## cr18173 - 1.1 percent last year, and the positive momentum continued in Q1:2018, although at a slightly ## Source details **Canonical URL:** [cr18173 - 1.1 percent last year, and the positive momentum continued in Q1:2018, although at a slightly](https://www.imf.org/-/media/files/publications/cr/2018/cr18173.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2018/cr18173.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2018/cr18173.pdf.json) --- ### Recent developments and macro outcomes - Real GDP grew by 1.1 percent in 2017; positive momentum continued in Q1:2018, although at a slightly reduced pace. - GDP growth is expected to reach 2¼ percent in 2018 and to gradually moderate to 1¾ percent over the medium term. - Headline inflation: - Turned positive in mid-2016 after five years of falling or flat prices. - Reported as 1.0 percent in May 2018 in one passage and 0.8 percent in April 2018 in another passage. - Domestic VAT reduction at the beginning of 2018 lowered domestically-sourced inflation by 0.3 percentage point, with domestically-sourced inflation around 0.3 percent. - The franc weakened by around 8 percent in real effective terms during mid-2017 to April 2018 (alternative passage: weakened by 7 percent in real effective terms during mid-2017 to March 2018). - Current account surplus has remained large and relatively stable around 10 percent of GDP. - Capacity utilization recovered to 84 percent in early 2018. - Registered unemployment decreased to 3 percent (4.8 percent on the ILO definition). - Output gap estimated to have narrowed to about ½ percentage point as of end-2017. ### Policies, recent actions, and assessments - Monetary policy - Two-pronged approach combining a negative interest rate with foreign currency purchases has supported modest inflation and growth recovery. - Interest rate on sight deposits at the SNB set at -0.75 percent (mid-point of the target range for the three-month LIBOR minus 1.25 percent to minus 0.25 percent); negative policy rate applies only above elevated exemption thresholds (tiering). - Directors and staff: current accommodative stance appropriate; future tightening should be gradual, well-communicated, data-dependent, and consider actions by major central banks. - Recommendation to assign policy tools clearly: interest rates to address cyclical conditions; interventions to respond to excessive foreign exchange market volatility. - Macroprudential policy - Series of measures introduced targeting systemic risk in the real estate market. - Prices remain high relative to household income and exposure to mortgage debt is elevated. - Scope seen for targeted macroprudential measures and removal of tax incentives encouraging leveraged real estate acquisition. - Fiscal policy - Fiscal position strong with sustained small surpluses and declining public debt; debt brake fiscal rule introduced in 2003 has been effective. - Recommendation to maintain a structurally-balanced fiscal position to relieve pressure on monetary policy and gradually shift composition of growth from net exports. - Use substantial fiscal space for discretionary stimulus during a severe or prolonged downturn; consider making the debt brake ex post provision symmetrical to allow spending catch-up. - Structural and tax policy - Urgent need to meet international standards on corporate income tax (CIT) in a timely manner. - Prompt adoption of CIT reform would boost investment by SMEs, encourage R&D, and improve competitiveness of labor-intensive sectors. - Pension reform encouraged: raise retirement age, increase working population, link guaranteed conversion rate in the second pillar to a long-term market interest rate. - Sustain innovation and life-long learning via CIT reform, adequate funding of scientific education, and expanding the pool of highly-skilled Swiss and foreign workers. - Financial sector resilience - Authorities commended for enhancing banking sector resilience, including tightening macroprudential policies. - Directors noted vulnerabilities from sustained low interest rates and elevated exposures to real estate by both financial institutions and households. ### Risks and vulnerabilities - External and geopolitical risks - Rising international trade tensions and more uncertain geopolitics could rekindle safe-haven pressures, sharply appreciating the franc. - Abrupt policy tightening by major central banks or a resurgence in global inflation could trigger spillovers to Swiss property prices and markets. - Uncertainty regarding long-term Swiss-EU relations could affect cross-border flows. - Financial uncertainty and exchange rate effects if the “sovereign money” initiative is approved in the June referendum.1 - Domestic imbalances and institutional risks - Imbalances in the mortgage and property markets remain a concern. - Population aging and slower immigration will create funding gaps in the public pension system. - Further delays in meeting international standards on corporate income taxation (CIT) could reduce Switzerland’s appeal as an investment destination. - Measurement and statistical caveats - Internationally-active entities (merchanting, licensing of IP, event-related royalties) complicate interpretation of GDP and current account dynamics and can create biennial swings in GDP growth. ### Key projections and selected statistics (staff projections and tables) - Real GDP (percent change): 1.4 (2016); 1.1 (2017); 2.3 (2018); 2.0 (2019); 1.9 (2020); 1.7 (2021); 1.7 (2022); 1.7 (2023). - Total domestic demand (percent change): 0.4 (2016); 0.3 (2017); 1.5 (2018); 1.5 (2019); 1.5 (2020); 1.4 (2021); 1.4 (2022); 1.3 (2023). - Private consumption (percent change): 1.5 (2016); 1.2 (2017); 1.5 (2018); 1.3 (2019); 1.5 (2020); 1.5 (2021); 1.5 (2022); 1.5 (2023). - Nominal GDP (billions of Swiss francs): 659.0 (2016); 668.2 (2017); 691.4 (2018); 713.1 (2019); 733.7 (2020); 753.3 (2021); 773.4 (2022); 794.0 (2023). - Gross national saving (percent of GDP): 32.5 (2016); 33.5 (2017); 33.9 (2018); 33.4 (2019); 33.5 (2020); 33.5 (2021); 32.8 (2022); 32.5 (2023). - Current account balance (percent of GDP): 9.4 (2016); 9.8 (2017); 10.2 (2018); 9.8 (2019); 9.7 (2020); 9.6 (2021); 9.5 (2022); 9.3 (2023). - Consumer price index (period average): -0.4 (2016); 0.5 (2017); 1.0 (2018); 1.1 (2019); 1.0 (2020); 1.0 (2021); 1.0 (2022); 1.0 (2023). - Consumer price index (end of period): 0.0 (2016); 0.9 (2017); 1.2 (2018); 1.1 (2019); 1.0 (2020); 1.0 (2021); 1.0 (2022); 1.0 (2023). - Unemployment rate (percent): 3.3 (2016); 3.2 (2017); 3.0 (2018); 3.0 (2019); 2.9 (2020); 2.8 (2021); 2.8 (2022); 2.8 (2023). - Gross debt (percent of GDP): 41.9 (2016); 41.8 (2017); 40.3 (2018); 38.7 (2019); 37.3 (2020); 36.1 (2021); 34.9 (2022); 33.8 (2023). - Real effective rate (avg., 2000=100): 112.2 (2016); 107.4 (2017). ### Exchange rate dynamics, REER assessment, and external sector - The REER appreciated significantly since the GFC; CPI-based REER appreciated by 25 percent during 2007–17 with two episodes of rapid appreciation. - The EBA REER index and level models suggest the average REER in 2017 was 15–23 percent overvalued. - Based on the CA gap, staff assesses the REER gap to have been in the range of [-5.3, +2.3] percent in 2017. - As of March 2018, the REER had weakened a further 4 percent (compared with the 2017 average); the REER has depreciated somewhat during early 2018. - Net international investment position (NIIP): 127 percent of GDP at end-2017. - Foreign exchange reserves: USD811 bn (120 percent of GDP) at end-2017; Official reserves noted as 120 percent of GDP (including valuation changes). - External assessment (2017): cyclically-adjusted CA surplus of 9.6 percent of GDP versus an EBA norm of 6.1 percent produced a total gap of 3.5 percentage points of GDP; Switzerland-specific measurement factors amount to around 2¾ percent of GDP, leaving a remaining CA gap of about 0.8 percent of GDP (uncertainty band ±2 percentage points). ### Outlook, scenarios, and risks (staff forecasts and scenarios) - Growth projections: - GDP growth forecast lift to 2¼ percent in 2018 (including earnings from international sporting events). - Growth forecast to gradually moderate to 1¾ percent over the medium term. - Output gap forecast to close in late-2018 and turn modestly positive during 2019–21 before growth returns to potential. - Inflation outlook: - Inflation expected to increase to the upper half of the price stability band (0–2 percent) in 2018–19 on pass-through of recent nominal effective depreciation; subsequently revert to the mid-point as labor market tightness and capacity utilization normalize. - Upside and downside risks: - Upside: faster and more sustained global upswing could push GDP growth above forecasts. - Downsides include rising trade tensions, renewed safe-haven pressures sharply appreciating the franc, adoption of the “sovereign money” initiative, abrupt policy tightening by major central banks, and uncertainty on Swiss-EU relations. ### Monetary policy exit, tool assignment, and SNB balance sheet posture - If major central banks’ policy rates peak well-below pre-crisis levels, scope for the SNB to raise its policy rate may be constrained. - The SNB likely to maintain a considerably larger balance sheet than prior to the crisis; divestments expected to fall well-short of previous buildup. - Recommendation: clear assignment of policy tools—interest rate for slow-moving cyclical conditions and expected inflation; intervention reserved for volatility associated with foreign exchange market surges. - Staff view: monetary stance appropriate; any future tightening should depend on domestic conditions and actions by major central banks; tightening should be gradual and well communicated. ### Financial stability and macroprudential policy - Background findings - Private sector leverage and real estate exposure are high; households’ liabilities at 130 percent of GDP. - Growth of mortgage claims has slowed from a high base, but these claims increase by about 5 percentage points of GDP per year. - Eighty six percent of bank loans are for mortgages (83 percent for G-SIBs). - Build-to-let segment accounts for about one-third of bank mortgages. - Newer-vintage mortgages appear riskier; nearly half exceed indicative affordability thresholds and carry higher loan-to-value ratios. - Macroprudential regulations (selected) - Loan-to-value (LtV): minimum 10 percent cash downpayment for new mortgages (07/2012 FINMA-approved self-regulation). - LtV risk weights: excess of 80 percent LtV risk weighting 100 percent; LtV between two-thirds and 80 percent risk weight 75 percent; below two-thirds risk weight 35 percent (01/2013 Legal). - Amortization: to LtV of two-thirds within 20 years (07/2012 FINMA-approved self-regulation); within 15 years per linear schedule (09/2014). - Countercyclical capital buffer (CCyB): 1 percent on exposures secured with Swiss residential property (09/2013 Legal); raised to 2 percent (06/2014 Legal). CCyB introduced at zero in July 2012 with maximum ceiling 2½ percent. - Staff recommended actions - Adopt stricter regulatory limits on loan-to-value and debt-to-income ratios with limited exemptions. - Remove tax deductibility of mortgage interest payments for private households and eliminate taxation of imputed rental income. - Mortgages on investment property should carry a surcharge on applicable risk weight consistent with Basel III (December 2017). - Subject nonbank mortgage lending to similar macroprudential standards to prevent regulatory arbitrage. - Intensify monitoring of banks with similar business models and step up stress testing and cyber defenses. - Reinforce macroprudential framework focused on investment property and affordability risks. - Authorities’ stance - Support elimination of mortgage interest deductibility and removal of imputed rental income taxation in the long term. - View self-regulation as timely and effective in many cases; FINMA to endorse and supervise measures. ### Pension system sustainability, productivity, and CIT reform - Pension system - ‘Reform 2020’ package was voted down in late 2017; referendum proposal would have raised women’s retirement age to 65, lowered minimum conversion rate in the second pillar, and raised VAT by 0.3 percentage points earmarked for the public pension pillar. - Recommendations: raise retirement age or link it to life expectancy; link guaranteed conversion rate to long-term market yield and life expectancy; increase working population and female full-time employment. - Corporate Income Tax (CIT) reform - Current combined weighted effective tax rate on corporate income about 19.6 percent with heterogeneity across cantons; preferential regimes reduce effective rates for Swiss-based companies. - “Tax Proposal 17” foresees phasing out preferential regimes, introducing R&D deductions, and a patent box regime. - Expected combined CIT rate 13.9 percent (unweighted average) under reform. - Major part of reform (abolishing preferential regimes) would enter into effect in 2020 at the earliest. - Prompt adoption urged to dispel investment uncertainty. - Structural recommendations - Sustain innovation and life-long learning via CIT reform, adequate funding of STEM education, and expanding highly-skilled worker pool. - Address AML/CFT shortcomings from the 2016 FATF mutual evaluation; continue automatic exchange of tax information begun in 2018. ### Fiscal framework and debt brake - Findings - Debt brake rule has reduced general government debt from around 60 percent of GDP to 42 percent of GDP in 2017. - Since 2006, spending below budgeted amounts each year on average by 0.3 percent of GDP. - New global-budgeting procedures introduced in 2017, but underspending continued. - Staff recommendations - Make the debt brake's ex post provision operate symmetrically to permit spending catch-up and better countercyclical function. - With public debt projected to decrease to 34 percent of GDP by 2023, consider allowing larger countercyclical response when debt is below long-term sustainable levels. - Use fiscal space for discretionary stimulus in a severe or prolonged downturn and for exceptional circumstances under the rule. - Authorities’ view - Debt brake has broad popular support; recent measures to curb underspending expected to help. - Federal Council to consider amendments in spring 2019 based on Ministry of Finance report. ### Risk Assessment Matrix — selected high-likelihood or high-impact risks and policy responses - Tighter global financial conditions (Relative Likelihood: High; Expected Impact: Medium) - Policy response: pre-emptive slowing of bank lending via macroprudential measures; discretionary fiscal stimulus if growth slowdown occurs. - Structurally weak growth in key advanced economies (Relative Likelihood: High; Expected Impact: Medium) - Policy response: improve domestic productivity; allow full operation of structural-balance fiscal rule and discretionary stimulus if downturn sustained. - Resumption of safe haven inflows (Country-Specific: Relative Likelihood: Medium; Expected Impact: High) - Policy response: targeted foreign exchange purchases; allow temporary discretionary fiscal stimulus if downturn deep and/or sustained. - Delay in adopting internationally-compliant CIT or approval of “sovereign money” initiative (Country-Specific: Relative Likelihood: Low; Expected Impact: High) - Policy response: use “exceptional” clause in fiscal rule to inject discretionary stimulus. ### Data, SNB balance sheet, and financial indicators (highlights) - SNB balance sheet total assets (millions CHF): 2010 269,955; 2011 346,079; 2012 499,434; 2013 490,382; 2014 561,202; 2015 640,152; 2016 746,502; 2017 843,306. - SNB foreign currency reserves (millions CHF): 2016 696,104; 2017 790,125. - SNB sight deposits (millions CHF): 2016 530,049; 2017 573,679. - Households’ liabilities: 130 percent of GDP (noted). - Bank credit to households (share): 68.3 (2010); 69.4 (2016); 69.4 (2017:Q2). - Regulatory capital as percent of risk-weighted assets: 17.1 (2010); 16.1 (2016); 17.4 (2017:Q2). - Non-performing loans as percent of gross loans: 0.9 (2010); 0.7 (2016); 0.7 (2017:Q2). ### Consolidated key policy recommendations (condensed) - Maintain monetary accommodation for now; future tightening should be data-dependent and account for decisions by major central banks. - Maintain a structurally-balanced fiscal position to relieve pressure on monetary policy and gradually shift growth composition away from net exports; use fiscal space in severe or prolonged downturns. - Reinforce macroprudential framework for real estate, with a focus on investment property, and remove tax incentives that encourage leveraged real estate acquisition. - Meet international standards on corporate income tax (CIT) in a timely manner and continue progress on tax transparency and AML/CFT. - Reform the pension system: raise the retirement age, increase the working population, and link the guaranteed conversion rate in the second pillar to a long-term market interest rate. - Sustain innovation and life-long learning via CIT reform, adequate funding of scientific education, and expanding the pool of highly-skilled Swiss and foreign workers. - Strengthen supervisory vigilance, step up stress testing, and bolster cyber defenses. *Source: SWITZERLAND — STAFF REPORT FOR THE 2018 ARTICLE IV CONSULTATION (excerpt, cr18173).* ### 1.1 percent last year, and the positive momentum continued in Q1:2018, although at a slightly ### cr18173 - 1.1 percent last year, and the positive momentum continued in Q1:2018, although at a slightly ### Recent developments and macro outcomes - Real GDP grew by 1.1 percent last year; positive momentum continued in Q1:2018, although at a slightly reduced pace. - GDP growth is expected to reach 2¼ percent in 2018 and to gradually moderate to 1¾ percent over the medium term. - Headline inflation: - Turned positive in mid-2016 after five years of falling or flat prices. - Had risen to 1.0 percent in May 2018 in one passage and to 0.8 percent in April 2018 in another passage (both figures appear in the source). - Domestic VAT reduction at the beginning of 2018 lowered domestically-sourced inflation by 0.3 percentage point, with domestically-sourced inflation around 0.3 percent. - The franc weakened by around 8 percent in real effective terms during mid-2017 to April 2018. - Current account surplus has remained large and relatively stable around 10 percent of GDP. - Capacity utilization recovered to 84 percent in early 2018. - Registered unemployment decreased to 3 percent (4.8 percent on the ILO definition). - Output gap estimated to have narrowed to about ½ percentage point as of end-2017. ### Policies, recent actions, and assessments - Monetary policy: - Two-pronged approach combining a negative interest rate with foreign currency purchases has supported modest inflation and growth recovery. - Directors concurred that the current accommodative stance of monetary policy is appropriate and recommended future decisions be gradual and well-communicated, guided by domestic conditions while considering actions by major central banks. - Recommendation to assign policy tools clearly: use interest rates to address cyclical conditions and interventions to respond to excessive foreign exchange market volatility. - Macroprudential policy: - A series of macroprudential measures was introduced targeting systemic risk in the real estate market. - Prices remain high relative to household income and exposure to mortgage debt is elevated. - Directors saw scope for targeting macroprudential measures to contain risk-taking in the property market and for removing tax incentives that encourage leveraged acquisition of real estate. - Fiscal policy: - Fiscal position has remained strong with sustained small surpluses and declining public debt. - Directors agreed the debt brake fiscal rule has served Switzerland well. - Recommendation to maintain a structurally-balanced fiscal position to relieve pressure on monetary policy and gradually shift the composition of growth from net exports; use substantial fiscal space for a discretionary stimulus during a severe or prolonged downturn. - Directors welcomed initiatives to increase flexibility of spending within and outside the rule and consideration of possible amendments to address persistent budget underruns. - Structural and tax policy: - Urgent need to meet international standards on corporate income tax (CIT) in a timely manner. - Promptly adopting the corporate income tax reform would help boost investment by small- and medium-sized firms, encourage R&D, and improve competitiveness of labor-intensive sectors. - Directors encouraged reforming the pension system to ensure long-term viability, including raising the retirement age, increasing the working population, and linking the guaranteed conversion rate in the second pillar pension scheme to a long-term market interest rate. - Sustain innovation and life-long learning through the CIT reform, adequate funding of scientific education and expanding the pool of highly-skilled Swiss and foreign workers. - Financial sector resilience: - Authorities were commended for progress in enhancing banking sector resilience, including tightening macroprudential policies. - Directors noted vulnerabilities from sustained low interest rates and elevated exposures to real estate by both financial institutions and households. ### Risks and vulnerabilities - External and geopolitical risks: - Rising international trade tensions and more uncertain geopolitics could rekindle safe-haven pressures, sharply appreciating the franc. - Abrupt policy tightening by major central banks or a resurgence in global inflation could trigger spillovers to Swiss property prices and markets. - Uncertainty regarding long-term Swiss-EU relations could affect cross-border flows. - Domestic imbalances and institutional risks: - Imbalances in the mortgage and property markets remain a concern. - Population aging and slower immigration will create funding gaps in the public pension system. - Initiatives leading to abrupt institutional changes could undermine public confidence. - Further delays in meeting international standards on corporate income taxation (CIT) could reduce Switzerland’s appeal as an investment destination. - Measurement and statistical caveats: - Presence of internationally-active entities (merchanting, licensing of IP, event-related royalties) complicates interpretation of GDP and current account dynamics and can create biennial swings in GDP growth. ### Key projections and statistics (selected figures from staff projections and tables) - Real GDP (percent change): 1.4 (2016); 1.1 (2017); 2.3 (2018); 2.0 (2019); 1.9 (2020); 1.7 (2021); 1.7 (2022); 1.7 (2023). - Total domestic demand (percent change): 0.4 (2016); 0.3 (2017); 1.5 (2018); 1.5 (2019); 1.5 (2020); 1.4 (2021); 1.4 (2022); 1.3 (2023). - Private consumption (percent change): 1.5 (2016); 1.2 (2017); 1.5 (2018); 1.3 (2019); 1.5 (2020); 1.5 (2021); 1.5 (2022); 1.5 (2023). - Nominal GDP (billions of Swiss francs): 659.0 (2016); 668.2 (2017); 691.4 (2018); 713.1 (2019); 733.7 (2020); 753.3 (2021); 773.4 (2022); 794.0 (2023). - Gross national saving (percent of GDP): 32.5 (2016); 33.5 (2017); 33.9 (2018); 33.4 (2019); 33.5 (2020); 33.5 (2021); 32.8 (2022); 32.5 (2023). - Current account balance (percent of GDP): 9.4 (2016); 9.8 (2017); 10.2 (2018); 9.8 (2019); 9.7 (2020); 9.6 (2021); 9.5 (2022); 9.3 (2023). - Consumer price index (period average): -0.4 (2016); 0.5 (2017); 1.0 (2018); 1.1 (2019); 1.0 (2020); 1.0 (2021); 1.0 (2022); 1.0 (2023). - Consumer price index (end of period): 0.0 (2016); 0.9 (2017); 1.2 (2018); 1.1 (2019); 1.0 (2020); 1.0 (2021); 1.0 (2022); 1.0 (2023). - Unemployment rate (in percent): 3.3 (2016); 3.2 (2017); 3.0 (2018); 3.0 (2019); 2.9 (2020); 2.8 (2021); 2.8 (2022); 2.8 (2023). - Gross debt (percent of GDP): 41.9 (2016); 41.8 (2017); 40.3 (2018); 38.7 (2019); 37.3 (2020); 36.1 (2021); 34.9 (2022); 33.8 (2023). - Real effective rate (avg., 2000=100): 112.2 (2016); 107.4 (2017). ### Key policy recommendations (condensed from staff and Directors) - Maintain monetary accommodation for now; future tightening should be data-dependent and account for decisions by major central banks. - Maintain a structurally-balanced fiscal position to relieve pressure on monetary policy and gradually shift growth composition away from net exports; use fiscal space in severe or prolonged downturns. - Reinforce macroprudential framework for real estate, with a focus on investment property, and remove tax incentives that encourage leveraged real estate acquisition. - Meet international standards on corporate income tax (CIT) in a timely manner and continue progress on tax transparency and AML/CFT. - Reform the pension system: raise the retirement age, increase the working population, and link the guaranteed conversion rate in the second pillar to a long-term market interest rate. - Sustain innovation and life-long learning via CIT reform, adequate funding of scientific education, and expanding the pool of highly-skilled Swiss and foreign workers. *Source: SWITZERLAND — STAFF REPORT FOR THE 2018 ARTICLE IV CONSULTATION (excerpt, cr18173).* ### 4. The better global environment had—until ### 4. The better global environment had—until ### Exchange rate dynamics and real effective exchange rate (REER) - The franc weakened by 7 percent in real effective terms during mid-2017 to March 2018. - As a result, the REER had returned to the level that prevailed when the franc was under the floor (late 2011-early 2015), although it remained some 15 percent above its pre-crisis level. - The franc appreciated again in May on rising international political uncertainty. - Interest rates on longer-maturity debt have risen in tandem with those in other advanced economies, steepening the yield curve and pushing yields on maturities of 10 years and longer above zero. - Interest rates remain low, fueling search-for-yield that has buoyed real estate investment. ### Current account (CA) and external balances - The CA surplus averaged 10 percent of GDP during the past decade and has remained large and relatively stable despite substantial swings in the REER. - Drivers of the CA surplus: - Concentration on relatively price-insensitive exports (breakthrough pharmaceuticals and luxury goods). - Switzerland’s role as a financial hub and host to multinational companies, which affects the income balance. - From a saving-investment perspective, the household sector is the primary contributor. ### Outlook and risks (staff forecasts and scenarios) - Growth projections and drivers: - GDP growth is forecast to lift to 2¼ percent in 2018 (including earnings from international sporting events). - Growth is forecast to gradually moderate to 1¾ percent over the medium term as the global cycle matures. - The output gap is forecast to close in late-2018 and to turn modestly positive during 2019–21 before growth returns to potential. - Strong external demand and the lower REER will temporarily raise net exports. - Inflation outlook: - Inflation is expected to increase to the upper half of the price stability band (0–2 percent) in 2018–19 on the pass-through of recent nominal effective depreciation. - Subsequently inflation is expected to revert to the mid-point as labor market tightness and capacity utilization return to more normal levels. - Excluding temporary factors, underlying inflation is expected to increase gradually to the middle of the band. - Upside and downside risks: - Positive surprise: GDP growth could exceed forecasts if the global upswing were faster and more sustained than currently envisaged. - Downside risks include: - Rising international trade tensions affecting Switzerland’s externally-oriented economy. - Renewed safe-haven pressures from more uncertain geopolitics, sharply appreciating the franc and eroding competitiveness in less-productive sectors. - Financial uncertainty and exchange rate effects if the “sovereign money” initiative is approved in the June referendum.1 - A resurgence in global inflation triggering abrupt policy tightening by major central banks, leading to volatility spikes in financial markets and spillovers to Swiss property prices. - Uncertainty regarding a framework agreement governing Swiss-EU relations affecting cross-border flows. - Further delays in meeting international standards on corporate income taxation (CIT) reducing Switzerland’s appeal as an investment destination. - Footnote: - 1 The referendum is scheduled for June 10, 2018. The initiative would end fractional reserve banking whereby banks create deposits (which are not fully-backed by—but are fully-convertible into—central bank money), and replace it with a system where all sight deposits are 100 percent-backed by money created by the central bank that enters into circulation “debt free.” ### Authorities’ views (growth, inflation, risks) - The growth outlook has improved considerably, supported by robust external demand. - Following the exit from the exchange rate floor, realized and potential GDP growth decreased and profit margins were squeezed; the acceleration in global output since early 2017 supported a recovery in Swiss activity. - The negative output gap has narrowed and is likely to close in the first half of 2018. - Predicated on sustained robust global growth, Swiss GDP is forecast by the authorities to expand by 2.4 percent in 2018, driven mainly by exports and investment in equipment. - Over the medium term, still-low interest rates and further population growth would sustain growth, albeit at a somewhat slower pace than in 2018. - Under the assumption of a constant policy interest rate at the current level, year-average inflation is forecast to gradually increase to just below 2 percent in 2020. - Key uncertainties highlighted by the authorities: - Global economic conditions and pressures on the Swiss franc. - Protectionist tendencies and disrupted international supply chains reducing external demand and global investment propensity. - Resumption of international political risk renewing demand for the franc as a safe-haven asset. - Abrupt decompression of term premia and reduced risk appetite accompanying tightening by major central banks. - Domestic downside risks in the housing market and construction activity. ### External sector assessment and structural factors - External account features: - Persistent large CA surpluses attributable to trade in goods and services, merchanting and investment income. - Positive net international investment position (NIIP) of 127 percent of GDP, although smaller than implied by cumulating past current account surpluses. - Gross financial flows and stocks are very large relative to GDP due to global systemically-important banks and pass-through investment by foreign-controlled finance and holding companies. - International reserves have risen to 120 percent of GDP (including valuation changes) on several episodes of large-scale purchases as well as more frequent—but smaller—acquisitions. - As of end-March, the REER and NEER were 15 and 31 percent higher than before the crisis. - Staff’s views on structural drivers: - High per capita income, a large prime-saver-aged population alongside rising longevity, and high NIIP whose returns add to the income balance push up the CA. - Switzerland’s attractiveness for multinationals influences merchanting, royalties and income balances. - Stability of the CA to large REER swings is partly explained by shifts in the income balance; the trade balance has been very stable despite variations in real quantities of net exports, suggesting offsetting changes in the terms of trade. - Historical appreciation and SNB intervention: - Since the GFC, the Swiss franc has appreciated considerably driven by safe-haven demand. - The SNB purchased foreign currency to partially lean against appreciation pressures, accumulating a large amount of reserves. Some 85 percent of cumulative fx purchases occurred during surge episodes (defined as monthly purchases in amounts that exceed the average by at least one standard deviation). - The REER significantly overshot its long-term trend; more benign global economic and political outlooks contributed to nominal effective depreciation since mid-2017, while a continued trend appreciation has also been present. - External position assessment (2017): - Cyclically-adjusted CA surplus of 9.6 percent of GDP and an external balance assessment (EBA) norm of 6.1 percent produced a total gap including the unexplained residual equal to 3.5 percentage points of GDP. - Switzerland-specific measurement factors (compensation for valuation losses on some debt instruments and retained earnings of foreign-owned MNCs) amount to around 2¾ percent of GDP. - After accounting for these factors, the remaining CA gap is about 0.8 percent of GDP, with an uncertainty band of ±2 percentage points. - Conclusion: the external sector is within—but close to the upper bound of—the “broadly consistent” range, and measurement issues warrant further exploration. ### Box: Switzerland’s trend real appreciation (key points) - The REER shows a gradual long-term appreciation in addition to high short-term volatility from safe-haven effects. - Depending on estimation method, the annual long-run appreciation has been between 0.5 and 0.9 percent since 1980. - Two theoretical explanations discussed: - Balassa-Samuelson effects: faster productivity growth in tradables relative to nontradables can raise relative nontradable prices and lead to real appreciation. Measured productivity in tradables has grown considerably faster than for nontradables in Switzerland. However, productivity measurement error, especially in knowledge-based sectors, complicates assessment; Natal and others (2015) find no significant role for Balassa-Samuelson effects on the REER. - Dutch disease-like phenomenon: growth of high-income-generating tradable sectors (e.g., pharmaceuticals and merchanting) exerts upward pressure on wages and nontradable prices, producing trend appreciation; this is presented as a plausible explanation for Switzerland’s trend appreciation. ### Monetary and exchange rate policy — background and interventions - Since exiting the exchange rate floor in early 2015, the SNB has used dual instruments to pursue accommodative policy: - Interest rate on sight deposits at the SNB set at -0.75 percent, the lowest in the world.3 - Unsterilized foreign exchange intervention to lean against appreciation pressures. - Official reserves and sight deposits at the SNB have been broadly unchanged since mid-2017, indicating discretionary intervention has ceased, although interest income and dividends on the SNB’s portfolio continue to passively expand its balance sheet. - Footnote: - 3 This is the mid-point of the target range for the three-month LIBOR (minus 1.25 percent to minus 0.25 percent). The negative policy rate applies only to banks’ balances above generally elevated exemption thresholds (tiering), implying that the average rate is considerably less negative than the marginal rate. ### Staff’s views on monetary stance and policy guidance - Assessment of past policy: - The SNB’s two-pronged approach supported the return of modest inflation and recovery of growth while shielding the economy from safe-haven surges. - Limits of the approach: - Keeping policy rate at its current level avoided testing the effective lower bound and preserved bank profit margins, but rate differentials with other central banks compressed and contributed to appreciation pressure. - Foreign currency purchases prevented further tightening but expanded the SNB balance sheet, increasing exposure to valuation risk. - Current stance and recommendations: - The monetary policy stance is appropriate at this point. - Any future tightening should depend on domestic conditions and policy decisions by major central banks. - As domestic conditions strengthen and inflation picks up, monetary policy tightening should be gradual and well communicated, accompanied by tools to help absorb any excess liquidity. - With underlying inflation forecast to rise slowly, the domestic cyclical outlook does not suggest the need for a near-term tightening. - Policy should remain data-dependent to avoid falling behind the curve and requiring potentially-disruptive catchup responses. *International Monetary Fund — Report on the Discussions (SWITZERLAND).* ### 18. Exit from the SNB’s accommodative policies during the current economic upswing is ### 18. Exit from the SNB’s accommodative policies during the current economic upswing is unlikely to return the pre-crisis configuration of tools ### Monetary policy exit and balance-sheet posture - If—as markets currently expect—policy rates of major central banks peak well-below pre-crisis levels, scope for the SNB to raise its policy rate may be constrained, especially if re-widening the negative interest rate differential against other currencies is desired. - The SNB, alongside other central banks, is likely to maintain a considerably larger balance sheet than prior to the crisis, with divestments falling well-short of the previous buildup to avoid excessive tightening of monetary conditions. - Maintaining large reserves makes earnings and equity susceptible to changes in the value of the franc and volatility in asset prices. ### Policy assignment and communication - A clear assignment of policy tools would enhance effective communication and avoid the impression of targeting the exchange rate. - Interest rate is best suited for addressing slow-moving cyclical conditions and expected inflation, given lags in policy transmission. - Intervention should be reserved for responding to volatility associated with foreign exchange market surges that would otherwise cause temporary fluctuations in inflation and output, while still accommodating a modest secular trend real appreciation that derives from rising per capita income. ### Authorities’ views on monetary policy - Monetary policy has been effective at restoring positive inflation in the context of strong safe-haven demand for the Swiss franc. - The SNB’s definition of price stability—CPI inflation between 0 and 2 percent—accommodates some pass-through of exchange rate fluctuations. - Dual instruments of negative interest rates and foreign exchange intervention, as required, have been necessary to mitigate strong appreciation pressures and stabilize inflation. - Exemption thresholds have helped limit the effects of the negative policy rate on banks’ profitability; there are no signs of cash hoarding and cashless payment transactions have risen. - The prevailing monetary policy remains appropriate. Underlying inflation is expected to remain low despite the negative output gap having narrowed, suggesting maintaining the current expansionary monetary policy is warranted. - Policy decisions are based on the forecast for inflation, which is influenced by the interest rate differential with major reserve-currency central banks. - Continued normalization of policies by these large central banks would increase room for maneuver for others. - Foreign exchange purchases have diminished alongside moderating safe haven pressures; with the franc remaining a safe-haven currency and foreign exchange market conditions still fragile, the SNB reiterates its willingness to intervene as needed. - Tightening prematurely could reignite exchange rate pressures and undermine price stability. - Any financial stability concerns should be addressed using macroprudential, rather than monetary, policies. ### Fiscal policy — background and staff views Findings: - Switzerland’s fiscal position is strong, with sustained small surpluses and declining public debt. - The federal-level “debt brake” rule, introduced in 2003, together with similar rules in many cantons, has reduced general government debt from around 60 percent of GDP to 42 percent of GDP in 2017. - The federal rule calls for a structural (cyclically-adjusted) balance on an ex ante basis; in case of ex post spending overruns, offsetting structural surpluses are required in subsequent years. No similar requirement exists for ex post under-spending. - Since 2006, spending has been below budgeted amounts each year, on average by 0.3 percent of GDP. - New global-budgeting procedures (complementing line-item budgeting) were introduced in 2017 to achieve more-complete execution of appropriated expenditures, but underspending continued. Staff recommendations and views: - Recent measures to curtail within-year underspending are welcome, although the tightening bias in the rule’s design remains. - New measures to raise spending execution closer to budgeted levels (including reserve funds to carry forward allocations to subsequent years) are expected to gain effectiveness over time. - Spending outside the perimeter of the rule has risen, reducing budget transparency and efficiency. - Preferably, the rule’s ex post provision would operate symmetrically—permitting spending to catch up in the following year—to achieve the stated objective of structural balance and allow the rule to better serve its countercyclical function. - With the public debt ratio projected to decrease to 34 percent of GDP by 2023, consideration could be given to allowing a larger (smaller) countercyclical response when debt is below (above) long-term sustainable levels. - The substantial fiscal space affords valuable flexibility for a discretionary stimulus during a severe or prolonged downturn; this contrasts with monetary policy where further large-scale accommodation could be constrained. - The debt brake rule envisages utilizing fiscal policy to respond to significant adverse events through the “exceptional financial circumstances” clause, which was invoked during the GFC. - A symmetric rule would support a better macroeconomic policy mix; a somewhat looser fiscal policy would relieve pressure on monetary policy tools during periods of low inflation and, over the long term, increase the contribution of domestic demand. Authorities’ views (fiscal): - The debt brake rule simultaneously delivers debt reduction and economic stabilization, and enjoys broad popular support. - Annual underspending and its macroeconomic consequences are modest. The case for removing the structural surplus by raising spending, rather than lowering taxes, is not obvious as available funding for public infrastructure and education at the federal level is adequate. - Simplified procedures for within-year supplementary budgets are under consideration. - The Federal Council will consider early next year whether structural surpluses should be used to compensate for potential revenue loss from tax reforms or to finance higher expenditure. - Policy assignment for economic stabilization depends on the nature of the shock: fiscal spending is effective for domestic-demand shortfalls; monetary policy is more appropriate for exchange rate shocks, although fiscal automatic stabilizers still contribute. ### Challenge Two — Financial stability amid tightening global conditions Background findings: - Private sector leverage and real estate exposure is high. - Growth rate of mortgage claims has slowed from a high base, but these claims increase by about 5 percentage points of GDP per year. - Liquidity and capital of domestically-focused banks exceed regulatory minima, and profits have held up despite narrowing interest spreads. - Following macroprudential tightening measures during 2012–14, property prices stabilized but have risen again recently alongside moderating mortgage interest rates. - Property prices in Geneva and Zurich have been among the fastest growing in the world; however, standard housing-price metrics do not indicate significant misalignment. - Newer-vintage mortgages appear riskier, with nearly half exceeding indicative affordability thresholds and also carrying higher loan-to-value ratios, especially those for purchasing investment properties. - The banking sector encompasses about 260 banks, with the two global systemically-important banks (G-SIBs) and three other domestic systemic banks accounting for about 58 percent of system-wide assets. - Eighty six percent of bank loans are for mortgages (83 percent for G-SIBs). - Households’ liabilities are at 130 percent of GDP. Macroprudential regulations (selected, as reported) - Loan-to-value (LtV): For new mortgages, a minimum 10 percent cash downpayment, excluding use of borrower’s pension savings — 07/2012 FINMA-approved self-regulation. - LtV risk weights: For that part of a residential mortgage in excess of an 80 percent LtV ratio, 100 percent risk weighting is applied; for the part with an LtV between two-thirds and 80 percent, the risk weight is 75 percent; for the part below an LtV of two-thirds, the risk weight is 35 percent — 01/2013 Legal. - Amortization: Amortize to an LtV ratio of two-thirds within 20 years — 07/2012 FINMA-approved self-regulation; Amortize to an LtV ratio of two-thirds within 15 years, according to a linear schedule — 09/2014 FINMA-approved self-regulation. - Countercyclical capital buffer (CCyB): CCyB set at 1 percent of direct and indirect exposures secured with Swiss residential property — 09/2013 Legal; CCyB on Swiss residential property exposures raised to 2 percent — 06/2014 Legal. - Note: The CCyB was introduced at zero in July 2012, with a maximum ceiling of 2½ percent. Switzerland was the first country to activate the CCyB. Staff’s views on financial stability and recommended measures: - Considerable progress has been made in strengthening banking sector resilience; capital and liquidity buffers have increased across all categories of banks. - Sustained low interest rates are encouraging risk taking in some market segments; low and flattened yield curves and competition from nonbanks put downward pressure on loan interest rates even as most retail deposit rates remain floored at zero. - Lending standards have slipped, with a significant share of new mortgages clustered near the indicative minimum down-payment level and falling short of loan affordability norms. - New complex financial products have not been tested in a period of heightened financial market volatility and could impact profits of G-SIBs. - Reinforcing the macroprudential framework for real estate is needed. A gradual unwinding of ultra-loose global financial conditions would help, while a rapid tightening could be disruptive. - Measures requiring banks to hold additional capital if they assume more risk help absorb future losses but may not curb risk buildup when banks have ample capital buffers or when higher risk is priced into interest rates. - Current self-regulation by banks may not be sufficiently timely or fully internalize system-wide risk; a more-flexible system for amending regulation would ensure timelier policy responses. Specific recommended actions: - Adopt stricter regulatory limits on loan-to-value and debt-to-income ratios, with only limited exemptions allowed. - Remove the tax deductibility of mortgage interest payments for private households alongside elimination of taxation of imputed rental income. - Mortgages on investment property should carry a surcharge on the applicable risk weight in a manner consistent with Basel III requirements as published in December 2017. - Intensify monitoring of individual banks that share similar business models, especially in regionally-concentrated markets. - Remove guarantees on cantonal banks. - Subject nonbank mortgage lending to similar macroprudential standards as for banks, to prevent regulatory arbitrage. - Step up stress testing and building defenses against cybersecurity attacks; strengthen supervisory focus on cyber risk. - Financial sector oversight should remain vigilant and independent. Authorities’ views (financial stability): - Misalignment in the mortgage and real estate markets has inched up; investor demand for rental apartments and other investment properties is high. - Leverage in the build-to-let segment is high, accounting for about one-third of bank mortgages. - Loan affordability risk has risen, with about half of new loans issued exhibiting increased loan-to-income ratios. - Nonbanks, while a small share of the mortgage market, exert downward pressure on banks’ lending rates. - Stress tests indicate domestically-oriented banks have sufficient capital to cope with a sharp increase in interest rates or correction in house prices, although a combined shock could have significant effects on some banks. - Previous measures to contain financial stability risks were successful; further measures are being considered. - Demand-side measures (minimum down-payment and amortization requirements) may be more effective than capital-based measures at preventing risk buildup, though sufficient capital remains necessary to absorb losses. - Greater differentiation of risk weights will be introduced between income-generating and owner-occupied mortgages and among different loan-to-value buckets, consistent with new Basel III guidelines. - With changes in mandatory regulation requiring legal amendments, voluntary self-regulation by banks may be more timely; measures must be endorsed and supervised by FINMA. - Eliminating mortgage interest deductibility for individuals and imputed rental income from the tax base would reduce incentives for households to maintain high debt. - Switzerland exceeds global minimum standards regarding regulation of systemic banks; preserving independent and robust supervision is critical. *Source: cr18173 - 18. Exit from the SNB’s accommodative policies during the current economic upswing is unlikely to return the pre-crisis configuration of tools* ### 35. Long-term sustainability of the public (first-pillar) and occupational (second-pillar) ### Long-term sustainability of the public (first-pillar) and occupational (second-pillar) ### Pension system sustainability — findings and challenges - A referendum proposal that was voted down in late 2017 would have: - raised the retirement age for women from 64 to 65 years (same as for men), - lowered the minimum conversion rate at which pension savings are converted into annuities in the private defined-contribution pillar, - raised the VAT rate by 0.3 percentage points with earmarking to support the public pay-as-you-go pension pillar. - Implications for the long-term trajectory of public debt will depend on population growth, labor force participation, number of years in work and life expectancy. - Life expectancy in Switzerland is high and rising, but has not been reflected in the official retirement age. - Longer time in retirement encourages increased saving, compressing investment yields and inducing more saving, supported by tax incentives for pension contributions. - Recommendations for improving sustainability: - Working longer or linking the official retirement age to life expectancy is an effective way to improve system viability and ensure sufficient post-retirement resources. - For the second pillar, sustainability would be improved by linking the guaranteed conversion rate to the market yield on a long-term sovereign bond and life expectancy at retirement. - Immigration and raising the full-time employment of women—whose participation is discouraged by high childcare costs—remain important sources of new pension contributors. - Curtailing incentives for early retirement is under consideration. ### Labor productivity, sectoral heterogeneity, and competitiveness - Considerable heterogeneity exists across sectors in terms of labor productivity, consistent with the uneven effect of real appreciation. - Some sectors adapted via increased foreign procurement or relocating production abroad; more immobile sectors (tourism, retail trade) that face foreign competition and are relatively labor intensive were more heavily impacted. - High value-added sectors raise wages and prices, producing real appreciation that may encourage offshoring of production with re-shoring of profits, gradually reducing GDP and CA sensitivity to the exchange rate. - Policy priorities to sustain competitiveness and productivity: - Improve competitiveness in sectors where productivity growth is lagging. - Adopting the proposed CIT reform could lower the cost of investment for SMEs. - Continue adequate funding of STEM education and expand the pool of highly-skilled Swiss and foreign workers to sustain innovation and life-long learning. - These measures would help preserve a high-and-stable share of labor income in GDP and relatively-low inequality of post-redistribution income. ### Corporate Income Tax (CIT) reform — description and implications (Box 4) - Current system: - Combined (federal, cantonal, and municipal) weighted effective tax rate on corporate income is about 19.6 percent, with considerable heterogeneity across cantons. - Preferential tax regimes significantly reduce effective rates for Swiss-based companies. - “Tax Proposal 17” foresees: - phasing out preferential tax regimes to meet international standards; - introducing tax deductions for R&D expenditure; - introducing a patent box regime offering a lower effective CIT rate on income from qualified intellectual property assets. - The reform maintains federal structure allowing cantons and municipalities to offer different CIT rates, provided a minimum level of taxation is applied. - Expected outcomes: - The new expected combined CIT rate (13.9 percent unweighted average)—together with incentives for innovation—would maintain Switzerland’s position as a relatively low tax location while meeting international standards. - Following the reform, some MNCs would face a higher CIT rate, while others—mainly domestic firms—would see a tax cut. The patent box mitigates increases for qualifying MNCs, but rates for firms that previously benefited from preferential regimes would remain higher than pre-reform. - Eliminating preferential regimes can make cross-cantonal CIT differences significantly more important in firms’ location and investment decisions; potential relocation across cantons or abroad could affect aggregate revenue, and effects remain somewhat uncertain. - Revenue effects on individual cantons depend on the share of CIT revenue they derive from non-MNCs (which will benefit from a tax cut) and the revenue elasticity of taxable income. - Implementation timeline and compliance: - The major part of the reform—abolishing preferential tax regimes—would enter into effect in 2020, at the earliest. - Following the rejection in a referendum of an earlier proposal, parliament is discussing a new proposal for reforming CIT that abolishes preferential tax regimes, in compliance with the OECD’s Base Erosion and Profit Shifting project and initiatives by the EU, including by equalizing treatment of multinationals and local firms. ### AML/CFT, tax transparency, and regulatory environment - Considerable progress has been made in addressing AML/CFT deficiencies; effective implementation should continue to address significant risks arising from tax evasion, private wealth management, and crypto-assets. - The automatic exchange of information on tax matters with the EU and other states and territories began in 2018 and the list of countries has been broadened. - Priority should be given to addressing shortcomings identified in the 2016 FATF mutual evaluation report (including enhancing preventative measures, entity transparency and international cooperation). - Switzerland’s proactive and balanced approach to fintech and initial coin offerings is consistent with receptiveness to cutting-edge technologies; authorities are cognizant of associated money laundering risks and require controls when converting into and out of fiat money. ### Staff views and macroeconomic assessment - Pension reform is essential given population aging and rising life expectancy; adjustments to retirement age and linking conversion rates to market yields and life expectancy are recommended. - The economy has largely absorbed substantial real appreciation since the global financial crisis via efficiency gains, accommodative monetary policy and robust global growth; growth has picked up, the output gap narrowed, and inflation is above zero but still low. - Prospects and risks: - GDP growth is forecast to rise to 2¼ percent in 2018 and then moderate gradually to 1¾ percent over the medium term. - Outlook could be affected by rising international trade tensions, renewed geopolitical risk, abrupt tightening of financial conditions, high mortgage debt and property prices, delays with CIT reform, adoption of the “sovereign money” initiative and lack of clarity on long-term Swiss-EU relations. - External position: - Saving net of investment is pushed up by high per-capita income, the large prime-saver-aged population and rising longevity. - Excluding items not appropriately treated in conventional measures, the current account is close to the level predicted on the basis of Switzerland’s economic fundamentals. - The overvaluation of the REER that followed the exit from the exchange rate floor in 2015 had been unwound by 2017 through equilibrium appreciation and depreciation of the actual REER. - Monetary policy: - The current accommodative monetary policy remains appropriate; no foreign exchange purchases occurred since mid-2017. - The policy interest rate should remain on hold for now; future decisions should depend on domestic conditions and the inflation outlook while considering actions by major central banks. - A clearer assignment of policy tools would enhance communications: interest rate for slow-moving cyclical conditions and foreign exchange intervention for countering strong exchange market pressures. - Fiscal policy and macroprudential stance: - Operating the fiscal debt brake rule in a symmetrical manner would support a more balanced macroeconomic policy mix; the tightening bias contributed to a rapid and sizable reduction in public debt and substantial fiscal space now exists for adopting a balanced structural position. - Allowing the rule’s ex post provision to operate symmetrically—such that underspent amounts could be carried forward—would bring greater transparency and efficiency. - Targeted macroprudential measures are needed to contain risk-taking in the property market: - Stricter regulatory limits on loan-to-value and debt-to-income ratios should accompany higher risk weights on mortgages on investment property. - Capital-based measures alone may not prevent build-up of risk; relying on self-regulation by banks may not produce adequate or timely tightening. - Eliminating the tax deductibility of mortgage interest payments from the personal income tax, and removing imputed rental income from the tax base, would reduce incentives for leveraged real estate acquisition. - Financial supervision should remain vigilant and independent. - Continued emphasis urged on meeting international standards, adopting CIT reform promptly to dispel investment uncertainty, encouraging R&D and SME investment, and balancing receptiveness to innovation with protection of financial stability and integrity. *Source: IMF staff report (Chapter 35 excerpt).* ### 51. It is recommended that the next Article IV consultation be held on the standard ### It is recommended that the next Article IV consultation be held on the standard 12-month cycle. ### Recommendation - It is recommended that the next Article IV consultation be held on the standard 12-month cycle. ### Economic outlook and key macro projections (Table 1: Selected Economic Indicators, 2016–23) - Real GDP (percent change): 2016 1.4; 2017 1.1; 2018 2.3; 2019 2.0; 2020 1.9; 2021 1.7; 2022 1.7; 2023 1.7 - Total domestic demand: 2016 0.4; 2017 0.3; 2018 1.5; 2019 1.5; 2020 1.5; 2021 1.4; 2022 1.4; 2023 1.3 - Private consumption: 2016 1.5; 2017 1.2; 2018 1.5; 2019 1.3; 2020 1.5; 2021 1.5; 2022 1.5; 2023 1.5 - Gross fixed investment: 2016 3.0; 2017 3.2; 2018 2.5; 2019 2.0; 2020 1.9; 2021 1.1; 2022 1.1; 2023 1.1 - Inventory accumulation: 2016 1/ -1.4; 2017 -1.3; 2018 -0.4; 2019 0.0; 2020 0.0; 2021 0.0; 2022 0.0; 2023 0.0 - Foreign balance (contribution to growth) 1/: 2016 1.1; 2017 0.8; 2018 1.1; 2019 0.7; 2020 0.6; 2021 0.5; 2022 0.5; 2023 0.5 - Nominal GDP (billions of Swiss francs): 2016 659.0; 2017 668.2; 2018 691.4; 2019 713.1; 2020 733.7; 2021 753.3; 2022 773.4; 2023 794.0 - Gross national saving (percent of GDP): 2016 32.5; 2017 33.5; 2018 33.9; 2019 33.4; 2020 33.5; 2021 33.5; 2022 32.8; 2023 32.5 - Gross domestic investment (percent of GDP): 2016 23.1; 2017 23.7; 2018 23.6; 2019 23.6; 2020 23.8; 2021 23.8; 2022 23.3; 2023 23.2 - Current account balance (percent of GDP): 2016 9.4; 2017 9.8; 2018 10.2; 2019 9.8; 2020 9.7; 2021 9.6; 2022 9.5; 2023 9.3 - Consumer price index (period average, percent change): 2016 -0.4; 2017 0.5; 2018 1.0; 2019 1.1; 2020 1.0; 2021 1.0; 2022 1.0; 2023 1.0 - Unemployment rate (percent): 2016 3.3; 2017 3.2; 2018 3.0; 2019 3.0; 2020 2.9; 2021 2.8; 2022 2.8; 2023 2.8 - Potential output growth (percent): 2016 1.6; 2017 1.5; 2018 1.6; 2019 1.6; 2020 1.6; 2021 1.6; 2022 1.5; 2023 1.5 - General government balance (percent of GDP): 2016 0.4; 2017 0.4; 2018 0.6; 2019 0.4; 2020 0.4; 2021 0.3; 2022 0.3; 2023 0.3 - General government gross debt (percent of GDP) 2/: 2016 41.9; 2017 41.8; 2018 40.3; 2019 38.7; 2020 37.3; 2021 36.1; 2022 34.9; 2023 33.8 ### External sector and balance of payments (Table 2: Balance of Payments, 2016–23) - Current account (billions CHF): 2016 62; 2017 66; 2018 71; 2019 71; 2020 72; 2021 73; 2022 74; 2023 74 - Goods balance (billions CHF): 2016 49; 2017 48; 2018 55; 2019 52; 2020 57; 2021 58; 2022 63; 2023 66 - Exports (billions CHF): 2016 311; 2017 309; 2018 330; 2019 340; 2020 356; 2021 371; 2022 389; 2023 407 - Imports (billions CHF): 2016 262; 2017 260; 2018 275; 2019 288; 2020 299; 2021 314; 2022 326; 2023 341 - Service balance (billions CHF): 2016 19; 2017 19; 2018 14; 2019 23; 2020 22; 2021 24; 2022 25; 2023 26 - Net primary income (billions CHF): 2016 49; 2017 11; 2018 55; 2019 57; 2020 6; 2021 7; 2022 6; 2023 (blank in source) - Net secondary income (billions CHF): 2016 -10; 2017 -11; 2018 -10; 2019 -10; 2020 -13; 2021 -14; 2022 -22; 2023 -25 - Private capital and financial account (billions CHF): 2016 77; 2017 39; 2018 60; 2019 51; 2020 57; 2021 56; 2022 58; 2023 58 - Financial account (billions CHF): 2016 74; 2017 53; 2018 66; 2019 60; 2020 64; 2021 66; 2022 66; 2023 66 - Net IIP (percent of GDP): 2016 118.8; 2017 126.9; 2018 121.5; 2019 123.0; 2020 125.4; 2021 127.9; 2022 129.7; 2023 131.5 - Official reserves (billions of U.S. dollars, end-period): 2016 64; 2017 44.3; 2018 76.2; 2019 2 (ellipsis in source) - Current account (percent of GDP): 2016 9.4; 2017 9.8; 2018 10.2; 2019 9.8; 2020 9.7; 2021 9.6; 2022 9.5; 2023 9.3 - Exports (percent of GDP): 2016 47.2; 2017 46.2; 2018 47.8; 2019 47.7; 2020 48.5; 2021 49.3; 2022 50.3; 2023 51.3 - Imports (percent of GDP): 2016 39.8; 2017 39.0; 2018 39.8; 2019 40.4; 2020 40.7; 2021 41.6; 2022 42.1; 2023 42.9 ### Swiss National Bank balance sheet (Table 3: SNB Balance Sheet, 2010–17) - Total assets (millions CHF): 2010 269,955; 2011 346,079; 2012 499,434; 2013 490,382; 2014 561,202; 2015 640,152; 2016 746,502; 2017 843,306 - Gold (millions CHF): 2010 43,988; 2011 49,380; 2012 50,772; 2013 35,565; 2014 39,630; 2015 35,467; 2016 39,400; 2017 42,494 - Foreign currency reserves (millions CHF): 2010 203,810; 2011 257,504; 2012 432,209; 2013 443,275; 2014 510,062; 2015 593,234; 2016 696,104; 2017 790,125 - Sight deposits (millions CHF): 2010 48,917; 2011 216,701; 2012 369,732; 2013 363,910; 2014 387,666; 2015 469,034; 2016 530,049; 2017 573,679 - Currency in circulation (banknotes, millions CHF): 2010 51,498; 2011 55,729; 2012 61,801; 2013 65,766; 2014 67,596; 2015 72,882; 2016 78,084; 2017 81,639 - Provisions and equity capital (millions CHF): 2010 42,591; 2011 53,123; 2012 58,075; 2013 48,023; 2014 86,305; 2015 61,053; 2016 84,527; 2017 137,168 - Balance sheet, percent of GDP: 2010 44.3; 2011 55.7; 2012 79.7; 2013 76.8; 2014 86.4; 2015 97.9; 2016 113.3; 2017 126.2 - Monetary base (millions CHF): 2010 90,208; 2011 137,728; 2012 284,381; 2013 360,765; 2014 375,305; 2015 455,863; 2016 504,140; 2017 551,849 ### General government finances (Tables 4 and 5) - General government (billions CHF): Revenue 2016 220; 2017 223; 2018 231; 2019 238; 2020 245; 2021 252; 2022 258; 2023 265 - General government (billions CHF): Expenditure 2016 217; 2017 220; 2018 227; 2019 235; 2020 243; 2021 249; 2022 256; 2023 263 - General government net lending/net borrowing (billions CHF): 2016 3; 2017 3; 2018 4; 2019 3; 2020 3; 2021 3; 2022 3; 2023 2 - General government gross debt (percent of GDP): 2016 41.9; 2017 41.8; 2018 40.3; 2019 38.7; 2020 37.3; 2021 36.1; 2022 34.9; 2023 33.8 - Confederation (Federal government) gross debt (percent of GDP): 2016 19.8; 2017 19.0; 2018 17.8; 2019 16.8; 2020 16.1; 2021 15.5; 2022 15.0; 2023 14.4 - General government revenue (percent of GDP): consistently 33.4 from 2016 through 2023 in projections - General government expenditure (percent of GDP): 2016 33.0; 2017 33.0; 2018 32.8; 2019 33.0; 2020 33.1; 2021 33.1; 2022 33.1; 2023 33.1 ### Monetary policy, inflation, and interest rate indicators (Figures 2–3 highlights) - Money market rates (2010–2018): policy-related series include Target Range, SARON, and 3M Libor (charts present 2010–2018 dynamics) - CPI inflation (y/y percent change): charted 2010–2018 showing CPI and core inflation (series values in figures) - Real lending rates (Dec-17): Current account advance facilities; Investment loans with fixed interest rates; Mortgages with fixed interest rates (levels indicated in figures) - Policy rate and real policy rate series shown 2010–2018 (policy rate and Real policy rate 1/ plotted) ### Financial sector and bank soundness (Figures 4–5 and Table 6) - 10-Year government bond yields (Percent) series for Switzerland, Germany, United States (charts up to Apr-18) - Credit growth (nominal credit, y-o-y, percent) series for household mortgages; total credit to NFCs; credit to domestic nonbanks; non-mortgage credit to NFCs (2009–2017 charted) - Indicators for Global Systemic Banks (2006–17): Switzerland numbers for Credit Suisse and UBS; metrics include Wholesale Funding (percent of total funding), CDS Spreads, Equity Prices (2011=100), RWA to Assets (percent), Tangible Common Equity to Tangible Assets (percent), Loans-to-deposits and Liquid assets-to-deposits and borrowings (2017) - Bank soundness indicators (Table 6): - Regulatory capital as percent of risk-weighted assets 1/: 2010 17.1; 2011 16.6; 2012 16.9; 2013 18.7; 2014 16.6; 2015 17.0; 2016 16.1; 2017:Q2 17.4 - Regulatory Tier I capital as percent of risk-weighted assets 1/: 2010 15.4; 2011 15.4; 2012 15.7; 2013 17.8; 2014 16.1; 2015 16.6; 2016 15.7; 2017:Q2 17.0 - Non-performing loans as percent of gross loans: 2010 0.9; 2011 0.8; 2012 0.8; 2013 0.8; 2014 0.7; 2015 0.7; 2016 0.7; 2017:Q2 0.7 - Non-performing loans net of provisions as percent of tier I capital: 2010 6.0; 2011 5.4; 2012 5.0; 2013 4.5; 2014 3.7; 2015 3.8; 2016 3.9; 2017:Q2 3.0 - Households share of sectoral distribution of bank credit to the private sector (percent): 2010 68.3; 2011 68.8; 2012 68.4; 2013 68.0; 2014 68.6; 2015 69.5; 2016 69.4; 2017:Q2 69.4 - Commercial real estate, IT, R&T share (percent): 2010 12.1; 2011 12.4; 2012 12.8; 2013 13.3; 2014 13.6; 2015 13.6; 2016 13.8; 2017:Q2 13.1 - Earnings and profitability (ROAA): 2010 0.3; 2011 0.5; 2012 0.1; 2013 0.3; 2014 0.1; 2015 0.2; 2016 0.3; 2017:Q2 0.3 - Liquidity metrics and net long position in foreign exchange as percent of capital series are provided in Table 6 (including negative net long positions) ### Housing and household debt (Figure 7 highlights) - Nominal house transaction prices (1970=100) series for Rental apartments, Single family homes, Owner occupied apartments (1985–2017) - Price-to-Rent Ratio (Q4 1992=100) and Price-to-Income Ratio (Q4 1992=100) series 1985–2017 - Mortgages (percent of GDP) series 2000–2017 (plotted) - Total household debt, 2016 (percent of net disposable income) chart comparing countries with Switzerland (CHE) shown _International Monetary Fund staff report based on IMF country report content (Switzerland)._ ### Annex I. Risk Assessment Matrix ### Annex I. Risk Assessment Matrix ### Global Risks - Tighter global financial conditions - Relative Likelihood: High - Expected Impact: Medium - Key channels and vulnerabilities: - Continued monetary policy normalization and increasingly stretched valuations across asset classes could lead to sudden, sharp increases in interest rates and associated tightening of financial conditions. - Higher debt service and refinancing risks could stress leveraged firms, households, and vulnerable sovereigns, including through capital account pressures in some cases. - The nonfinancial private sector, especially households, have a large debt stock (although financial assets of households are larger than liabilities). An abrupt increase in interest rates could stress leveraged borrowers. - An abrupt increase in interest rates may reduce real estate prices, lowering the value of collateral for mortgages (85 percent of bank loans). - Higher interest payments and negative wealth effects could curtail consumption and investment. - Policy Response: - A pre-emptive slowing of bank lending to the private sector (which is expanding by 5 percentage points of GDP per year) through macroprudential measures is needed to prevent a further increase in vulnerabilities. - In the event of a growth slowdown, and given substantial fiscal space, a countercyclical discretionary fiscal stimulus would be warranted. - Further pressure on traditional bank business models - Relative Likelihood: Medium - Expected Impact: Medium - Key channels and vulnerabilities: - Legacy problems and potential competition from non-banks curtail banks’ profitability globally. - Loss of confidence if profitability challenges are not addressed could increase the risk of distress at one or more major banks with possible knock-on effects on the broader financial sector and for sovereign yields in vulnerable economies. - Migration of activities outside of the traditional banking sector, including provision of financial services by fintech intermediaries, raises competitive pressures on traditional banks, making risk monitoring and mitigation more difficult. - The banking sector accounts for a sizable share of Swiss GDP and employment. Pressure on traditional bank business models would adversely affect sector profitability unless banks actively adjust to the new business environment. - Such pressures could arise from the need to comply with new international initiatives on AML/CFT or to curtail bank secrecy and tax avoidance schemes. Brexit could affect Swiss G-SIBs’ EU funding models. - Policy Response: - Strengthen the macroprudential framework and bank and insurance supervision to help curtail vulnerabilities. - Ensure full compliance and effective implementation of relevant international tax-sharing and AML standards. - Make preparations for alternative EU banking “gateways.” - Cyber-attacks on interconnected financial systems and broader private and public institutions - Relative Likelihood: Medium - Expected Impact: Medium - Key channels and vulnerabilities: - Cyber-attacks would disrupt financial operations and encourage the adoption of substitute forms of financial intermediation, including fintech. - Policy Response: - Ensure adequate cyber-security defenses in vital infrastructure (finance, energy, telecommunications, transportation). - Develop strategies to limit financial stability risks that could arise in the context of fintech. - Policy uncertainty - Relative Likelihood: Medium - Expected Impact: Medium - Key channels and vulnerabilities: - Two-sided risks to U.S. growth with uncertainties about the positive short-term impact of the tax bill on growth and the extent of potential medium-term adjustment to offset its fiscal costs. - Uncertainty associated with negotiating post-Brexit arrangements and NAFTA and associated market fragmentation risks. - Evolving political processes, including elections in several large economies, weigh on the whole on global growth. - The Swiss economy is highly integrated in world trade and financial markets. Policy uncertainty would disrupt these flows. - Depending on the UK’s status after Brexit, the “passporting” rights of UK-based subsidiaries of Swiss banks to the EU market may be disrupted and need to be re-established. - Policy Response: - Continue to work with international partners to secure the benefits of economic integration and cooperation across Europe and internationally. - Structurally weak growth in key advanced economies - Relative Likelihood: High - Expected Impact: Medium - Key channels and vulnerabilities: - Low productivity growth (U.S., euro area and Japan), high debt, and failure to fully address crisis legacies by undertaking structural reforms amidst persistently low inflation (euro area and Japan) undermine medium-term growth. - The Swiss economy is very open to trade and financial flows. A slowdown in Europe or the US – two of its main trading partners – would dampen Swiss GDP growth. - Major emerging economies (especially in Asia) are an important source of external demand. - Policy Response: - Improve domestic productivity to increase resilience and competitiveness. - Allow full operation of the structural-balance fiscal rule and, if the downturn is sustained, allow a discretionary fiscal stimulus. - Some room for a modest decrease in the policy interest rate may also exist. ### Country-Specific Risks - Resumption of safe haven inflows in response to renewed global risk-off sentiment - Relative Likelihood: Medium - Expected Impact: High - Key channels and vulnerabilities: - Switzerland is a major financial center and is seen as a safe haven. Flight to safety would lead to sharp appreciation pressures on Swiss franc assets. - Franc appreciation adds to deflation and hurts Swiss competitiveness and growth. - Policy Response: - Use targeted foreign exchange purchases to prevent a sharp appreciation of the Swiss franc. - Allow full operation of the structural-balance fiscal rule, but allow a temporary discretionary fiscal stimulus if the downturn is deep and/or sustained. - Political events that result in a reversal of goods, labor, and financial integration with the EU - Relative Likelihood: Low - Expected Impact: High - Key channels and vulnerabilities: - Introducing immigration quotas or restricting financial and goods flows could restrict access to skilled workers and EU markets, weakening long-run growth. - Unilaterally altering migration arrangements with the EU could affect other contracts and areas of cooperation. - Policy Response: - Seek to limit economic fallout by preserving efficient flows of goods, labor and financial services with the EU. - Delay in adopting an internationally-compliant CIT or approval of the “sovereign money” initiative - Relative Likelihood: Low - Expected Impact: High - Key channels and vulnerabilities: - Further postponement of CIT reform could reduce Switzerland’s appeal as an investment destination, with considerable knock-on effects to real activity. - Adoption of the “sovereign money” initiative could create uncertainty in the financial sector, and weaken the Swiss franc. With a less flexible monetary policy growth would likely be lower and more volatile. - Policy Response: - Use the “exceptional” circumstances clause in the fiscal rule to inject a discretionary stimulus. *International Monetary Fund staff assessments as presented in the Risk Assessment Matrix.* ### 11. The EBA REER index and level models suggest Switzerland’s REER was 15–23 percent ### 11. The EBA REER index and level models suggest Switzerland’s REER was 15–23 percent ### REER assessment and key quantitative findings - The EBA REER index and level models suggest the average REER in 2017 was 15–23 percent overvalued. - Based on the CA gap, staff assesses the REER gap to have been in the range of [-5.3, +2.3] percent in 2017. - The CPI-based REER appreciated by 25 percent during 2007–17, including two episodes of rapid appreciation. - The average REER for 2017 weakened by 2 percent relative to the 2016 average. - As of March 2018, the REER had weakened a further 4 percent (compared with the 2017 average). - The REER has depreciated somewhat during early 2018. - The empirical models’ large estimated REER gap largely reflects the “reversion to trend” properties of the model in the context of prior rapid appreciation episodes. - Measurement issues mean the models may not fully capture secular improvement in productivity, especially in knowledge-based sectors. ### Current account, CA gap, and interactions with REER - Switzerland has run large CA surpluses, averaging about 10 percent of GDP since 2006. - The CA surplus increased to 9.8 percent of GDP in 2017 from 9.4 percent of GDP in 2016. - Cyclically-adjusted CA surplus: 9.6 percent of GDP. - EBA CA norm: 6.1 percent of GDP. - Total CA gap (including unexplained residual): 3.5 percentage points of GDP in 2017. - Policy gap contribution to the CA gap: -0.5 percentage points (mainly due to excessive private sector credit). - Switzerland-specific measurement adjustments (retained earnings on portfolio equity investment; compensation for valuation losses on fixed income securities) reduce the underlying CA by about 2¾ percent of GDP. - After accounting for these factors (and the lagged NFA contribution to the norm), staff estimates a remaining CA gap of about 0.8 percent of GDP (with a range of ±2 percentage points). ### External position, assets, liabilities, and reserves (relevant context) - Net international investment position (NIIP): 127 percent of GDP at end-2017. - Gross foreign asset and liability positions: 714 and 587 percent of GDP, respectively, at end-2017. - NIIP-to-GDP ratio is about unchanged from its peak in 2011 at 133 percent, then declined steadily, and recovered by around 35 percentage points from 2015 to 2017 partly on account of valuation gains. - Since 2007, cumulative net inflows amounted to about 75 percent of GDP. - Foreign exchange reserves: USD811 bn (120 percent of GDP) at end-2017; up USD 132 bn (including valuation changes) since end-2016. - About 75 percent of reserves were accumulated during 2009–15. - Purchases by the SNB ceased in mid-2017; purchases had been used periodically to counter safe-haven surges. ### Overall assessment and interpretation - Overall assessment: Switzerland’s external position was broadly consistent with medium-term fundamentals and desirable policies in 2017, although this assessment is subject to especially-high uncertainty. - REER overvaluation that followed the exit from the exchange rate floor in 2015 had been unwound by 2017; were the recent real depreciation to continue, future assessments could be affected. - The estimated REERs, which exhibit an increasing trend, reflect mainly the influence of per capita income and net foreign assets. ### Policy recommendations and implications - Macroeconomic policies should be geared toward ensuring balanced contributions to GDP growth from domestic and external demand. - Move to—and maintain—a structurally-neutral fiscal stance to ease the burden on monetary policy that faces operational limits during periods of economic weakness or safe-haven appreciation pressures. - Monetary policy should continue to accommodate a modest secular trend real appreciation via timely adjustment of the policy interest rate to keep inflation within target. - Foreign currency intervention should be reserved for addressing large exchange market pressures that would otherwise cause temporary volatility in inflation and output. - Reforming the corporate income tax would encourage investment by SMEs, thereby reducing net saving. *Source: IMF staff (Switzerland – External Sector Assessment and related sections).* ### Annex IV. Status of Previous Recommendations ### Annex IV. Status of Previous Recommendations ### Fiscal Policy - Recommendation: Utilize fully the room available under the existing fiscal debt brake framework. - Finding: Budget underruns at the federal-level have continued. A review of the design of the debt brake rule found systematic underruns, but new measures are under consideration. - Recommendation: Adjust pension system parameters to protect the viability of the social safety net. - Finding: The ‘reform 2020’ package was voted down in a referendum in September 2017. - Recommendation: Corporate income tax reform is needed to comply with international standards, and may also help raise investment by small and medium-sized domestic firms. - Finding: A corporate tax reform package intended to comply with international obligations was voted down in a referendum in February 2017. Work is ongoing on new reform proposal. ### Monetary Policy - Recommendation: In the event of sustained weak inflation and inflow pressures, widen modestly the negative interest rate differential against major central banks. - Finding: The policy interest rate has remained unchanged since it was lowered to -0.75 percent in early 2015. However, other major central banks (notably the Fed) have raised their short-term rates, thereby widening Switzerland’s effective policy rate differential without the need for action by the SNB. With domestic-sourced inflation gradually rising, there was no need for the SNB to lower its policy rate. - Recommendation: Utilize foreign currency purchases only to address capital inflow surges. Allow some real appreciation. - Finding: Evolving global cyclical and political conditions have reduced the extent of safe haven surges, and hence the need for foreign exchange purchases. Foreign exchange purchases ceased in mid-2017. ### Financial Sector Policy - Recommendation: Stand ready to adopt new macroprudential measures if credit and house prices again turn up, with a focus on the build-to-let segment. - Finding: No changes have been made to the macroprudential toolkit. - Recommendation: Continue to encourage the large Swiss cross-border banks to implement new too-big-to-fail regulations. - Finding: The Swiss G-SIBs are gradually phasing-in the new TBTF regulations. - Recommendation: Strengthen buffers for D-SIBs. - Finding: Regulations for D-SIBs are unchanged. - Recommendation: Ensure banks’ risk weights adequately reflect risk and encourage greater disclosure of weights. - Finding: Banks‘ IRB models will be adjusted in line with the revised Basel III Standards on risk weights. - Recommendation: Adapt to the evolving regulatory landscape. - Finding: Basel reforms are being implemented. ### Structural Reforms - Recommendation: Resolve uncertainty regarding the referendum on immigration in a constructive manner. - Finding: The parliament approved a measure to comply with the immigration referendum. - Recommendation: Continue to implement the sharing of tax information obligations and make progress on strengthening the AML/CFT framework. - Finding: AML efforts are ongoing to address deficiencies identified in the FATF’s 2016 mutual evaluation report. Automatic exchange of tax information with numerous countries—under the OECD’s initiative—began in 2018. ### Fund Relations and Key Financial Data (as of March 31, 2018) - Membership Status: Joined May 29, 1992; Article VIII. - Quota: 5,771.10 SDR Million (100.00 percent). - Fund holdings of currency: 5,757.95 SDR Million (99.77 percent). - Reserve position in Fund: 13.16 SDR Million (0.23 percent). - New arrangements to borrow: 592.17 SDR Million. - Net cumulative allocation (SDR Department): 3,288.04 SDR Millions (100.00 percent). - Holdings (SDR Department): 3,278.02 SDR Millions (99.70 percent). - Outstanding Purchases and Loans: None. - Financial Arrangements: None. - Projected payments to Fund (Charges/Interest): 0.17 (2018), 0.18 (2019), 0.18 (2020), 0.18 (2021), 0.18 (2022) SDR Million. - Exchange rate arrangement: De jure free floating. SNB ended CHF 1.20 per euro floor on January 15, 2015; franc has since been floating. Over the last 12 months the exchange rate has been floating between 1.08 and 1.20 CHF per euro, with occasional SNB intervention. - Switzerland has accepted obligations of Article VIII, Sections 2, 3, and 4. On May 15, 2018, Switzerland notified the IMF of exchange restrictions imposed in accordance with UN Security Council resolutions and EU regulations. - Latest Article IV Consultation: Last concluded on November 21, 2016; staff report published on December 15, 2016. Switzerland is on the standard 12-month consultation cycle. - Technical Assistance: None. Resident Representatives: None. - Financial System Stability Assessment Update: Conducted in 2013–14; report issued on May 28, 2014. A new update scheduled for 2019. - ROSCs: Reports on Basel core principles, IAIS core principles, and IOSCO objectives and principles were conducted in 2013–14; report issued on May 28, 2014. ### Statistical Issues and Data Adequacy (As of May 2018) - General: Data provision is adequate for Fund surveillance. Most data and documentation are posted on the internet. - National Accounts: Timely for expenditure, production and income approaches. GDP by canton and detailed industry disaggregation published with significant lag (2016 data released in late 2018). Responsibility split: quarterly national accounts by State Secretariat for Economic Affairs; annual national accounts by Federal Statistics Office. - Price Statistics: Consumer price indices and producer and import price indices published monthly with base period December 2015. Additional producer price indexes for services and construction being developed (currently published twice a year). - Government Finance Statistics: Compiled by the Federal Finance Administration. Data for general government finalized with eight months lag. Reconciliation with national accounts completed with publication of 7 September 2017 (except for financial transactions in financial assets and liabilities). SNB publishes statistics on outstanding and new bond issues by the Swiss confederation. - Monetary and Financial Statistics: SNB reports monetary statistics monthly for submission to IMF’s International Financial Statistics, but report forms are not fully consistent with IMF Standardized Report Forms. - Financial Sector Surveillance: Switzerland reports 12 core FSIs and 9 additional FSIs for deposit takers, and 3 FSIs for real estate markets; all FSIs reported annually and posted on IMF’s FSI website. - External Sector Statistics: BOP and IIP data published based on BPM6; official data in BPM6 format available from 1999 onwards. SNB reclassified old data to align with BPM6. Switzerland reports annual Coordinated Direct Investment Survey and semi-annual Coordinated Portfolio Investment Survey. - Data Standards and Quality: Switzerland subscribed to SDDS in June 1996; metadata posted on DSBB. Switzerland is in full observance of SDDS requirements and is availing flexibility options on production index data and wages and earnings periodicity. The Swiss Federal Council supports participation in SDDS Plus; implementation will take several years with an interagency working group (SIF, SNB, FSO, FFA, FSIO, SECO, and FINMA). ### Table of Common Indicators Required for Surveillance (As of May 25, 2018) - Exchange Rates: Date of latest observation — Same day; Date received — Same day; Frequency of data — D and M; Frequency of reporting — M and M; Frequency of publication — D and M. - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of latest observation — Mar 18; Date received — Apr 18; Frequency of data — M; Frequency of reporting — M; Frequency of publication — M. - Reserve/Base Money: Mar 18 (observed), Apr 18 (received), M/M/M. - Broad Money: Mar 18 (observed), Apr 18 (received), M/M/M. - Central Bank Balance Sheet: Apr 18 (observed), May 18 (received), M/M/M. - Consolidated Balance Sheet of the Banking System: Apr 18 (observed), Apr 18 (received), M/M/M. - Interest Rates: Same day (observed), Same day (received), D and M / M and M / D and M. - Consumer Price Index: April 18 (observed), May 18 (received), M/M/M. - Revenue, Expenditure, Balance and Composition of Financing – General Government: 2016 (observed), Mar 18 (received), A/A/A. - Revenue, Expenditure, Balance and Composition of Financing – Central Government: 2016 (observed), Mar 18 (received), A/A/A. - Stocks of Central Government and Central Government-Guaranteed Debt: 2016 (observed), Mar 18 (received), A/A/A. - External Current Account Balance: Q4/17 (observed), Mar 18 (received), Q/Q/Q. - Exports and Imports of Goods and Services: Mar 18 (observed), Apr 18 (received), M/M/M. - GDP/GNP: Q4/17 (observed), Mar 18 (received), Q/Q/Q. - Gross External Debt: Q4/18 (observed), Mar 18 (received), Q/Q/Q. - International Investment Position: Q4/17 (observed), Mar 18 (received), Q/Q/Q. ### Statement by Swiss Authorities (June 11, 2018) — Key Points - Outlook: - Authorities broadly agree with staff on the outlook: global acceleration since early 2017 has supported stronger Swiss activity. Q1 2018 growth was 0.6 percent quarter-on-quarter. - Federal Government’s Expert Group projections: GDP growth of 2.4 percent in 2018 and 2.0 percent in 2019. - Risks: international political risk renewing safe-haven demand for the franc; spiraling protectionism; domestic imbalances in mortgage and real estate markets. - Fiscal Policy: - Debt brake has served well; general government debt just over 40 percent of GDP. - Recent measures to curtail within-year underspending, including new global-budgeting procedures, expected to curb budget underruns. - A group of experts reviewed the debt brake; measures under consideration include simplification of procedures for within-year supplementary budgets. Ministry of Finance to monitor budget underruns; Federal Council to consider amendments in spring 2019 based on Ministry of Finance report. - Fiscal stance viewed as adequate; fiscal policy not suitable to address exchange rate shock effects. - Monetary Policy: - Authorities agree accommodative policy remains appropriate. CPI inflation low and expected to rise gradually. Negative interest rate on sight deposits and SNB’s willingness to intervene remain essential. - Financial Sector Policies: - Progress in strengthening banking resilience: increased capital and liquidity buffers; systemic bank regulation more stringent than international minima. - Macroprudential measures (2012–2014) helped contain risks in owner-occupied residential real estate; imbalances and affordability risks persist, and IPRE market has expanded. - FINMA has intensified supervision in IPRE; authorities favor closer monitoring and consideration of further measures focused on IPRE and affordability risks. - Regulatory arbitrage by nonbank mortgage lenders should be prevented; mortgage lending by insurance companies is small and subject to strict requirements leading to lower risk profiles. - Authorities support elimination of tax deductibility of mortgage interest payments and removal of taxation of imputed rental income in the long term; they view self-regulation as timely and effective in many cases. - External Sector: - Authorities welcome staff’s analysis of retained earnings on portfolio equity and inflation compensation on debt instruments as contributors to the current account. - Further work needed to understand how financial center characteristics and pension-demographic interactions affect the current account. - Structural Issues: - Pension reform is essential. After rejection of “reform 2020,” strategy focuses on reforming the first pillar: unification of retirement age at 65, increasing earmarked revenue, and strengthening incentives for working longer. - Corporate tax reform and abolishment of non-compliant tax regimes remain key priorities; swift adoption is crucial to dispel uncertainty. Parliament is currently discussing the reform proposal. *Source: IMF staff.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18173.pdf_