investment position (2017): 12.8 percent of GDP. ### Inflation, wages, and monetary policy - Inflation measures and outlook - Underlying inflation estimated at 1.3 percent in September 2017 after excluding large rises in package holiday prices and bank service fees. - HICP inflation (e.o.p) projections: 1.8 percent in 2017; 1.5 percent in 2018; 1.8 percent in 2019; 2.0 percent in 2020 (Table). - Trend estimate of adjusted core inflation: centered at about 1.1 percent. - Wages and labor costs - Business sector wage rises: "2.2 percent y/y in 2017" (estimated); hourly earnings in the business sector rose 2.3 percent y/y in 2015–16. - The centralized wage agreement of March 2017: cumulative wage rises of "6.5 percent" over the next three years. - Staff concern: subdued wage rises pose a downside risk to the inflation outlook and may prolong interest rate normalization if persistently low. - Monetary policy stance and guidance - Policy (repo) rate: unchanged at "-0.5 percent" since early 2016 (Table shows Repo rate -0.5 in 2016 and -0.5 in 2017). - Riksbank actions: slowed purchases of government bonds during 2017 to a cumulative SEK 290 billion (40 percent of the total stock) by year end. - Guidance: maintain accommodative stance; rate hikes should wait for clearer signs of a sustained uptrend in inflation; unwinding of monetary accommodation should await clearer signs. ### Housing market, household credit, and macrofinancial policies - Housing market and construction - House price increases moderated to "7 percent y/y" in September 2017. - Housing prices had risen by "40 percent more than construction costs in the past four years". - New dwelling construction: starts at 25-year highs in H1 2017. - Household credit and lending quality - Bank lending to households (year-on-year, eop): 6.7 percent in 2017 (Table). - Household credit growth eased to "6.7 percent y/y in August" from "7.4 percent" a year earlier. - Minimum mortgage amortization requirement effective mid-2016: modest decline in share of high debt-to-income mortgages and improved credit composition; preliminary analysis suggests limited lasting impact on house prices. - Macroprudential and supervisory measures - Recent macroprudential steps and rising housing supply helped moderate household credit risks. - Directors endorsed proposed tightening targeted on high debt-to-income mortgages and supported retention of liquidity requirements on banks’ euro and U.S. dollar exposures. - Recommendation for the Riksbank to continue holding sufficient foreign reserves given bank reliance on wholesale funding. - Encouragement for Swedish and regional authorities to collaborate on supervisory and resolution arrangements regarding Nordea’s proposed relocation. ### Fiscal position and medium-term fiscal outlook - Recent fiscal outcomes and projections - Unexpectedly strong government revenues in 2016 carried into 2017, with the general government fiscal surplus projected at "1 percent of GDP." - 2018 budget proposal includes "0.9 percent of GDP" in new initiatives for public services, defense and security, welfare and the environment. - Fiscal aggregates (2017): - Total revenues: 49.2 percent of GDP. - Total expenditures: 48.2 percent of GDP. - Net lending: 1.0 percent of GDP. - Structural balance: 0.7 percent of potential GDP. - General government gross debt: 38.4 percent of GDP. - Medium-term stance and recommended pace - Medium-term surplus target revised from 1 percent of GDP to 0.33 percent of GDP from 2019. - Revenue growth on a no-policy change basis provides additional resources averaging about ½ percent of GDP annually. - Given the positive output gap, frontloaded fiscal stimulus is not warranted; the decline in the surplus should be relatively gradual, such as by phasing it over 2–3 years. - Under the assumption that the surplus target is reached by 2021: - Public debt is expected to decline to 33 percent of GDP in 2021. - This would be below the 35 percent benchmark added to Sweden’s fiscal framework. ### Key policy recommendations and priorities - Monetary and inflation framework - Maintain accommodative monetary stance until clearer signs of a sustained uptrend in inflation. - Use the parliamentary review of the Riksbank Act to enhance specification of the inflation target and strengthen the financial stability role of the Riksbank while preserving its financial autonomy. - Labor market and wage-setting - Social partners should ensure wages are responsive to Swedish conditions at macro and sectoral levels. - Use trends in Swedish labor productivity and medium-term inflation expectations to guide the industrial wage benchmark to facilitate inflation returning to target and interest rate normalization. - Encourage greater sectoral and firm-level wage flexibility and initiatives to raise employment among the low-skilled and migrants through targeted wage flexibility and suitable education. - Housing market and macrofinancial stability - Undertake deep reform of the housing market to address macrofinancial vulnerabilities and support inclusive growth. - Reforms to reduce construction costs and promote better utilization of existing property, including overcoming political hurdles to phasing out rent control and shifting the composition of property taxes. - Consider reductions in mortgage interest deductibility, expanded support for affordable housing construction, and enhanced public transportation within regions. - Adopt the proposed stricter amortization requirement and consider further steps, including a possible debt-to-income (DTI) limit, if needed. - Macroprudential, supervision, and liquidity - Complete expansion of Finansinspektionen’s (FI) macroprudential mandate; proposed draft legislation to enter into force on 1 February 2018 (parliamentary process ongoing). - Retain national liquidity requirements on euro and U.S. dollar exposures alongside EU liquidity regulations; monitor an extended (three-month) Liquidity Coverage Ratio in U.S. dollars and euros. - Collect regular household balance sheet data (KRITA) and securities holdings data (VINN) to support risk analysis. - Augment FI’s budget in 2018 to build supervisory capacity. - Riksbank should hold sufficient foreign reserves; consider charging banks a fee to cover public sector costs from holding foreign reserves. ### Financial conditions, banking sector, and risks - Financial conditions and credit - Swedish bond yields have moved roughly in line with German bunds and the krona has been broadly stable in effective terms despite a recent appreciation against euro. - Mortgage rates and corporate lending rates remain low; credit spreads on banks’ covered bonds remain low. - Growth in overall MFI lending averaged 7.6 percent y/y in the first eight months of 2017. - Banking sector metrics (selected) - Return on equity averaged 12 percent in 2016. - Capital buffers raised to meet the minimum requirement of 24.6 percent of risk-weighted assets at end 2016. - Leverage ratio exceeds the European Commission proposal of 3 percent but falls just short of 5 percent as recommended by the Riksbank. - Covered bonds and foreign funding: - Swedish banks issue covered bonds, unsecured bonds, and commercial paper; about half denominated in krona and the rest in foreign currencies (mainly euros and U.S. dollars). - Risks and vulnerabilities - Housing overvaluation estimated at about 5 percent at end-2016 (cross-country analysis). - Household debt is high: household debt is 182 percent of disposable income; new purchasers take on debts averaging 402 percent of their disposable income. - Heavy reliance on floating rate mortgages: some 72 percent of mortgages have variable rates. - Stress testing at mortgage origination includes mortgage rates of 7–8 percent despite current rates below 2 percent. - Risk Assessment Matrix highlights key risks, including "Tighter global financial conditions" (Overall Level of Concern: High; Relative Likelihood: Medium) and "Significant house price decline in Sweden" (Overall Level of Concern: Medium; Relative Likelihood: High). ### Appendix I — Impact of the Amortization Requirement (summary) - Policy design (effective June 2016) - Annual repayments of at least 1 percent of debt principal for mortgages with an LTV over 50 percent. - Annual repayments of at least 2 percent for mortgages with an LTV above 70 percent. - Impact on credit composition (2016 observations) - Amortization shares in 2016: - 1.2 percent for mortgages with LTVs of 50–70 percent, - 1.9 percent for mortgages with LTVs of 70–85 percent, - 3.4 percent for mortgages with LTVs over 85 percent. - Average LTV for new mortgages declined slightly to 64 percent in 2016 from 65 percent in 2015. - Measure reduced the average DTI ratio of new mortgage borrowers by 8 percentage points (difference-in-difference analysis). - Impact on debt and prices - Household credit growth eased to 6.7 percent y/y in August 2017 from 7.4 percent a year earlier. - House price growth slowed in 2017 to an annualized pace just under 7 percent. - Empirical methods (VAR, error-correction, difference-in-difference) indicate the amortization requirement improved credit composition and reduced household debt, but had limited lasting impact on house prices; results are preliminary and interpretation requires caution. ### Appendix IV — Update on FSAP Recommendations (selected) - Recommendation 1 (cap on DTI / FI & MoF): NT — FI proposed stricter amortisation for borrowers > 4.5 times gross income; procedural steps require Government consent. - Recommendation 4 (extended (three-month) LCR in EUR and USD / FI): NT — FI initiated work; final Pillar-2 decision expected by April 2018. - Recommendation 5 (regular household balance sheet surveys / MoF): I — RB tasked Statistics Sweden to establish KRITA and VINN databases. - Recommendation 8 (clear legal mandate for FI macroprudential policy / MoF): I — Draft bill to broaden FI’s toolbox; legislative changes foreseen to enter into force on 1 February 2018. - Recommendation 11 (swap agreements / RB): NT — Nordic and Baltic central banks signed a MoU on cooperation in December 2016. - Resources (Recommendation 20): I — FI received additional budget allocations (SEK 15 million in 2017, supplementary SEK 25 million; Government proposal for SEK 80 million in 2018). ### Integration, labor market, and housing policy interactions - Integration and labor market - Fast tracks for professions with shortages introduced in 2016; new regulation from January 1, 2018 to harmonize integration regulation for new arrivals. - Education and training obligations for newly arrived immigrants lacking sufficient skills. - Social partners lead wage formation; current system considered to have contributed to stability and real wage development in line with productivity growth for the last two decades. - Housing and tax issues - Supply shortfalls present in 255 out of 290 municipalities, concentrated in Stockholm, Gothenburg, and Malmo. - Target to build 250,000 dwellings during 2015–20. - Subsidizing construction of affordable rental housing at 0.1 percent of GDP. - Government implemented an investment grant for rental dwellings and student housing in 2016; threshold for deferring capital gains tax temporarily removed to increase mobility. - Policy options discussed: phase out rent control for new construction, shift composition of property taxes, and consider reducing mortgage interest deductibility with great care given potential distributional and growth effects. ### Selected macroeconomic indicators (exact values from source) - Real GDP (Y/Y percent change): 2014 2.6; 2015 4.5; 2016 3.3; 2017 3.1; 2018 2.4; 2019 2.2; 2020 2.0 - Domestic demand (Y/Y percent change): 2014 2.9; 2015 4.3; 2016 3.3; 2017 3.1; 2018 2.6; 2019 2.4; 2020 2.1 - Exports of goods and services (Y/Y percent change): 2014 5.3; 2015 5.7; 2016 3.3; 2017 3.8; 2018 4.0; 2019 3.9; 2020 3.8 - Current account (percent of GDP): 2014 4.6; 2015 4.7; 2016 4.5; 2017 3.9; 2018 3.7; 2019 3.5; 2020 3.2 - Unemployment rate (percent): 2014 7.9; 2015 7.4; 2016 7.0; 2017 6.6; 2018 6.3; 2019 6.3; 2020 6.3 - Output gap (percent of potential): 2014 -2.1; 2015 -0.3; 2016 0.3; 2017 0.9; 2018 0.8; 2019 0.7; 2020 0.5 - Core HICP inflation, e.o.p. (percent): 2014 0.5; 2015 1.1; 2016 1.1; 2017 1.8; 2018 1.5; 2019 1.6; 2020 1.8 - Repo rate (percent, end of period): 2014 0.0; 2015 -0.4; 2016 -0.5; 2017 -0.5 (data for 2017 as of September 2017) *Source: IMF staff report for the 2017 Article IV consultation (Sweden) — cr17350.* ### 1.3 percent y/y excluding some volatile items. Wage rises are also low, at an estimated ### SWEDEN: STAFF REPORT FOR THE 2017 ARTICLE IV CONSULTATION ### Recent developments and macro outlook - Growth and employment - Real GDP growth: "just over 3 percent" expected in 2017; GDP grew 2.6 percent y/y in the first half of 2017, modestly down from 3.3 percent in 2016. - Employment growth: "over 2 percent" in 2017; employment growth firmed to "2¼ percent y/y" in 2017 H1. - Sweden’s employment rate: "over 81 percent" (highest in the EU). - Unemployment rate: 6.6 percent (Table: 2017); unemployment reached 6.8 percent in Q3 2017, or just 4.5 percent excluding full-time students. - Output gap: 0.9 percent of potential in 2017 (Table). - Demand and investment - Domestic demand growth (2017): 3.1 percent (Table). - Gross fixed investment growth (2017): 7.0 percent; residential construction accounted for the majority of the investment surge with starts hitting 25-year highs in H1 2017 and residential construction rising 21 percent y/y. - Exports of G&S growth (2017): 3.8 percent; Imports of G&S growth (2017): 4.2 percent. - External sector and savings - Current account (2017): 3.9 percent of GDP. - Gross national saving (2017): 29.9 percent of GDP. - Net international investment position (2017): 12.8 percent of GDP. ### Inflation, wages, and monetary policy - Inflation measures - Underlying inflation estimated at 1.3 percent in September 2017 after excluding large rises in package holiday prices and bank service fees. - HICP inflation (e.o.p) projections: 1.8 percent in 2017; 1.5 percent in 2018; 1.8 percent in 2019; 2.0 percent in 2020 (Table). - Trend estimate of adjusted core inflation: centered at about 1.1 percent. - Wages and labor costs - Business sector wage rises: "2.2 percent y/y in 2017" (estimated); hourly earnings in the business sector rose 2.3 percent y/y in 2015–16. - The centralized wage agreement of March 2017: cumulative wage rises of "6.5 percent" over the next three years. - Staff concern: subdued wage rises pose a downside risk to the inflation outlook and may prolong interest rate normalization if persistently low. - Monetary policy stance - Policy (repo) rate: unchanged at "-0.5 percent" since early 2016 (Table shows Repo rate -0.5 in 2016 and -0.5 in 2017). - Central bank actions: slowed purchases of government bonds during 2017; accommodative stance considered appropriate given low underlying inflation and uncertainties around the inflation outlook. - Guidance: rate hikes should wait for clearer signs of a sustained uptrend in inflation; unwinding of monetary accommodation should await clearer signs. ### Housing market, household credit, and macrofinancial policies - Housing prices and construction - House price increases moderated to "7 percent y/y" in September 2017. - Housing prices had risen by "40 percent more than construction costs in the past four years" (text). - New dwelling construction: large increases; starts at 25-year highs in H1 2017. - Household credit and lending quality - Bank lending to households (year-on-year, eop): 6.7 percent in 2017 (Table). - Household credit growth eased to "6.7 percent y/y in August" from "7.4 percent" a year earlier. - Minimum mortgage amortization requirement effective mid-2016: led to a modest decline in the share of high debt-to-income mortgages and improved credit composition; preliminary analysis suggests limited lasting impact on house prices. - Macroprudential and supervisory measures - Recent macroprudential steps and rising housing supply helped moderate household credit risks. - Directors endorsed proposed tightening targeted on high debt-to-income mortgages and supported retention of liquidity requirements on banks’ euro and U.S. dollar exposures. - Recommendation for the Riksbank to continue holding sufficient foreign reserves given bank reliance on wholesale funding. - Encouragement for Swedish and regional authorities to collaborate on supervisory and resolution arrangements regarding Nordea’s proposed relocation. ### Fiscal position and public finances - Recent fiscal outcomes and projections - Unexpectedly strong government revenues in 2016 carried into 2017, with the general government fiscal surplus projected at "1 percent of GDP." - 2018 budget proposal includes "0.9 percent of GDP" in new initiatives for public services, defense and security, welfare and the environment. - Fiscal aggregates (Table): - Total revenues (2017): 49.2 percent of GDP. - Total expenditures (2017): 48.2 percent of GDP. - Net lending (2017): 1.0 percent of GDP. - Structural balance (2017): 0.7 percent of potential GDP. - General government gross debt (2017): 38.4 percent of GDP. - Medium-term stance: Directors considered that a phased reduction in the fiscal surplus to the new medium-term target of "0.33 percent of GDP" over a period of a few years would strike an appropriate balance while maintaining prudent fiscal policy. ### Key policy recommendations and priorities - Monetary and inflation framework - Maintain accommodative monetary stance until clearer signs of a sustained uptrend in inflation. - Use the parliamentary review of the Riksbank Act to enhance specification of the inflation target and strengthen the financial stability role of the Riksbank while preserving its financial autonomy. - Labor market and wage-setting - Social partners should ensure wages are responsive to Swedish conditions at macro and sectoral levels. - Use trends in Swedish labor productivity and medium-term inflation expectations to guide the industrial wage benchmark to facilitate inflation returning to target and interest rate normalization. - Encourage greater sectoral and firm-level wage flexibility and initiatives to raise employment among the low-skilled and migrants through targeted wage flexibility and suitable education. - Housing market and macrofinancial stability - Undertake deep reform of the housing market to address macrofinancial vulnerabilities and support inclusive growth. - Reforms to reduce construction costs and promote better utilization of existing property, including overcoming political hurdles to phasing out rent control and shifting the composition of property taxes. - Consider reductions in mortgage interest deductibility, expanded support for affordable housing construction, and enhanced public transportation within regions. - Adopt the proposed stricter amortization requirement and consider further steps, including a possible debt-to-income (DTI) limit, if needed. - Fiscal policy - Continue a balanced approach to fiscal management: allow the surplus to decline to the new medium-term target of "0.33 percent of GDP" over a period of a few years while preserving prudence given uncertainties around the output gap and persistently low inflation. *Source: IMF staff report for the 2017 Article IV consultation (Sweden).* ### 5. Financial conditions remain supportive of the real economy (Figure 3). Swedish bond ### 5. Financial conditions remain supportive of the real economy (Figure 3). Swedish bond ### Financial conditions and credit - Swedish bond yields have moved roughly in line with German bunds and the krona has been broadly stable in effective terms despite a recent appreciation against euro. - The real effective exchange rate is also little changed from its levels in 2015–16. - Mortgage rates and corporate lending rates remain low, as do credit spreads on banks’ covered bonds. - Despite negative interest rates, bank profitability remains strong (Section D). - Growth in overall MFI lending is solid, averaging 7.6 percent y/y in the first eight months of 2017. ### Fiscal position and public finances - The 2017 fiscal balance is expected to come in significantly stronger than budgeted, a carry-forward from a surprise in 2016. - A general government surplus of 1 percent of GDP is projected in 2017, compared with the budgeted deficit of 0.3 percent. - The 2016 balance was lifted 1.3 percentage points above that expected at the time of Budget 2017, driven primarily by higher business profits and capital gains as well as higher VAT collection linked to strong dwelling investment. - The estimated structural balance declines only slightly to 0.7 percent of GDP in 2017, making the current fiscal stance broadly neutral. ### External position and current account - Sweden’s current account surplus declined to 4.1 percent of GDP in 2016 (excluding large swings in EU contributions and ODA), down from 4.6 percent in 2015. - Fixed investment rose to 24 percent of GDP in 2016. - Sweden’s external position (a cyclically-adjusted headline surplus of 5 percent of GDP in 2016) is assessed to be stronger than the level consistent with medium-term fundamentals and policies. - Progress in narrowing external gaps is seen in the first half of 2017 with the headline external surplus at 4.1 percent of GDP. - High household savings are the main driver of surpluses in recent years. ### Outlook and risks - Baseline expectations: - GDP growth is likely to moderate over the next few years, declining to about 2 percent in the medium term, consistent with estimates for trend labor productivity growth of 1¼ percent and labor force growth averaging ¾ percent. - Unemployment is expected to decline to about 6.3 percent. - A further decline in the current account surplus is expected, in part reflecting an appreciation of the krona with an eventual unwinding of the accommodative monetary policy stance and a decline in the fiscal surplus toward its new medium-term target. - Risks and vulnerabilities: - Timing of a rise in inflation is subject to heightened uncertainty; output is estimated to exceed potential by almost 1 percent, but potential could be higher than estimated. - Downside risks to higher wage-driven inflation include subdued external labor market developments. - Other external risks include weaker than expected global growth and tighter external financial conditions. - A cross-country analysis finds housing overvaluation of about 5 percent at end-2016. - Macroeconomic vulnerabilities could build over time: house price levels are clearly high, requiring new home purchasers to take out high debt-to-income (DTI) loans. - Rising share of heavily-indebted households increases sensitivity to shocks, especially an eventual rise in policy rates given high reliance on floating rate mortgages. - Existing prudential instruments include stress tests at mortgage origination which incorporate mortgage rates of 7–8 percent despite current rates of below 2 percent. ### Monetary and exchange rate policies - The Riksbank has slowed bond purchases while keeping the negative policy rate unchanged. - The repo rate has remained at -0.5 percent since February 2016. - The Riksbank slowed purchases of government bonds in 2017 to a cumulative SEK 290 billion (40 percent of the total stock) by year end. - The Riksbank dropped signals regarding potential further rate cuts but central outlook for policy rates is little changed, with slow increases expected after mid-2018. - Inflation outlook and policy guidance: - Staff projections are for core inflation of about 1.5 percent in 2018, somewhat below Riksbank projections. - A gradual convergence to target is expected as wage rises respond to labor shortages and as inflation in the euro area picks up. - Rate hikes will become appropriate once there are clearer signs that inflation is on a sustained upward trend. - Further tapering of bond purchases may be warranted, especially if downward pressure on bond yields in the euro area is eased. - Foreign exchange intervention should remain a last resort, limited to containing a decline in inflation owing to a sharp appreciation in the krona. - Institutional review: - The parliamentary review of the Riksbank Act should evaluate targeting the internationally-comparable HICP measure and consider putting the Riksbank’s financial stability role on a firmer legal footing, including explicit mandates to monitor systemic financial risks and provide emergency liquidity to banks. - The Riksbank announced a shift in the inflation target measure by focusing on the CPI with fixed mortgage interest rates (CPIF) and restored a 1 percentage point variation band around the 2 percent target. ### Labor market and wage formation - Since 1997, Swedish wage formation is led by bargaining in the industrial sector; close to 90 percent of employees are covered by the collective bargaining system. - Firm-level bargaining coverage rose from 10 percent of employees in 2013 to close to 20 percent by 2015. - Recent moderation of Swedish wages could prove temporary; over the longer-term Sweden’s real product wages follow trends in labor productivity and show flexibility in relation to unemployment. - Wage formation also reflects inflation expectations together with German wage growth and swings in euro area unemployment. - Anchoring wages to external wage growth could be problematic if it persists: - It may make Swedish wages less responsive to labor productivity. - It weakens the link between wage rises, domestic inflation expectations, and unemployment, impairing monetary policy’s capacity to achieve the inflation target. ### Select macroeconomic indicators (exact values from source) - GDP (Y/Y percent change): 2014 2.6; 2015 4.5; 2016 3.3; 2017 3.1; 2018 2.4; 2019 2.2; 2020 2.0 - Domestic demand (Y/Y percent change): 2014 2.9; 2015 4.3; 2016 3.3; 2017 3.1; 2018 2.6; 2019 2.4; 2020 2.1 - Exports of goods and services (Y/Y percent change): 2014 5.3; 2015 5.7; 2016 3.3; 2017 3.8; 2018 4.0; 2019 3.9; 2020 3.8 - Trading partner GDP (Y/Y percent change): 2014 1.7; 2015 1.8; 2016 1.6; 2017 1.9; 2018 1.8; 2019 1.8; 2020 1.7 - Current account (percent of GDP): 2014 4.6; 2015 4.7; 2016 4.5; 2017 3.9; 2018 3.7; 2019 3.5; 2020 3.2 - Unemployment rate (percent): 2014 7.9; 2015 7.4; 2016 7.0; 2017 6.6; 2018 6.3; 2019 6.3; 2020 6.3 - Output gap (percent of potential): 2014 -2.1; 2015 -0.3; 2016 0.3; 2017 0.9; 2018 0.8; 2019 0.7; 2020 0.5 - Core HICP inflation, e.o.p. (percent): 2014 0.5; 2015 1.1; 2016 1.1; 2017 1.8; 2018 1.5; 2019 1.6; 2020 1.8 ### Policy recommendations and priorities - Monetary policy should continue to focus on inflation to restore and preserve credibility, taking into account research indicating that housing price rises mostly reflect factors besides low interest rates. - Wage formation should be anchored to trends in Sweden’s labor productivity and medium-term inflation expectations rather than external wage growth. - Reforms of the dysfunctional housing market are a major shortfall in Swedish macrofinancial stability policies and would support more inclusive growth. - A targeted tightening of recent macroprudential measures is appropriate, and further measures should be implemented if needed; completing the expansion of Finansinspektionen’s (FI) macroprudential mandate is critical. - The budget should support inclusive growth, including in housing supply and low-skill employment, while gradually easing the surplus in line with the new medium-term fiscal targets. _International Monetary Fund staff summary of Section 5 and related passages from the Sweden country report excerpt._ ### 21. The social partners should work to build consensus on making wages more responsive ### 21. The social partners should work to build consensus on making wages more responsive ### Wage formation and recommendations - Use trends in Sweden’s labor productivity and medium-term inflation expectations as the main guideposts for industrial wage negotiations within the current pattern-bargaining approach. - Incorporate safeguards to ensure the adequacy of business sector profitability, as analyzed in the annual wage formation reports of the National Institute of Economic Research (NIER). - Higher nominal wage rises may have more modest effects on real wage growth owing to higher inflation than otherwise, but they would relieve pressure on monetary policy to prolong low interest rates. - A combination of greater scope for sectoral wage differences and firm-level flexibility would help meet changing labor needs, including growing labor needs in education, health care, and other social services owing to rises in the young and elderly populations. - Employers’ organizations in the industrial sector highlighted competitiveness as the decision factor for wage negotiations (2017 Collective Agreement Negotiations Report). - The Swedish Labour Policy Council strongly supported shifting the focus of wage formation to domestic factors, noting that the structure of employment between industry and services would need to evolve given prospects for rising services demand. ### Labor market composition, vulnerabilities, and policy measures - Foreign-born workers account for over half of the unemployed. - Job creation for low-skilled workers has fallen in the past decade and their unemployment rates have climbed to very high levels. - Demand for workers without strong general skills and education is limited by strict job protection, high collectively-bargained minimum wages, and low wage differentiation across sectors. - Education and training are critical, especially for refugees, as a significant portion of 2015 arrivals have limited education. - LO (the Swedish Trade Union Confederation) proposed a Job and Education Initiative to facilitate labor market entry by adults who lack sufficient knowledge and skills: - Temporarily lower wage costs for these employees to encourage employer participation. - Government provision of well-matched educational opportunities and student aid to ensure a reasonable standard of living. - Employers have responded positively and discussions are moving to sectoral level. - Complementary approaches: younger working age persons—greater emphasis on education; older persons—more prolonged wage subsidies and work matching capacities. - Authorities’ views: - Defer to social partners regarding wage formation; anticipate wage growth will pick up eventually. - Current system seen by social partners as working well for employment, real wage growth, and limiting disputes; changes possible if consensus reached. - Concern that nominal wage growth exceeding that in key countries would threaten exports and jobs despite the floating exchange rate. - Budget includes additional education resources and streamlines active labor market policies to increase employer participation; authorities would play a supportive role if social partners agree new initiatives. ### Housing market implications for labor and macro risks - Large house price increases were necessary to overcome high construction costs before construction rose; supply shortfalls present in 255 out of 290 municipalities, concentrated in Stockholm, Gothenburg, and Malmo owing to urbanization. - Strict rent controls have led to declining supply of rental apartments as they are converted into tenant-owned condominiums and existing renters are “locked-in”. - Long waiting times for rental apartments push many households to purchase housing, incentivized by mortgage interest tax deductibility. - Home costs relative to median household income have more than doubled since the mid-1990s; in Stockholm the price-to-income ratio is nearly twice the national average. - Household debt and leverage: - Household debt is 182 percent of disposable income. - New purchasers take on debts averaging 402 percent of their disposable income. - Government housing measures and targets: - Target to build 250,000 dwellings during 2015–20. - Subsidizing construction of affordable rental housing at 0.1 percent of GDP. - Policy recommendations to improve affordability and use of existing property: - Sustain housing supply: streamline building regulations, promote competition, harmonize planning and approval processes, improve public transportation, expand budgetary support for affordable rental housing that meets affordability tests. - Phase out rent control: fully exempt all new construction of rental apartments from controls; steadily align rents on controlled apartments with market rates while protecting low-income households via the housing allowance. - Address tax incentives: shift property tax composition by cutting capital gains taxes that deter sales while raising recurrent property tax; if property tax cannot be raised, reduce mortgage interest deductibility to ease demand and discourage high leverage. ### Macrofinancial stability and housing-related prudential measures - Banking sector health and buffers: - Return on equity averaged 12 percent in 2016. - Capital buffers raised to meet the minimum requirement of 24.6 percent of risk-weighted assets at end 2016. - Leverage ratio exceeds the European Commission proposal of 3 percent but falls just short of 5 percent as recommended by the Riksbank. - Banks meet liquidity regulations including additional requirements on major currencies; high reliance on wholesale funding requires close monitoring. - Amortization and lending measures: - Current amortization requirement adopted mid-2016: minimum amortization of 2 percent for mortgages with LTV over 70 percent, and 1 percent in the 50–70 percent LTV range. - FI proposed tightening: an additional 1 percentage point of annual amortization for new mortgages with a DTI ratio above 450 percent on a gross income basis, which is equivalent to about 630 percent on a disposable income basis. - Effectiveness of amortization requirements should be monitored; authorities should collect information on households’ balance sheets. Further steps, including a possible DTI limit, should be implemented if needed. - Fixed vs. variable rate mortgages: - Some 72 percent of mortgages have variable rates; rate fixing for over 5 years is rare partly because fixed rate loans can be subject to a prepayment fee. - Households with a 500 percent DTI ratio with all loans at a floating rate would face a 10 percent cut in spending power from a 2 percentage point rise in rates. - Recommendation: remove prepayment fees to encourage fixed-rate mortgage uptake and better manage interest risk exposure; this would also facilitate possible limits on variable rate mortgages if warranted. - Macroprudential framework and supervision: - Draft legislation would, from February 2018, give FI authority to use macroprudential tools without parliamentary approval, but remaining subject to government approval; government approval should operate only as an “emergency brake”. - Augmentation of FI’s budget in 2018 is welcome to build supervisory capacity. - Memoranda of Understanding on supervision, resolution, and liquidity support signed by Nordic, Baltic, and euro area authorities in December 2016 provide a foundation for cooperation. - Liquidity and foreign reserves: - Swedish banks issue covered bonds, unsecured bonds, and commercial paper to meet deposit funding deficits; half denominated in krona and the rest in foreign currencies (mainly euros and U.S. dollars). - Sweden should retain its own requirements on euro and U.S. dollar exposures alongside EU liquidity regulations; monitoring an extended (three-month) Liquidity Coverage Ratio in U.S. dollars and euros is recommended. - The Riksbank must hold sufficient foreign reserves; costs to the public sector from holding foreign reserves could be covered by charging banks a fee in relation to their foreign currency liquidity gaps. - Authorities’ views: - Alert to macroeconomic vulnerabilities from housing prices and household debt; government awaits FI’s final proposal on stricter amortization after consultation. - Legislation regarding prepayment fees amended in 2014 to align fees with creditor’s actual loss related to prepayment; households nonetheless borrow on floating rates to a large extent. - Expected expansion of FI’s macroprudential authority to proceed as planned with government approval as an “emergency brake”. - On Nordea’s proposed headquarters move to Finland, authorities will engage with euro area and regional counterparts to ensure cooperation and preserve Nordea’s capital and liquidity. - Riksbank sees a need to further tighten foreign currency liquidity regulation; parliamentary review of the Riksbank Act will consider foreign reserves and their financing. ### Fiscal stance and labor integration spending - 2018 budget initiatives total 0.9 percent of GDP addressing core public services, defense and domestic security, welfare, and climate and the environment. - Government expects the new initiatives will help unemployment fall below 6 percent in 2018. - Spending specifically directed at supporting migrant integration is expected to decline modestly in 2018 as exits from the 2-year introduction program begin to exceed new entrants. - Government projects a fiscal surplus of 0.9 percent of GDP in 2018. - IMF staff estimates the structural balance declines only slightly to about 0.5 percent of GDP in 2018. - The composition of measures is expected to reinforce macroeconomic stimulus while concerns around overheating are limited by persistently low inflation. *Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17350.pdf* ### 38. Looking to the medium-term, robust economic prospects urge a phased decline in the ### 38. Looking to the medium-term, robust economic prospects urge a phased decline in the ### Fiscal outlook and recommended pace of surplus decline - Revenue growth on a no-policy change basis provides additional resources averaging about ½ percent of GDP annually. - The medium-term surplus target will be revised from 1 percent of GDP to 0.33 percent of GDP from 2019. - An immediate transition to the 0.33 percent of GDP target could bring forward a further decline in the external current account surplus of about ½ percentage point in coming years. - Given the positive output gap, frontloaded fiscal stimulus is not warranted; the decline in the surplus should be relatively gradual, such as by phasing it over 2–3 years. - Under the assumption that the surplus target is reached by 2021: - Public debt is expected to decline to 33 percent of GDP in 2021. - This would be below the 35 percent benchmark added to Sweden’s fiscal framework. ### Fiscal projections and key statistics (selected) - Net lending (Percent of GDP): 2016: 1.1; 2017: 1.0; 2018: 0.9 - Adjustment for one-off factors: 2016: 0.2; 2017: 0.0; 2018: 0.0 - Net lending ex. one-offs: 2016: 0.9; 2017: 1.0; 2018: 0.9 - Cyclical contribution: 2016: -0.1; 2017: -0.3; 2018: -0.3 - Structural balance (percent of potential GDP): 2016: 0.8; 2017: 0.7; 2018: 0.5 - Migration-related adjustment: 2016: 0.7; 2017: 0.7; 2018: 0.4 - Adjusted structural balance: 2016: 1.5; 2017: 1.4; 2018: 0.9 - Change in structural balance (percentage points): 2016: 0.8; 2017: -0.1; 2018: -0.1 - Output gap (percent of potential GDP): 2016: 0.3; 2017: 0.9; 2018: 0.8 - Migration-related spending: 2016: 1.2; 2017: 1.2; 2018: 0.9 - Gross public debt: 2016: 41.3; 2017: 38.4; 2018: 36.5 ### Authorities’ views on the 2018 budget and fiscal stance - Authorities assessed the fiscal stance to be mildly stimulatory, supportive of accommodative monetary policy. - They considered the modest decline in the structural balance would enable a smoother transition to the new surplus target. - The Fiscal Policy Council recognized the improvement in public finances but recommended somewhat smaller net budgetary initiatives and a neutral fiscal stance in 2018, given strong growth and a positive output gap. ### Staff appraisal — macroeconomic outlook - Sweden’s economy continues to perform well, with robust growth expected in 2017 supported by accommodative monetary policy. - Prospects include solid growth and a further decline in unemployment in coming years, aided by an improving international economy and a mildly expansionary fiscal stance. - Business sector wage rises remain subdued despite high employment rates, posing downside risks to an expected pick up in inflation. - The current account surplus has narrowed and is expected to continue narrowing over the medium term, aided by a decline in the fiscal surplus toward its new medium-term target. ### Monetary policy guidance - Clearer signs that inflation is on a sustained uptrend are needed before unwinding monetary accommodation. - An accommodative monetary stance remains appropriate given low underlying inflation and uncertainties around inflation prospects. - The stance can be maintained even with some further tapering of bond purchases, especially if downward pressure on bond yields in the euro area is reduced. - Rate hikes should be considered once labor cost growth and services inflation provide clearer signs of a sustained upward trend in inflation. - Foreign exchange intervention should remain a last resort. - The parliamentary review of the Riksbank Act is a welcome opportunity to enhance the inflation target specification and clarify the Riksbank’s role in financial stability while preserving its financial autonomy. ### Wage formation recommendations - Social partners should build consensus to make wages more responsive to Swedish conditions at both the macroeconomic and sectoral level. - Recent nominal wage rises are increasingly anchored to those in Germany; if low nominal wage rises persist, inflation would likely remain below target. - Within the current bargaining system, guiding the benchmark industrial sector wage increase using trends in Sweden’s labor productivity and medium-term inflation expectations, while preserving business sector profitability, would better support macrofinancial stability. - Increase scope for differences in sectoral wage rises and firm-level flexibility. - Support initiatives to raise employment of the low-skilled and migrants, including the scope for temporarily lower wages coupled with suitable education. ### Housing market reforms and fiscal support - Housing prices have more than doubled relative to median incomes since the mid-1990s, especially in major centers, leading to heavy debts for new purchasers, hindered mobility, and higher inequality. - Recommendations to reduce construction costs: - Streamline complex and burdensome building regulations. - Promote competition in the construction sector, including harmonizing fragmented municipal planning and approval processes. - Use existing property more efficiently by addressing political hurdles to reforming rent control and shifting the composition of property taxes. - Fiscal policy can support market rebalancing by: - Reducing mortgage interest deductibility. - Expanding support for construction of rental housing that meets affordability tests. - Enhancing public transportation within regions. ### Macroprudential and supervisory measures - The mortgage amortization measure adopted in mid-2016 has modestly reduced the share of new mortgages with high DTI ratios. - A proposed stricter amortization requirement is a well-targeted tightening and should be adopted soon. - Effectiveness of macroprudential measures should be reviewed regularly; authorities should collect information on households’ balance sheets. - Further steps, including a possible DTI limit, should be implemented if needed. - Expand the FI’s macroprudential authority in early 2018 as planned; the government’s intended “emergency brake” approval role is welcome. - Augment FI’s budget in 2018 to build capacity for robust supervision of Sweden’s large and interconnected financial system. - Swedish and regional authorities should collaborate closely on supervisory and resolution arrangements related to Nordea’s proposed relocation, including by not reducing its capital. - Given Swedish banks’ heavy reliance on wholesale funding, Sweden should retain its own liquidity requirements on euro and U.S. dollar exposures alongside adoption of EU liquidity regulations. - The Riksbank must hold sufficient foreign reserves to safeguard Swedish and regional financial stability. ### Overall fiscal management recommendation - A balanced approach should continue: allow the surplus to decline to its new medium-term target of 0.33 percent of GDP over a period of a few years. - If public debt falls below the new 35 percent of GDP benchmark, a further reduction in the surplus target may be appropriate when the fiscal framework is next reviewed. - The 2018 budget mobilizes resources to address climate and the environment, reduce inequality, and promote employment including migrant integration, while concerns about overheating are mitigated by output gap uncertainties and persistently low inflation. *Source: cr17350 - 38. Looking to the medium-term, robust economic prospects urge a phased decline in the* ### 47. It is proposed that the next Article IV consultation with Sweden take place on the ### 47. It is proposed that the next Article IV consultation with Sweden take place on the standard 12-month cycle. ### Macroeconomic indicators and growth drivers - Strong economic and employment growth is turning the output gap positive. - Key drivers of growth in recent years: Residential investment, private consumption, and exports. - Contributions to growth (percent, selected series shown in figures): - Output gap and output growth shown for 2006–2017 (charts). - Consumption, Gross capital formation, Exports of goods and services, Imports of goods and services, Gross domestic product — contributions shown for 2006–2017 (charts). - Staff forecasts referenced in charts (Staff forecasts). ### Confidence and labor market - Confidence indicators: - Economic tendency indicator, Consumer, Total industry (Index: Historical average = 100) for 2005–2017 (charts). - Labor market improvements: - Unemployment rate and New vacancies series displayed (Thousands and Percent) for 2010–2017 (charts). - Labor market indicators show rising labor shortages and declining slack (Riksbank, Statistics Sweden, NIER). - Labor market metrics shown in figures: - Employment growth by sector (Industry, Services) for 1996Q1–2017Q1. - Labor force participation (LHS) and Unemployment rate (RHS) for 2001Q1–2017Q2. - Labor shortages (index) and Resource utilization (index) for 1999Q1–2017Q1. - Employment Gap (percent) and Hours gap (percent) for 1999Q1–2017Q1. - Involuntary part-time workers and other slack indicators (percent of total employment). - Wages and expectations: - Wage drift and centrally-agreed wages (Percent, y/y) for 1997–2019 (charts). - Expected inflation, 2 years ahead; Trend productivity growth; Nominal wage growth, 4-quarter moving average (Percent, y/y) shown in charts. ### Inflation and monetary policy - Headline figures for core HICP inflation have risen sharply in recent months, led by higher services inflation; a few items (package holidays and bank fees) played a major role (charts). - HICP components: - HICP overall, HICP goods, HICP core services (Percent, y/y, 3-month average) for 2007–2017 (charts). - Inflation expectations: - Survey measures of inflation expectations have risen to target, supported by monetary policy easing (Inflation Expectations charts). - Inflation target = 2% (chart annotation). - Riksbank policy outlook: - Riksbank Repo Rate Forecasts: Actual, Sep 2016 proj., Dec 2016 proj., Jul 2017 proj., Sep 2017 proj. (Percent) for 2007–2020 (chart); first hike expected in the second half of 2018 (text). - Markets expect the Riksbank to hike rates at a faster pace than other central banks (chart: Actual Policy Rates and Expected Overnight Rates). - Interest rates and retail lending: - Repo Rate, Mortgage Rate, lending Rate to NFC, Deposit Rate (Percent) for 2010–2017 (chart). - Accommodative monetary policies have kept retail lending and deposit rates low. ### Housing market developments - House price growth has moderated since end-2015; strongest in Gothenburg and Malmo in recent years, with signs of market cooling emerging recently (charts). - Growth in mortgage credit has eased modestly despite very low mortgage rates. - Rising house prices have led to a rise in housing starts and investment. - Population rising faster than housing supply; house prices rising faster than income, especially in big cities. - Swedish households devote more than a quarter of their total expenditure to housing, exceeding the OECD average. ### Household balance sheet indicators (cross-country comparisons) - Composition of household assets (ex-pensions, 2015): Non-financial assets and Financial assets shown (Percent of total). - Swedish household assets broadly evenly split across financial and non-financial assets. - Household liabilities to assets ex-pensions, 2015: Sweden among comparators, chart shows percent values with median line. - Household debt to net worth, 2016 (Percent) — Sweden just above median of peers with high housing ownership. - Household debt to net disposable income, 2016 (Percent): Sweden listed among peers; chart shows median. - Household and NPISHs Debt to GDP, 2016 (Percent): Sweden near the median, similar to the UK. - Household liabilities to non-financial assets, 2015 (Percent): Sweden just above median. ### Selected financial market indicators - Exchange rates: Swedish krona per US dollar and per Euro (SEK/currency) for 2008–2017 (charts). - Krona broadly stabilized against the USD and somewhat weakened against the euro. - Equity markets: OMX Stockholm Stock Exchange Index trended up to substantially exceed pre-crisis levels (chart). - Sovereign bond yields: - Sweden: 10 year government bond tracked Germany closely since 2015 (Percent). - Sovereign CDS spreads: remain very close to other AAA rated countries (Basis points). - Interbank rates remained below zero (3-Month Interbank Rates, Percent). - Covered bond yields: stayed very low, with stable spreads over government bonds (Spread of Covered Bonds over Government Bond Yields, Basis points). ### Banking sector developments and financial soundness - Profitability and asset quality: - Swedish bank profitability greatly exceeds European averages; limited impact from negative interest rates in recent years (charts). - Nonperforming loans to total gross loans and NPL metrics show smaller deterioration and quick return to normal levels. - Capital and leverage: - Capital positions of major Swedish banks have risen and are comfortably above regulatory minima. - Leverage ratio of major Swedish banks has increased to just below the European average. - Financial Soundness Indicators, Banks, selected values (2011–2016): - Regulatory capital to risk-weighted assets: 12.2 (2011), 12.5 (2012), 12.7 (2013), 22.4 (2014), 24.2 (2015), 26.7 (2016). - Regulatory Tier I capital to risk-weighted assets: 11.3 (2011), 11.7 (2012), 12.0 (2013), 19.5 (2014), 21.1 (2015), 23.0 (2016). - Capital as percent of assets (leverage ratio): 4.1 (2011), 4.4 (2012), 4.5 (2013), 5.0 (2014), 5.5 (2015), 6.3 (2016). - Nonperforming loans to total gross loans: 1.6 (2011), 1.5 (2012), 1.3 (2013), 2.1 (2014), 1.9 (2015), 2.0 (2016). - Return on assets: 0.5 (2011), 0.5 (2012), 0.6 (2013), 0.5 (2014), 0.6 (2015), 0.7 (2016). - Return on equity: 10.6 (2011), 11.4 (2012), 11.4 (2013), 10.2 (2014), 11.4 (2015), 12.1 (2016). - Liquid assets as percent of total assets: 6.2 (2011), 8.5 (2012), 8.9 (2013), 7.1 (2014), 9.2 (2015), 9.3 (2016). - Customer deposits as a percent of total (non-interbank) loans: 49.8 (2011), 52.9 (2012), 53.8 (2013), 56.5 (2014), 52.6 (2015), 53.0 (2016). - Noninterbank loans to noninterbank deposits: 153.8 (2011), 148.8 (2012), 145.9 (2013), 140.7 (2014), 152.4 (2015), 188.6 (2016). - Foreign currency loans as percent of total loans: 37.4 (2011), 34.9 (2012), 36.8 (2013), 39.4 (2014), 39.4 (2015), 39.4 (2016). ### Selected economic indicators and projections (Table 1, 2014–20) - Real economy (percent change): - Real GDP: 2.6 (2014), 4.5 (2015), 3.3 (2016), 3.1 (2017), 2.4 (2018), 2.2 (2019), 2.0 (2020). - Domestic demand: 2.9 (2014), 4.3 (2015), 3.3 (2016), 3.1 (2017), 2.6 (2018), 2.4 (2019), 2.1 (2020). - Private consumption: 2.1 (2014), 3.1 (2015), 2.2 (2016), 2.5 (2017), 2.5 (2018), 2.3 (2019), 2.1 (2020). - Gross fixed investment: 5.5 (2014), 6.9 (2015), 5.6 (2016), 7.0 (2017), 4.1 (2018), 4.0 (2019), 3.3 (2020). - Exports of G&S: 5.3 (2014), 5.7 (2015), 3.3 (2016), 3.8 (2017), 4.0 (2018), 3.9 (2019), 3.8 (2020). - Imports of G&S: 6.3 (2014), 5.2 (2015), 3.4 (2016), 4.2 (2017), 4.6 (2018), 4.5 (2019), 4.4 (2020). - HICP inflation (e.o.p): 0.3 (2014), 0.7 (2015), 1.7 (2016), 1.8 (2017), 1.5 (2018), 1.8 (2019), 2.0 (2020). - Unemployment rate (percent): 7.9 (2014), 7.4 (2015), 7.0 (2016), 6.6 (2017), 6.3 (2018), 6.3 (2019), 6.3 (2020). - Output gap (percent of potential): -2.1 (2014), -0.3 (2015), 0.3 (2016), 0.9 (2017), 0.8 (2018), 0.7 (2019), 0.5 (2020). - Public finance (percent of GDP): - Net lending: -1.6 (2014), 0.2 (2015), 1.1 (2016), 1.0 (2017), 0.9 (2018), 0.6 (2019), 0.5 (2020). - Structural balance (as a percent of potential GDP): -0.6 (2014), 0.0 (2015), 0.8 (2016), 0.7 (2017), 0.5 (2018), 0.3 (2019), 0.3 (2020). - General government gross debt, official statistics: 45.2 (2014), 43.7 (2015), 41.3 (2016), 38.4 (2017), 36.5 (2018), 34.3 (2019), 32.1 (2020). - Money and credit (year-on-year, percent change, eop) 1/: - M3: 4.1 (2014), 7.6 (2015), 8.4 (2016), 9.5 (2017) (data for 2017 are as of August 2017). - Bank lending to households: 6.0 (2014), 7.4 (2015), 7.4 (2016), 6.7 (2017) (mortgage rates for new contracts, data for 2017 as of August 2017). - Interest rates (percent, end of period): - Repo rate: 0.0 (2014), -0.4 (2015), -0.5 (2016), -0.5 (2017) (data for 2017 are as of September 2017). - Ten-year government bond yield: 1.7 (2014), 0.7 (2015), 0.5 (2016), 0.6 (2017). - Mortgage lending rate: 1.9 (2014), 1.6 (2015), 1.6 (2016), 1.6 (2017). - Balance of payments (percent of GDP): - Current account: 4.6 (2014), 4.7 (2015), 4.5 (2016), 3.9 (2017), 3.7 (2018), 3.5 (2019), 3.2 (2020). - Net international investment position: 1.2 (2014), 4.6 (2015), 11.2 (2016), 12.8 (2017), 14.3 (2018), 15.7 (2019), 16.9 (2020). - Fund position (September 30, 2017): - Quota (in millions of SDRs): 4,430. - Reserve tranche position (in percent of quota): 3.2. - Holdings of SDRs (in percent of allocation): 91.5. - Other indicators (projections/memoranda): - GDP per capita (2016, USD): 51,473. - Population (2016, million): 10.0. - Main products and exports: Services, including computer and information; motor vehicles, forest products. - Key export markets: Germany, Norway, United Kingdom. ### General government operations (Table 2, 2014–20; Billions of SEK and percent of GDP) - Revenue (Billions of SEK): 1,926 (2014), 2,070 (2015), 2,187 (2016), 2,283 (2017), 2,330 (2018), 2,417 (2019), 2,512 (2020). - Tax revenue (Billions of SEK): 1,561 (2014), 1,688 (2015), 1,775 (2016), 1,858 (2017), 1,920 (2018), 1,994 (2019), 2,072 (2020). - Expenditure (Billions of SEK): 1,989 (2014), 2,060 (2015), 2,140 (2016), 2,237 (2017), 2,289 (2018), 2,386 (2019), 2,484 (2020). - Net lending / borrowing (Billions of SEK): -63 (2014), 10 (2015), 47 (2016), 46 (2017), 41 (2018), 32 (2019), 28 (2020). - Net lending / borrowing (Percent of GDP): -1.6 (2014), 0.2 (2015), 1.1 (2016), 1.0 (2017), 0.9 (2018), 0.6 (2019), 0.5 (2020). - Structural Balance (percent of potential GDP): -0.6 (2014), 0.0 (2015), 0.8 (2016), 0.7 (2017), 0.5 (2018), 0.3 (2019), 0.3 (2020). - Fiscal Impulse (expansionary +): 0.0 (2014), 0.6 (2015), 0.8 (2016), -0.1 (2017), -0.1 (2018), -0.2 (2019), 0.0 (2020). - Memorandum: Gross public debt (percent of GDP): 45.2 (2014), 43.7 (2015), 41.3 (2016), 38.4 (2017), 36.5 (2018), 34.3 (2019), 32.1 (2020). - Nominal GDP (in billions of SEK): 3,937 (2014), 4,200 (2015), 4,405 (2016), 4,639 (2017), 4,823 (2018), 5,014 (2019), 5,210 (2020). ### Public sector balance sheet (Table 3, 2008–16; Billions of SEK and percent of GDP) - Assets (Billions of SEK): 5,056 (2008), 5,376 (2009), 5,651 (2010), 5,967 (2011), 6,137 (2012), 6,459 (2013), 6,912 (2014), 7,087 (2015), 7,522 (2016). - Financial assets and Capital stock net of depreciation series reported for 2008–2016 (tables). - Liabilities (Billions of SEK): 1,807 (2008) rising to 2,671 (2016). - Net worth (Billions of SEK): 3,249 (2008), 3,542 (2009), 3,785 (2010), 4,001 (2011), 4,128 (2012), 4,302 (2013), 4,376 (2014), 4,479 (2015), 4,851 (2016). - Financial net worth (Billions of SEK): 295 (2008), 509 (2009), 603 (2010), 701 (2011), 777 (2012), 783 (2013), 777 (2014), 800 (2015), 919 (2016). - GDP (SEK billions) used in table: 3,388 (2008) through 4,405 (2016). ### Balance of payments (Table 4, 2014–20) - Current Account Balance (Billions of SEK): 183 (2014), 196 (2015), 198 (2016), 182 (2017), 179 (2018), 174 (2019), 168 (2020). - Trade Balance (Billions of SEK): 172 (2014), 207 (2015), 188 (2016), 195 (2017), 199 (2018), 202 (2019), 203 (2020). - Exports of G&S (Billions of SEK): 1,758 (2014), 1,896 (2015), 1,911 (2016), 1,996 (2017), 2,092 (2018), 2,190 (2019), 2,288 (2020). - Imports of G&S (Billions of SEK): 1,586 (2014), 1,689 (2015), 1,723 (2016), 1,801 (2017), 1,893 (2018), 1,988 (2019), 2,085 (2020). - Financial Account Balance (Billions of SEK): 131 (2014), 85 (2015), -74 (2016), 179 (2017), 175 (2018), 170 (2019), 163 (2020). - Net International Investment Position (Percent of GDP): 1.2 (2014), 4.6 (2015), 11.2 (2016), 12.8 (2017), 14.3 (2018), 15.7 (2019), 16.9 (2020). - Exports and imports value and volume changes in USD terms are provided in table (percent changes). ### Financial system structure (Table 6, 2014–16) - Total financial system assets (Billions of SEK): 22,016 (2014), 21,590 (2015), 22,522 (2016). - Total financial system as percent of GDP: 559.2 (2014), 514.1 (2015), 511.3 (2016). - Four major banks, consolidated (Total Top Four Banks, Billions of SEK and percent of total assets): - 2014: 12,793 (58.1 percent of total assets; 325.0 percent of GDP). - 2015: 11,981 (55.5 percent; 285.3 percent of GDP). - 2016: 12,008 (53.3 percent; 272.6 percent of GDP). - Top four banks in Sweden (unconsolidated) total assets (Billions of SEK): 10,436 (2014), 10,280 (2015), 10,613 (2016). - Banking sector (Memorandum): Total banking sector assets (Billions of SEK): 14,894 (2014), 14,094 (2015), 14,421 (2016); percent of total financial system assets: 67.6 (2014), 65.3 (2015), 64.0 (2016); percent of GDP: 378.3 (2014), 335.6 (2015), 327.4 (2016). - Foreign bank branches in Sweden (Memorandum): 27 branches, 1,023 (Billions of SEK) in 2014; 28 branches, 1,038 (2015); 28 branches, 1,056 (2016). *Source: IMF World Economic Outlook, Riksbank, Swedish Ministry of Finance, Statistics Sweden, NIER, Employment Service, Financial Supervisory Authority, Bloomberg Finance L.P., Haver Analytics, and Fund staff calculations.* ### Appendix I. Impact of the Amortization Requirement ### Appendix I. Impact of the Amortization Requirement ### Overview and policy design - A minimum amortization requirement for new mortgages was announced by the FI in October 2015 and became effective in June 2016. - Regulation specifics: - Annual repayments of at least 1 percent of the debt principal for mortgages with an LTV over 50 percent. - Annual repayments of at least 2 percent for mortgages with an LTV above 70 percent. - Primary objective: dampen macroeconomic risks associated with highly-indebted households by discouraging high borrowing and reducing household debt over time through amortization. ### Impact on credit composition - General observation: The risk profile of household credit composition improved somewhat following the introduction of the measure. - Key findings: - Amortization of mortgages with an LTV above 50 percent rose sharply as a share of principal in 2016, reaching: - 1.2 percent for mortgages with LTVs of 50–70 percent, - 1.9 percent for mortgages with LTVs of 70–85 percent, - 3.4 percent for mortgages with LTVs over 85 percent. - The impact is most pronounced for households with an LTV higher than 70 percent, with an average increase of about 0.7 percentage points in the annual amortization rate. - Average repayments for mortgages with LTV of 50–70 percent have risen to a level broadly aligned with the new 2 percent requirement. - The average LTV ratio for new mortgages declined slightly in 2016 to 64 percent from 65 percent in 2015. - This largely reflects a significant 3 percentage point decline in the share of loans with an LTV of 70–85 percent in total new loans. - The measure led to a small decline in the share of new mortgages with DTI (disposable income basis) over 600 percent, although the share with DTI above 450 percent rose modestly. ### Impact on household debt and house prices - Observed dynamics: - A sharp slowing in house price growth was observed after the measure was announced in October 2015. - This was followed by a temporary acceleration in 2016H2 after the measure became effective. - After these swings, house price growth slowed in 2017 to an annualized pace just under 7 percent. - Household credit growth eased to 6.7 percent y/y in August 2017 from 7.4 percent a year earlier. - Caveat: Careful assessment requires controlling for the economic environment in which the measures were taken. ### Empirical evaluation and methods - Difference-in-difference analysis (FI’s analysis): - Households divided into three groups based on policy design (two affected, one not). - Findings: - The amortization measure reduced the average DTI ratio of new mortgage borrowers by 8 percentage points. - Households subject to the new requirement bought homes that on average are about 3 percent less expensive. - The measure has a smaller estimated impact on house prices than on household debt; households may have chosen smaller or less attractive-location homes or used more savings to finance purchases. - VAR-based counterfactual analysis (following Price (2014)): - Two-step approach: 1. Estimate a VAR using pre-announcement data with housing-specific variables (household credit growth, house price growth, housing starts, house sales) and macroeconomic variables (household income growth, net immigration, population growth, after-tax mortgage interest rate). 2. Project dynamics of housing-specific variables conditional on actual macroeconomic behavior after the announcement. - Result: Actual credit and house price growth paths remain below the counterfactual, although the difference is not quite statistically significant at the 95 percent confidence level. - Error correction model (Turk (2015)) dynamic forecasting: - Coefficients re-estimated until 2015Q3 and dynamic forecasts generated for 2015Q4–2017Q2. - Model-implied initial disequilibrium in 2015Q3: - Housing prices above long-run equilibrium by about 5 percent. - Household debt above long-run equilibrium by about 6 percent. - Compared with no-policy-change predictions, the amortization requirement helped reduce DTI by 1.2 percentage points by 2017Q1. - Some initial moderating impact on house prices was observed, but more rapid house price rises in 2016H2 brought prices back to a level consistent with macroeconomic outturns. ### Overall assessment (from the Appendix) - Preliminary conclusion: The amortization requirement achieved its goal of improving the composition of household credit and reducing household debt. - House prices: Limited lasting impact on house prices. - Interpretation caveats: - Results should be interpreted with care given the relatively short time span since the announcement. - It is empirically challenging to isolate the impact of policy changes from other contemporaneous factors. *Source: Appendix I. Impact of the Amortization Requirement (cr17350).* ### Appendix IV. Update on FSAP Recommendations ### Appendix IV. Update on FSAP Recommendations ### Financial Stability - Recommendation 1: Introduce a cap on the debt-to-income ratio (FI/MoF) — Time: NT - Status: Finansinspektionen (FI) has proposed stricter amortisation requirement for new mortgage holders who borrow more than 4.5 times their gross income. After 31 December 2017, new mortgage holders borrowing > 4.5 times gross income must amortise at least one percentage point more per year according to the proposal. - Proposed amortisation schedule in the proposal: - debt-to-income > 4.5 and loan-to-value < 50 percent: amortise at least 1 percent - debt-to-income > 4.5 and loan-to-value > 50 percent but < 70 percent: amortise at least 2 percent - debt-to-income > 4.5 and loan-to-value > 70 percent: amortise at least 3 percent - Procedural note: Proposal on referral until the 8th of September. FI must obtain the Government’s consent before adopting the amendments. - Recommendation 2: Remove tax incentives to hold real estate assets and fund them with debt (MoF) — Time: NT - Status: Mortgage interest tax relief has most likely contributed to household debt. Measures must be handled with great care due to potential negative effects on households’ financial position and economic growth. - Context: Over the past ten years, property taxation in Sweden moved away from recurrent taxation to taxation of capital gains at time of sale. In 2016 the Government implemented more generous rules for deferring capital gains tax to increase mobility on the property market. - Recommendation 3: Timely adoption of a leverage ratio as a backstop (FI) — Time: NT - Status: FI supports near term implementation across the EU through CRR II and views adoption of the Leverage Ratio as on track. - Recommendation 4: Monitor an extended (three-month) LCR in euro and U.S. dollar (FI) — Time: NT - Status: FI initiated a project to review supervisory methods for liquidity and liquidity risks, investigating need for a Pillar 2 requirement on the EU LCR. - Notes: - EU requirement becomes a binding minimum in the EU from 1 January 2018 and current Swedish LCR requirement will repeal. - EU regulation does not cover requirements in individual currencies; current national regulation implied LCR-requirements in EUR and USD separately. - FI will explore replicating LCR in different currencies via Maturity Ladder reporting template as part of liquidity stress testing project. - FI intends to follow recommendation to adopt an extended (three-month) LCR in EUR and USD. - Final Pillar-2 requirement decision depends on updated assessment of Swedish banks’ funding risks (in SEK and foreign currency). Work expected to be finalized by April 2018. - Recommendation 5: Introduce regular surveys on the distribution of household balance sheets (MoF) — Time: I - Status: Riksbank (RB) tasked Statistics Sweden to establish two new databases: credit database (KRITA) and securities holdings database (VINN). - Expected outputs: - VINN: analyze exposures and spread risks for Swedish securities portfolios; household data reported on aggregated level for secrecy. - KRITA: enable analysis of risks and vulnerabilities of different borrowing groups at detailed level. - Recommendation 6: Introduce regular stress tests of corporate resilience (FI) — Time: I - Status: Granular corporate credit data not currently available. A joint project between FI, RB, and Statistics Sweden has been initiated to collect required data (see recommendation 5). Timeframe for implementation difficult to establish. - Recommendation 7: Improve stress testing framework for banks and insurance companies (FI, RB) — Time: I - Status: FI launched a project in 2017 to improve stress testing framework for primarily banks; project continues through 2018. - FI developing liquidity stress testing methodology: - Objective: construct indicators of capacity to hold satisfactory volumes of liquid assets in stress. - Will use variables from EBA Maturity Ladder template and investigate deriving time-dependent LCR. - Liquidity work expected finalised by end March 2018. - FI and RB participate in ESRB stress testing task force to monitor/influence European exercises. - RB building a comprehensive stress testing framework using more granular bank exposure data and modeling interest income; consulted external experts for guidance. ### Macroprudential Policy, Systemic Risk Oversight, and Systemic Liquidity Management - Recommendation 8: Give FI a clear legal mandate for macroprudential policy, ensuring FI has tools to address systemic risks in a timely and effective manner (MoF) — Time: I - Status: Based on political agreement in October 2016, Government presented draft bill to Council on Legislation in June 2017 to broaden FI’s macroprudential toolbox. - Main proposal: strengthen FI’s legal mandate to counteract financial imbalances on credit market; draft bill includes requirement for FI to obtain Government consent before new regulations adopted. - After Council on Legislation deliberations, Government will present draft bill to Parliament during the fall. Legislative changes foreseen to enter into force on 1 February 2018. - Recommendation 9: Give the FSC, or similar body, a statutory basis with power to issue recommendations, preferably with ‘comply or explain’; expand mandate to include crisis preparedness; establish two preparatory groups (MoF) — Time: MT - Status: Government assessment: FSC can be forum for discussion and cooperation but cannot issue recommendations with “comply or explain” attribute as this would be unconstitutional. - Constitutional constraints: - No authority may determine how another authority should decide or apply law (Section 2 of Swedish Instrument of Government). - Government minister membership of FSC could raise concerns of ministerial rule. - Authorities can issue recommendations to Government, but no obligation for Government or other authority to comply or explain. - Recommendation 10: Amend the RB Act to: (1) clarify RB’s role in financial stability, including authority to extend liquidity assistance for financial stability purposes; and (2) ensure RB is in strong financial position and protected from potential losses on such liquidity assistance (MoF) — Time: MT - Status: Parliamentary committee appointed December 2016 to review monetary policy framework and Riksbank Act; report to Government by 31 May 2019. - Committee will investigate monetary policy objectives and RB's responsibility for financial stability, including whether losses on liquidity assistance to individual firms should be guaranteed by Government. - Recommendation 11: Seek to establish swap agreements with central banks in Nordic countries, the Fed, and the ECB, aiming to strengthen availability of ELA in relevant currencies (RB) — Time: NT - Status: December 2016: Nordic and Baltic central banks signed a Memorandum of Understanding (MoU) on cooperation regarding banks with cross-border operations among Denmark, Estonia, Finland, Iceland, Latvia, Lithuania, Norway and Sweden. - MoU: concerns sharing information and cooperation; replaces earlier agreements from 2003 and 2006; not legally binding. ### Financial Sector Regulation and Supervision - Recommendation 12: Broaden FI’s mandate to issue binding regulations on safety and soundness issues (MoF) — Time: MT - Status: FI has relatively broad mandate under Banking and Financing Business Act (SFS 2004:297), Chapter 16, Section 4 p. 4, but adjustments to laws/ordinances have been necessary historically. Government is taking steps to ensure necessary legal empowerment. - Recommendation 13: Ensure same level of protection for occupational pensions as for life insurance (MoF) — Time: NT - Status: Implementing IORP II in Sweden will be complemented with a risk-based solvency regulation. FI tasked to propose design; first proposal from FI to be presented in September 2017. - Recommendation 14: Improve availability and quality of investment fund data and enhance FI’s ability to conduct stress testing and other analyses for investment funds (FI) — Time: NT - Status: FI preparing new regulation to enable enhanced data collection and improved quality data from investment funds; information required will enable FI to perform stress tests when needed. - Recommendation 15: Enhance cross-border supervisory cooperation, including supervision of systemic bank branches and cross-border management of investment funds (FI) — Time: NT - Status: - MoU agreed between Nordic-Baltic stability group to coordinate supervision of systemic branches; MoU regulates cooperation within supervisory colleges established under Article 116 or Article 51(3) of Directive 2013/36/EU (CRD). - FI initiated internal project to implement intensified supervision processes with ambition to have processes in place by end of 2017. - FI started initiative for investment firms similar to investment funds cooperation among Nordic countries, covering cross-border supervision. - FI joined Joint Committee of the European Supervisory Authorities 2017 work programme, including JC SC CPFI Sub-group on cross border supervision of retail financial services. ### Crisis Readiness, Management, and Resolution - Recommendation 16: Under FSC auspices, ensure agency-specific and national financial crisis preparedness, including a national crisis management plan, updated bi- and multilateral cooperation MoUs, and regular single- and multi-agency financial crisis simulation exercises (MoF/NDO/FI/RB) — Time: NT, C - Status: - FSC secretariat and preparatory group planned and implemented regular crisis simulation exercises (autumn 2016, spring 2017; next planned spring 2018). - Work ongoing on common crisis management plan; authorities implementing preparedness within operational frameworks. - Regular updates to cooperation MoUs performed. - Recommendation 17: Seek to revamp the Nordic-Baltic Stability Group, supported by updated bi- and multilateral MoUs, to strengthen crisis preparedness and management, including regular financial crisis simulation exercises (MoF/NDO/FI/RB) — Time: NT, C - Status: - Work to revamp NBSG initiated at October 2016 meeting; revised MoU drafted in spring 2017 expected to be adopted at NBSG meeting in Stockholm in November 2017. - Revised MoU expected to focus on financial stability, information exchange, preparedness for crisis management and joint simulation exercises. - Parties to MoU: Ministries, Central Banks, Financial Supervisory Authorities, and Resolution Authorities of Signatory Countries. - Decision made in November 2016 to prepare regional (Nordic-Baltic) crisis simulation exercise in late 2018; working group formed and first meeting held January 2017. Call for tenders to select external consultant expected to be concluded in September 2017. - Recommendation 18: Expedite resolution planning for systemic financial institutions (NDO) — Time: I - Status: - Group resolution plans for four Swedish cross-border banks (Handelsbanken, Nordea, SEB and Swedbank) adopted through “Joint Decisions” by respective Resolution College in December 2016. - NDO producing and updating 2017 resolution plans; focus on improving and expanding group plans and developing first plans for remaining systemically important institutions. - NDO expects resolution plans for all Swedish institutions subject to BRRD to be adopted before year-end. - MREL framework finalized in February 2017; institutions subject to individual requirements effective as of January 2018. - Recommendation 19: Define strategies for liquidity assistance to banks in resolution, and conclude cooperation agreement for solvency and viability assessment of institutions that need ELA (RB/NDO/FI) — Time: I - Status: - Ongoing work regarding liquidity in resolution between NDO and resolution colleges of four Swedish cross-border banks, including mapping access to central banks’ standard facilities and public sector mechanisms (resolution funds). - Preliminary findings: resolution per se not a hindrance to access central banks’ ordinary facilities; central bank lending is at discretion of central bank and conditional on eligibility (solvency and ability to mobilise eligible collateral). - Unlike Bank of England and Bank of Canada, relevant central banks do not have lending facilities solely designed for liquidity support in resolution; available liquidity limited by eligible collateral. - Public sector backstop mechanisms established in three relevant jurisdictions for Swedish banks (Sweden, Banking Union and Denmark), originating in BRRD; arrangements can issue loans and guarantees and are flexible in currency and duration. - Bilateral dialogue initiated between NDO and RB focused on practical aspects of liquidity support to banks under resolution; no agreement reached yet. - Ongoing parliamentary review of the Riksbank Act including analysis of RB’s role in ensuring liquidity in resolution. ### Resources - Recommendation 20: Increase financial and human resources allocated for prudential supervision, and recovery and resolution planning, to ensure resource levels commensurate with size and complexity of Sweden’s financial sector and home-country responsibilities (MoF/FI/NDO) — Time: I - Status: - FI received substantial resource increases in recent years: - Government's budget for 2017: additional contribution of SEK 15 million to handle new regulations and strengthen banking oversight. - Supplementary budget for 2017: additional SEK 25 million for increased bank supervision (including Nordea branchification). - Government budget proposal for 2018: proposed another SEK 80 million to FI to strengthen bank supervision (including Nordea branchification), work against money laundering and financing of terrorism, new regulations, and integrate sustainability into regulations and supervision. - NDO: - Appointed resolution authority in 2015 and developed financial stability department. - Resolution planning funded by state budget; administrative costs of carrying out resolution imposed on institution under resolution or on resolution reserve if not possible. - Government deems NDO’s appropriation level well balanced and will review annually via central Government budget process. - Human resources: NDO increased staff in Department for financial stability and consumer protection from 11,5 FTEs when FSSA 2016 was published (November) to 15 FTEs (30 percent increase). One further FTE joining shortly and additional staff to be recruited. * C = continuous; I (immediate) = within one year; NT (near term) = 1–3 years; MT (medium term) = 3–5 years *Appendix IV. Update on FSAP Recommendations — cr17350* ### Appendix V. Risk Assessment Matrix ### Appendix V. Risk Assessment Matrix ### Overview / Methodology - The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of the IMF staff). - The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding this baseline: - "low" is meant to indicate a probability below 10 percent, - "medium" between 10 and 30 percent, and - "high" between 30 and 50 percent. - The RAM reflects staff's views on the source of risks and overall level of concern as of the time of discussions with the authorities. ### 1. Tighter global financial conditions - Source of Risks: Fed normalization and tapering by ECB increase global rates and term premia, strengthen the US dollar and the euro, and correct market valuations. - Overall Level of Concern: High - Relative Likelihood: Medium - Impact if Realized: - Swedish banks are reliant on wholesale funding and are directly and indirectly exposed to international financial markets. - Higher bank funding costs translate into higher lending interest rates and curtailed lending, weighing on growth. - Adverse impact could be partially mitigated by safe-haven flows. - Policy response: - Preventively, reduce vulnerabilities of the financial sector and preserve fiscal buffers. - In the event, provide liquidity support, including in foreign currency. ### 2. Weaker-than-expected global growth - Source of Risks: Significant slowdown in China and other large Emerging Market and frontier economies, and structurally weak growth in key advanced economies. - Overall Level of Concern: Medium-High - Relative Likelihood: Medium - Impact if Realized: - Sweden’s economy is small and highly open with strong links to European markets. - Sensitivity to shocks could be increased by high household debt and more limited space for additional monetary easing. - As exports and income decline, investment will slow as well, further reducing growth. - Inflation will decline with falling growth, lower import prices, and possibly with an appreciation of the krona. - Policy response: - Provide additional monetary support, let automatic fiscal stabilizers operate fully, and make faster structural fiscal adjustment (easing) to medium-term targets. ### 3. Policy uncertainty and retreat from cross-border integration - Source of Risks: - Risks from difficult to predict U.S. policies; uncertainty associated with negotiating post-Brexit arrangements. - A fraying consensus about the benefits of globalization lead to protectionism and economic isolationism. - Overall Level of Concern: Medium-High - Relative Likelihood: Medium - Impact if Realized: - The UK is an important trading partner (Sweden exports over 2 percent of its GDP to the UK). - More generally, Sweden is a small open economy highly dependent on movement of labor, goods, and services. - Uncertainty during post-Brexit negotiations could weigh on confidence and investment. - Renewed large scale refugee inflows would increase spending and support activity but would further strain capacity to receive and integrate migrants, raising unemployment and undermining social cohesion. - Higher barriers to trade would dampen exports and investment and weaken the growth outlook. - Policy response: - Provide monetary and fiscal support, strengthen refugee integration policy and the demand for low-skilled workers, facilitate sectoral reallocation of labor and capital. ### 4. Significant house price decline in Sweden - Source of Risks: Significant house price decline in Sweden. - Overall Level of Concern: Medium - Relative Likelihood: High - Impact if Realized: - High house prices largely reflect supply not keeping up with demand increases driven by demographics, incomes, financial assets, and interest rates. - Price levels remain high despite some recent growth moderation, but the slow reduction in supply shortfalls mitigates downside risks. - Large impact on consumption and employment lowers growth. - Loan quality impacted, primarily of firms serving domestic market. - Lending could be curtailed if doubts about the quality of covered bonds rise, elevating bank funding costs. - Policy response: - Preventively, reduce vulnerabilities in the housing market through macroprudential measures, phasing out tax incentives, and enhancing housing supply. - In the event, provide monetary stimulus and funding support to banks. *Source: Appendix V. Risk Assessment Matrix, cr17350* ### introduction program in place for refugees coordinated by the Swedish Public Employment ### introduction program in place for refugees coordinated by the Swedish Public Employment Service ### Integration and labor market - In 2016, the Government, together with the social partners, put in place fast tracks to shorten the time from arrival to work in professions with a shortage. - A new regulation will enter into force on January 1, 2018, to harmonize the regulation of new arrivals' integration in working life and Swedish society to a greater extent with the regulations that apply to other jobseekers. - The Government will introduce targeted measures for foreign-born women. - An education and training obligation will be introduced for newly arrived immigrants who are considered in need of education and training to find work. - The Government welcomes ongoing negotiations between social partners on new ways to facilitate labor market entry for people with a weak attachment to the labor market. - Regarding wages, the source notes: wage formation in Sweden is the responsibility of the social partners. This arrangement has contributed to stability and real wage development in line with productivity growth for the last two decades. ### Housing and tax issues - The Government concurs with the IMF that there are challenges in the housing market: high construction costs and inefficient use of existing property need to be addressed. - The Government agrees that support for construction of more affordable rental housing is vital; an investment grant for rental dwellings and student housing was implemented in 2016. - Efficient public transportation is identified as a vital component to housing policy objectives. - The Government has focused reforms to make the planning and building process smoother, faster, and more predictable, continuing work in line with the 22-item list presented by the Government in 2016. - The rent-setting system is designed to create a balance between tenants’ right of security and reasonable rents for both the individual tenant and the property owners. - The model for rent setting on new production (presumption rents), which takes production costs and the need for a reasonable return on investment into account, has been reviewed by an inquiry. - One proposal in the inquiry report aims at making the model less rigid and more adaptable to new, altered or unforeseen circumstances. - The threshold for deferring capital gains tax has been temporarily removed to give greater incentives for those with high capital gains to move in the near future. - The Government is continuously looking at different possibilities to improve the functioning of the housing market. - On tax design and household debt: - The design of the tax system is one of many factors that influence the level of household debt. - Any potential measures must be seen in a long-term perspective and be based on a broad political consensus. - Changes must be handled with great care due to the potential negative effects on growth. - General changes to the rules on mortgage interest deductibility will affect those who have already made the decision to buy a house or part of a tenant-owned property. - There must be predictable conditions for households’ investment in property as this is among the largest financial decisions a household can make. ### Fiscal policy - The Government agrees with staff’s fiscal assessment that the current fiscal stance is broadly neutral. - The fiscal stance for 2018 is assessed to be mildly expansionary with a marginal decline in the structural balance. - Concerns around overheating the economy are limited by persistently low core inflation and modest wage growth, which is in line with the Government’s assessment. - The Government agrees with staff that Sweden has a healthy fiscal position with substantial fiscal space were it to be needed. - The Government notes the IMF’s view that if debt in practice falls below the 35 percent of GDP benchmark, a further reduction in the surplus target may be appropriate at the time when the fiscal framework is due for its 8- yearly review. *Source: cr17350 - introduction program in place for refugees coordinated by the Swedish Public Employment Service* --- _Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17350.pdf_