## 1. Corporate Tax and First Pillar Pension Funding (STAF) Reform ## Source details **Canonical URL:** [1. Corporate Tax and First Pillar Pension Funding (STAF) Reform](https://www.imf.org/-/media/files/publications/cr/2019/1cheea2019001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/1cheea2019001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/1cheea2019001.pdf.json) --- ### Context - Swiss economy performed relatively well during the decade since the global financial crisis, with cumulative economic growth comparing favorably with other advanced economies. - High standard of living supported by high-quality human and physical capital and sizable ongoing investment in innovation and education. - Aggregate employment has grown robustly; productivity is among the highest in the OECD. - Fiscal and public debt positions are strong; external trade surplus remains large and stable despite episodes of intense appreciation pressure. - Strong fundamentals and sound macroeconomic management have contributed to the Swiss franc’s reputation as a safe haven. ### Recent developments - Output and growth - Output grew by 2.5 percent in 2018, around one percentage point higher than in 2017. - Biennial international sporting events contributed about 0.3 percentage points to 2018 GDP. - Growth momentum slowed in the second half of 2018 and temporarily turned negative in Q3:2018 due to weaker global trade and temporary factors (a drought and bottlenecks in the European auto sector). - Year-on-year growth was 1.4 percent in Q1:2019. - Inflation and labor market - Headline inflation moderated to 0.7 percent in April 2019, below the mid-point of the SNB’s 0–2 percent price stability band. - Domestic-sourced inflation is around ½ percent. - Unemployment rate reached 4.6 percent at end-2018 (ILO definition). - On the national definition, unemployment was 2.4 percent in April 2019. - Tightening labor market with job openings signaling shortages of engineers and IT specialists. - External accounts and financial conditions - Current account (CA) surplus was 10.2 percent of GDP in 2018. - Balance on trade in goods and services remained around 11 percent of GDP. - Net international investment position (NIIP) was broadly constant at 128 percent of GDP. - CPI-based REER has continued to appreciate over the longer term despite short-term volatility. - Interest rates near historical lows; negative yields on government bonds with maturities up to 10 years. - Private sector credit relative to GDP has risen strongly since the GFC, mainly for mortgages, exceeding its long-term trend. - Continued low interest rates are increasing risk-taking in residential real estate, where prices are high or rising. ### Outlook and Risks (Staff and Authorities) - Staff short- and medium-term outlook - Annualized GDP growth expected to slow to around 1.1 percent in 2019. - Momentum projected to recover quickly; output excluding sporting events projected to grow by around 1½ percent from 2020. - Output gap expected to remain broadly closed over the medium term. - Inflation projected to return close to the mid-point of the SNB’s inflation band by end-2020. - Current account surplus expected to remain broadly stable at around 10 percent of GDP. - Authorities’ outlook and forecasts - Authorities expect GDP growth to reach 1.1 percent in 2019 and around 1.7 percent in 2020. - Inflation forecast to slightly decline in 2019 before rising gradually to 1.2 percent by 2021 (as of March 2019). - Downside risks (tilted to the downside) - Regional slowdown, intensified international trade tensions, persistent weakness in global import demand, disruptive Brexit. - High global indebtedness triggering financial market volatility. - Franc vulnerable to appreciation pressure from renewed global or regional risk aversion. - Prolonged low growth-low inflation search-for-yield setting could cause domestic real estate risks to materialize. - Uncertainties about institutional agreement with the EU and remaining domestic reform agenda (including corporate taxation and old-age pensions). ### External Sector Assessment — Key figures and conclusions - Background - Large CA surpluses have averaged around 10 percent of GDP since the GFC. - Positive NIIP of 128 percent of GDP has been relatively stable despite persistent CA surpluses. - CPI-based REER is 16 percent higher than in 2008. - Reserves are about 115 percent of GDP. - Staff’s assessment and external position conclusion - Switzerland’s external position in 2018 was broadly consistent with medium-term fundamentals and desirable policies. - Based on a cyclically-adjusted CA surplus of 10.4 percent of GDP and an EBA norm of 6.0 percent, policy gaps and the unexplained residual sum to 4.4 percent of GDP. - Some Switzerland-specific measurement factors reduce the CA gap by 3.5 percentage points (see Current Account Assessment below). - Remaining CA gap after adjustments is 0.9 percent of GDP (with an uncertainty band of ±2 percentage points). - The corresponding REER gap estimated at [-6.5, +1.0] percent. ### Current Account Assessment — numeric breakdown - a Current Account (actual) 10.2 (percent of GDP) - b Cyclical contributions -0.2 - c = a - b Current Account (cyclically adjusted) 10.4 (percent of GDP) - d EBA current account norm 6.0 (percent of GDP) - e = c - d Total gap 4.4 (percent of GDP) - of which policy gap contribution -0.8 (percent of GDP) - unexplained residual 5.2 (percent of GDP) - f Adjustments for measurement issues 3.5 (percent of GDP) - of which valuation losses due to inflation 2.2 (percent of GDP) - retained earnings on portfolio equity 1.3 (percent of GDP) - g = e - f Remaining current account gap 0.9 (percent of GDP) - Excluding the factors in f results in a remaining CA gap centered on 0.9 percent of GDP with an uncertainty band of ±2 percentage points. ### Policy Challenges — Macroeconomic mix for stability and growth - Background findings - Public debt is among the lowest and fiscal balances among the highest within OECD peers. - Central bank assets are considerably larger than in most other countries and the nominal policy rate is the lowest in the world. - Staff recommendations - Some rebalancing of monetary and fiscal policies is warranted. - Shift to a structurally-balanced fiscal position through a step increase in the public spending to GDP ratio to prepare for technological change and aging. - Use fiscal policy more decisively to support growth if downside risks materialize. - If accompanied by safe-haven inflows, lean against large appreciation pressures while preserving the secular trend. - Authorities’ views - Monetary policy should prevent excessive appreciation given a highly valued franc. - The debt brake rule allows a cyclical deficit when GDP is below potential. - Public spending has supported aggregate demand over the last ten years, creating 200,000 new jobs in health, education, public administration and social services against 70,000 job losses in sectors exposed to international competition. ### Monetary Policy — background, constraints, and guidance - Background - Since early 2015 SNB uses a negative interest rate on sight deposits and unsterilized foreign exchange intervention. - The interest rate on sight deposits at the SNB has been set at -0.75 percent. - Negative rate applies only to banks’ balances above elevated exemption thresholds (tiering), so the average rate is less-negative than the marginal rate. - Discretionary intervention largely ceased since mid-2017; SNB purchased modest amounts on several occasions in H2:2018. - Staff views and constraints - Monetary policy effective at avoiding deflation and supporting the economy. - Around 85 percent of FX acquisitions occurred during severe risk-off episodes. - Policy space is limited but moving further into negative territory—including introducing a second, lower interest rate tier—remains feasible. - Doing so would strengthen the need for tighter macroprudential measures. - FX intervention should be reserved mainly for leaning-against-the-wind of large safe-haven pressures. - Regular and timely publication of foreign exchange intervention data is encouraged. - Authorities’ views - Current expansionary monetary policy appropriate; room to act if conditions deteriorate. - No adjustments needed at present; room exists to further reduce the interest rate and resume FX purchases if needed. - Additional numeric points - Due to tiering, the effective negative policy rate is around 0.3 percent. - Negative policy interest rates (as of May 2019): Switzerland -0.75; Denmark -0.65; Euro Area -0.40; Sweden -0.25; Japan -0.10. ### Fiscal Policy — findings and recommendations - Background facts - General government headline surplus averaged 0.6 percent of GDP since the mid-2000s. - General government gross debt has decreased by almost 18 percentage points during this period to 41 percent of GDP. - Fiscal surpluses in 2017–18 were 1.2 and 1.3 percent of GDP, respectively. - Staff’s views and recommendations - Fiscal policy has consistently overperformed the DB rule’s structural-balance objective, imposing a sustained drag on output. - Structural fiscal position has averaged a surplus of 0.5 percent of GDP since 2006 (cumulating to around 6 percent of 2018 GDP). - Policy recommendations / refinements: - Adopt a less-conservative implementation of the DB rule to allow additional spending for long-term trends (population aging, health care, upskilling). - Use surpluses to compensate cantons for any residual revenue loss from corporate tax reform. - Improve procedures for assessing the output gap and forecasting revenue. - Increase the rule’s countercyclical function by estimating the cyclical position on the basis of GDP excluding biennial international sporting events. - Allow the rule’s ex post provision to operate symmetrically, permitting spending to catch up the following year. - Authorities’ views - Authorities consider the debt brake framework provides growth-enhancing and counter-cyclical support. - An expert group recommended not changing the debt brake rule for the time being and—if changes were made—to lower taxes rather than raise spending. ### Financial stability and real estate — findings and policy recommendations - Findings - Persistent low growth, low inflation, and very-low interest rates intensify financial stability risks. - Home-ownership rate is 40 percent. - Mortgages comprise 85 percent of banks’ domestic loans and more than 200 percent of GDP, and are increasing by about 5 percentage points of GDP per year. - Pension funds and insurance companies have allocated about a quarter of their resources to the real estate sector. - An SNB survey finds about 40 percent of banks’ new lending is mortgages for investment properties. - Staff recommendations - Curtail buildup of risk in residential investment mortgages through tighter eligibility and amortization requirements. - Broaden the macroprudential toolkit and specify an accountability framework. - Remove taxation of imputed rent only if mortgage interest deductibility is also removed to preserve tax neutrality. - Tighten existing amortization requirement on owner-occupied mortgages (currently, one-third of collateral value within 15 years, after which the loan becomes interest-only until maturity). - Authorities’ views - Authorities agree new measures are needed and are being prepared. - FINMA has intensified supervision of income-producing residential real estate (IPRRE) and levied targeted capital surcharges on risky lending by individual banks. - Government preparing changes to the Capital Adequacy Ordinance to raise risk weights on residential investment mortgages. ### Banking supervision, FINMA governance, and financial safety nets — findings and recommendations - Findings - Considerable progress made in strengthening banking sector resilience, but sustained low interest rates and high real estate exposure create risks. - Stress tests (FSAP) find institutions well-capitalized and liquid though some banks would breach capital buffers under very adverse scenarios. - Important deficiencies remain in regulatory and supervisory frameworks and capacities. - Recommendations - FINMA should directly contract and pay audit firms for supervisory audits and conduct more on-site inspections, especially of the largest banks. - Strengthen protections against cyber risk and increase oversight of fintech activity. - Strengthen FINMA’s autonomy and governance. - Further improve banks’ recovery and resolvability and create a public and fully-funded bank deposit insurance agency. - Remedy data gaps including on fintech. - Authorities’ views - Authorities concur that amending supervision and regulation frameworks is needed; legislative approval required to allow FINMA to contract, design and pay for supervisory audits. - Support exists for increased pre-funding of deposit insurance, but concern that a government backstop fund could encourage moral hazard. ### Adapting to structural challenges: labor, automation, corporate tax and pensions - Labor and automation findings and recommendations - Swiss wages considerably higher than neighboring regions; foreign workers account for about one-third of the Swiss labor force. - Nearly half of Swiss jobs are at moderate or high risk of automation. - Staff recommendations: - Maintain high-quality education and remain open to foreign labor. - Review social safety nets to support employment transitions. - Eliminate higher contribution rates for older workers under the second pillar pension scheme to reduce disincentives for employing older workers. - Corporate tax and pension reform findings and recommendations - Recent referendum allows implementation in 2020 of the new CIT framework (STAF) abolishing preferential tax regimes. - The referendum modestly increases funding for the first-pillar, pay-as-you-go public pension scheme. - Staff recommendations: - Reform the pension system: equalize male and female retirement ages and raise them over time; source additional tax revenue. - For the second pillar, lower the guaranteed conversion rate for annuities and link it to market yields on long-term sovereign debt and life expectancy at retirement. - Promptly complete corporate income tax reform at the cantonal level to maintain competitiveness. - Authorities’ views: - Cantons will be partly compensated for revenue loss through higher revenue sharing of direct federal tax budgeted for 2020. - The approved first pillar pension financing package is a necessary first step; additional reforms needed for sustainability. ### Box 1. Corporate Tax and First Pillar Pension Funding (STAF) Reform — Tax Reform elements and effects - Tax Reform: main elements - Abolishes cantonal preferential tax regimes for “status companies.” - Provides cantons three new bases for corporate tax relief: patent box regimes, super R&D tax deductions, allowance for corporate equity (under certain condition). - Cantons retain autonomy to set cantonal CIT rates; bases and rates can differ across cantons. - Cantons expected to respond by lowering their CIT rates. - Tax Reform: fiscal and distributional effects - Authorities expect the overall reform to produce a static revenue loss at the general government level of around 0.3 percent of GDP. - Reform raises cantons’ share of direct federal tax revenue from 17 to 21.2 percent. - Reform likely to result in relatively competitive effective CIT rates on the order of about 10 percent (depending on the canton). - Current OECD average statutory CIT rate is 22.4 percent; expected unweighted Swiss cantonal average rate is 14.3 percent. - Simulation assumptions (chart notes) - Cantonal and municipal taxes are imposed on only 30 percent of pre-tax profit. - The federal tax is imposed on the entire pre-tax profit, and the tax amount is itself deductible. - Canton Vaud (VD) lowered its CIT rate to 13.79 as of January 2019. A referendum in November 2018 in Bern rejected lowering its CIT rate. ### Box 1. STAF Reform — Pension reform financing, gaps, and key figures - Reform details and financing measures - The new pension reform increases funding for the first pillar by CHF 2 billion (0.3 percent of GDP) annually. - Additional financing comes from: - raising mandatory social security contributions from 4.2 to 4.35 percent (1.2 billion CHF), and - increasing the federal transfer by CHF 0.8 billion (0.3 billion from increasing the federal payment from 19.55 percent to 20.2 percent of pillar one expenditures, and 0.5 billion from earmarking VAT). - Remaining gaps and further reform needs - Without the STAF reform, cumulative financing shortfalls for pillar 1 would reach CHF 53 billion (about 8 percent of 2018 GDP) by 2030. - Even with the STAF reform, the financing gap is estimated at CHF 23 billion. - Key figures (from the box) - Annual additional first-pillar funding: CHF 2 billion (0.3 percent of GDP). - Contribution increase: from 4.2 to 4.35 percent (1.2 billion CHF). - Federal transfer increase component: CHF 0.8 billion. - Cumulative financing shortfall by 2030 without STAF: CHF 53 billion (about 8 percent of 2018 GDP). - Cumulative financing shortfall by 2030 with STAF: CHF 23 billion. ### Risk Assessment Matrix — selected risks and policy responses - Global risks and responses - Weaker-than-expected global growth (Relative Likelihood: High (Europe)/Medium (U.S., China); Time Horizon: ST, MT; Expected Impact: High) - Policy Responses: Loosen fiscal policy; improve domestic productivity; temporarily suspend fiscal rule; consider pre-announced FX purchases for excessive currency volatility. - Rising protectionism (Relative Likelihood: High; Time Horizon: ST, MT; Expected Impact: High) - Policy Responses: Work with partners, diversify trade, strengthen supervision, consider fiscal loosening if needed. - Sharp tightening of global financial conditions (Relative Likelihood: Medium; Time Horizon: ST; Expected Impact: Medium) - Policy Responses: Pre-emptive slowing of bank lending via macroprudential measures; use fiscal space for stimulus if growth slows. - Country-specific risks and responses - Resumption of safe haven inflows (Relative Likelihood: Medium; Time Horizon: ST, MT; Expected Impact: High) - Policy Responses: Targeted FX purchases; allow structural-balance fiscal rule to operate and use discretionary fiscal stimulus if needed; enhance AML/CFT framework. - Prolonged low-growth and low-inflation environment (Relative Likelihood: Medium; Time Horizon: MT; Expected Impact: High) - Policy Responses: Expand macroprudential toolkit; strengthen banks’ buffers; assess construction sector; consider changes to pension funds’ portfolio limits. - Political developments affecting Swiss-EU relations (Relative Likelihood: Low; Time Horizon: MT; Expected Impact: High) - Policy Responses: Preserve flows with the EU; use exceptional clause in fiscal rule for discretionary stimulus if needed. ### Debt Sustainability — baseline and stress-test highlights (selected numeric projections) - Under baseline, public debt projected to decline from 40.5 percent of GDP in 2018 to about 32 percent of GDP in 2024. - Selected projections: - Nominal gross public debt: 43.3 (2017), 42.7 (2018), 40.5 (2019), 38.7 (2020), 37.3 (2021), 36.0 (2022), 34.7 (2023), 33.4 (2024), 32.1 (projection end). - Real GDP growth (in percent): 1.4 (2017), 1.7 (2018), 2.5 (2019), 1.1 (2020), 1.6 (2021), 1.6 (2022), 1.6 (2023), 1.6 (2024). - Inflation (GDP deflator, in percent): 0.1 (2017), -0.4 (2018), 0.6 (2019), 1.2 (2020), 0.9 (2021), 0.9 (2022), 1.0 (2023), 1.0 (2024). - Stress test outcomes: Combined shock brings debt-to-GDP ratio to around 40 percent in 2021 (approximately 4 percentage points higher than baseline), then declines on a trajectory nearly parallel to baseline. ### FSAP Main Recommendations (selected) - Strengthen FINMA’s autonomy, governance, and accountability; preserve primacy of prudential mandate (Timing: C). - Increase resources for high-quality data gathering and analysis, especially for fintech (Timing: MT). - Expand macroprudential toolkit and strengthen accountability to act (Timing: ST). - Ensure FINMA contracts and pays directly for supervisory audits and increase on-site inspections (Timing: ST). - Strengthen recovery and resolution planning for FMIs and reform DIS toward a public DIA with ex-ante funding (Timing: I / MT respectively). - Enhance monitoring of fintech and crypto-assets and address regulatory gaps (Timing: ST). ### Staff appraisal — priorities and procedural recommendation - Key policy priorities and recommendations - Switzerland’s external position broadly in line with fundamentals; household saving and preference for domestic assets compress yields. - Redress imbalance between monetary and fiscal policy utilization: limited room for further monetary accommodation; substantial fiscal space exists. - Shift from sustained structural surplus to a balanced fiscal position through higher public spending in 2019 to provide a one-off boost to growth and create room for permanently-higher spending addressing structural challenges. - New targeted macroprudential measures needed to curb banking and real estate sector risks; remove tax policies that encourage high household leverage; tighten amortization requirements. - Strengthen FINMA’s authority and autonomy; improve deposit insurance and crisis management frameworks; close data gaps. - Continue reforms for population aging and automation: reform pension pillars, maintain education and innovation investment, welcome foreign workers, review social safety nets. - Quickly resolve remaining gaps on corporate taxation, anti-corruption and AML/CFT. - Procedural recommendation - Next Article IV consultation recommended on the standard 12-month cycle. *Source: IMF staff report excerpt on Switzerland.* ### 1. Corporate Tax and First Pillar Pension Funding (STAF) Reform ________________________________ 26 ### 1. Corporate Tax and First Pillar Pension Funding (STAF) Reform ### Context - Swiss economy performed relatively well during the decade since the global financial crisis, with cumulative economic growth comparing favorably with other advanced economies. - High standard of living supported by high-quality human and physical capital and sizable ongoing investment in innovation and education. - Aggregate employment has grown robustly; productivity is among the highest in the OECD. - Fiscal and public debt positions are strong; external trade surplus remains large and stable despite episodes of intense appreciation pressure. - Strong fundamentals and sound macroeconomic management have contributed to the Swiss franc’s reputation as a safe haven. ### Recent developments - Output and growth - Output grew by 2.5 percent in 2018, around one percentage point higher than in 2017. - Biennial international sporting events contributed about 0.3 percentage points to 2018 GDP. - Growth momentum slowed in the second half of 2018 and temporarily turned negative in Q3:2018 due to weaker global trade and temporary factors (a drought and bottlenecks in the European auto sector). - Year-on-year growth was 1.4 percent in Q1:2019. - Inflation and labor market - Headline inflation moderated to 0.7 percent in April 2019, below the mid-point of the SNB’s 0–2 percent price stability band. - Domestic-sourced inflation is around ½ percent. - Unemployment rate reached 4.6 percent at end-2018 (ILO definition). - On the national definition, unemployment was 2.4 percent in April 2019. - Tightening labor market with job openings signaling shortages of engineers and IT specialists. - Rising productivity and inflows of foreign workers have kept unit labor costs contained. - External accounts and financial conditions - Current account (CA) surplus was 10.2 percent of GDP in 2018, about 3½ percentage points higher than the downwardly-revised value for 2017, driven by a rebound in investment income. - Balance on trade in goods and services remained around 11 percent of GDP. - Net international investment position (NIIP) was broadly constant at 128 percent of GDP. - CPI-based REER has continued to appreciate over the longer term despite short-term volatility. - Interest rates near historical lows; negative yields on government bonds with maturities up to 10 years. - Private sector credit relative to GDP has risen strongly since the GFC, mainly for mortgages, exceeding its long-term trend. - Continued low interest rates are increasing risk-taking in residential real estate, where prices are high or rising. ### Report on Discussions — Outlook and Risks - Staff’s short- and medium-term outlook - Annualized GDP growth expected to slow to around 1.1 percent in 2019 due to subdued global trade, carryover from late-2018 weakness, and absence of biennial sporting events. - Momentum projected to recover quickly; output excluding sporting events projected to grow by around 1½ percent from 2020, close to potential. - Output gap expected to remain broadly closed over the medium term. - Biennial sporting events will continue to add year-to-year volatility to headline GDP growth. - Tightening labor market and limited spare capacity projected to gradually return inflation close to the mid-point of the SNB’s inflation band by end-2020. - Continued inflows of foreign workers expected to contain incipient wage pressures. - Current account surplus expected to remain broadly stable at around 10 percent of GDP, notwithstanding unpredictability in the income balance. - Downside risks (tilted to the downside) - More sustained regional slowdown, intensified international trade tensions, persistent weakness in global import demand, and a disruptive Brexit could hurt the very-open Swiss economy. - High global indebtedness could trigger financial market volatility, transmitting to Swiss financial system and globally-active banks. - As a safe-haven currency, the franc is vulnerable to appreciation pressure from renewed global or regional risk aversion. - Prolonged low growth-low inflation search-for-yield setting could cause domestic real estate risks to materialize. - Uncertainties about an institutional agreement with the EU and remaining domestic reform agenda (including corporate taxation and old-age pensions) could increase volatility and reduce Switzerland’s attractiveness for investment. - Authorities’ views - Authorities expect activity to recover and grow in line with potential after the temporary slowdown. - GDP growth expected to reach 1.1 percent in 2019 and around 1.7 percent in 2020. - Conditioned on an unchanged policy interest rate, inflation forecast to slightly decline in 2019 before rising gradually to 1.2 percent by 2021 (as of March 2019). - Authorities share view that risks to growth are skewed to the downside, with domestic mortgage and real estate imbalances posing correction risks and external developments (protectionism, Brexit, euro-area fiscal concerns) potentially reviving safe-haven pressures. ### Report on Discussions — External Sector Assessment - Background on external position - Switzerland’s role as a financial center and corporate hub shapes the size and composition of external accounts. - Large CA surpluses have averaged around 10 percent of GDP since the GFC and increasingly driven by goods trade and profits from merchanting, with a declining contribution from services. - Direct investment income is subject to sizable year-to-year swings and large ex post revisions, introducing volatility into the CA and making it difficult to predict. - From a saving-investment perspective, the CA surplus is attributed to households’ net lending, partly offset by corporates’ more-moderate net borrower position. - Positive NIIP of 128 percent of GDP has been relatively stable despite persistent CA surpluses, reflecting valuation losses on net foreign assets. - Gross financial flows and stocks are large relative to GDP due to pass-through investment by multinationals, private-sector safe-haven flows, and accumulation of official reserves. - Gross positions declined in 2018 in response to the US Tax and Jobs Act. - Errors and omissions in the balance of payments tend to be volatile. - CPI-based REER is 16 percent higher than in 2008. - Staff’s assessment - While the REER has been volatile since the GFC, moderate trend appreciation is consistent with Switzerland’s highly-productive and profitable sectors. - Episodes of extreme safe-haven pressure produced sharp real appreciations that were largely unwound by subsequent nominal depreciation and relatively lower Swiss inflation. - Long-term REER strengthening is consistent with high value-added sectors exerting upward pressure on wages and prices. - High household saving is a major contributor to the CA surplus: - Large saving under mandatory pillar 2 pension scheme, supplemented by partly tax-incentivized voluntary pension saving. - A sizable share of the population approaching retirement age and long remaining life expectancy contribute to saving. - A bequest motive among high net worth individuals adds to saving. - High saving and limited domestic investment opportunities suggest sustained external contribution to GDP growth; rebalancing toward domestic absorption over the medium term would reduce dependence. - High savings could compress yields and encourage further saving to secure retirement income, reinforced by preference for domestic assets to avoid valuation losses on unhedged foreign-currency assets. - High household net lending and increased preference for Swiss assets since the GFC contributed to rapid buildup of SNB reserves in previous years. - Reserves are about 115 percent of GDP and are large but more moderate relative to short-term foreign liabilities. - Reserves are a byproduct of monetary policy operations aimed at avoiding volatility in output and inflation when the policy interest rate is close to the effective lower bound. - Resumption in mid-2017 of private financial outflows restored the pre-GFC balance of payments pattern. - External position conclusion - Switzerland’s external position in 2018 was broadly consistent with medium-term fundamentals and desirable policies. - Based on a cyclically-adjusted CA surplus of 10.4 percent of GDP and an external balance assessment (EBA) norm of 6.0 percent, policy gaps and the unexplained residual sum to 4.4 percent of GDP. - Some factors especially relevant for Switzerland are not appropriately treated in the income account of the CA and contribute to residuals. *Source: IMF staff report excerpt (Switzerland).* ### 3.5 percentage points to the EBA unexplained ### 3.5 percentage points to the EBA unexplained ### Current Account Assessment - a Current Account (actual) 10.2 (percent of GDP) - b Cyclical contributions -0.2 - c = a - b Current Account (cyclically adjusted) 10.4 (percent of GDP) - d EBA current account norm 6.0 (percent of GDP) - e = c - d Total gap 4.4 (percent of GDP) - of which policy gap contribution -0.8 (percent of GDP) - unexplained residual 5.2 (percent of GDP) - f Adjustments for measurement issues 3.5 (percent of GDP) - of which valuation losses due to inflation 2.2 (percent of GDP) - retained earnings on portfolio equity 1.3 (percent of GDP) - g = e - f Remaining current account gap 0.9 (percent of GDP) - Excluding the factors in f results in a remaining CA gap centered on 0.9 percent of GDP with an uncertainty band of ±2 percentage points. - The remaining CA gap is within—but close to the upper bound of—the “broadly consistent” range, with the corresponding REER gap estimated at [-6.5, +1.0] percent. - Measurement notes: - The measured CA treats as income the compensation for expected valuation losses on fixed income securities and considers retained earnings of Swiss corporations owned by foreign portfolio investors as Swiss income. - The extent of uncertainty is highlighted by frequent large revisions to previous years’ income balances, mostly in the downward direction, as well as volatile errors and omissions. ### Authorities’ Views on the Current Account and Exchange Rate - Authorities consider the Swiss franc highly valued—with the extent of overvaluation varying by currency—and the current account of an appropriate size. - Trend nominal appreciation has quickened since the GFC due to downside limits to interest rates and safe-haven pressures. - The CA has been largely stable because a flexible private sector and higher foreign-than-domestic inflation helped preserve competitiveness and restore profit margins. - Size of the CA surplus reflects: - saving by an aging population in the context of high pension contributions and rising longevity; - conceptual measurement bias in international statistical standards. - Low interest rates tend to encourage additional saving for retirement. - Given small Swiss capital markets, part of wealth is invested abroad. - Since the GFC, increased uncertainty and concerns about losses on foreign currency investments may have discouraged the private sector from recycling the CA surplus abroad, while encouraging foreign investors into Swiss franc investments, contributing to franc appreciation pressure and SNB policy responses. - Private placements abroad resumed in mid 2017 and are partially hedged, mitigating reversal risk during safe-haven episodes. ### Policy Challenges — A. Macroeconomic Mix for Stability and Growth Background findings: - Public debt is among the lowest, and fiscal balances are among the highest, within the group of OECD countries. - Central bank assets are considerably larger than in most other countries and the nominal policy rate is the lowest in the world. Staff’s views and recommendations: - Some rebalancing of monetary and fiscal policies is warranted. - With the Swiss franc a safe-haven currency, a negative policy interest rate and a large SNB balance sheet, monetary policy is approaching its limits while fiscal policy remains underutilized, even within the existing debt brake (DB) rule. - Borrowing costs for the Swiss government are negative and among the lowest in the world; benefits from further reducing already-moderate public debt are minimal. - The current dip in economic growth provides an opportunity to shift to a structurally-balanced fiscal position through a step increase in the public spending to GDP ratio—including by the cantons—with a focus on preparing the economy and the population for technological change and aging. - A fiscal shift would avoid over-reliance on monetary policy, which contributes to financial stability risks. - Given limited monetary policy space but substantial fiscal space, fiscal policy should contribute more decisively to supporting growth if downside risks materialize. - If accompanied by safe-haven inflows, leaning against large appreciation pressures—while preserving the secular trend—should be part of the policy response. Authorities’ views on macro policy assignment: - Macroeconomic policy assignment should reflect the source of economic weakness. - Monetary policy should prevent excessive appreciation given a highly valued franc. - The debt brake rule allows a cyclical deficit when GDP is below potential; lower public debt provides additional fiscal space if domestic demand falls sharply. - Public spending is not very effective at offsetting exchange rate or foreign demand shocks, but public policies have supported aggregate demand over the last ten years, creating 200,000 new jobs in health, education, public administration and social services against 70,000 job losses in sectors exposed to international competition (industry, tourism). ### Monetary Policy Background: - Since removing the exchange rate floor in early 2015, the SNB has utilized dual instruments: a negative interest rate on sight deposits and unsterilized foreign exchange intervention. - The interest rate on sight deposits at the SNB has been set at -0.75 percent. - Negative rate applies only to banks’ balances above elevated exemption thresholds (tiering), so the average rate is less-negative than the marginal rate. - Discretionary intervention largely ceased since mid-2017, although SNB purchased modest amounts on several occasions in H2:2018. - These dual tools aim to reduce attractiveness of the franc to keep inflation within the price stability band of 0–2 percent. Staff’s views on monetary policy effectiveness and constraints: - Monetary policy has been effective at avoiding deflation and supporting the economy. - Around 85 percent of FX acquisitions occurred during severe risk-off episodes. - Despite volatility, SNB actions allowed the REER to appreciate broadly in line with its long-term trend. - Continued accommodative policies by major central banks could constrain Swiss monetary policy flexibility. - A more negative rate risks “runs to cash” and “search for yield” by banks; larger reserves bring more volatile valuation changes. - Policy space is limited but moving further into negative territory—including introducing a second, lower interest rate tier—remains feasible if needed to meet persistent low inflation. - Doing so would strengthen the need for tighter macroprudential measures to contain excessive risk-taking in the real estate sector. - FX intervention should be reserved mainly for leaning-against-the-wind of large safe-haven pressures that would otherwise cause excessive volatility in inflation and output, while preserving trend appreciation. - Regular and timely publication of foreign exchange intervention data is encouraged. Authorities’ views on monetary policy: - Authorities consider current expansionary monetary policy appropriate and assert room to act if conditions deteriorate. - The two pillars of SNB policy remain essential given a still-fragile FX market, one-sided positioning, and risk of renewed safe-haven pressure. - Policy actions by the Federal Reserve and the ECB are relevant to SNB decision-making, with the ECB carrying somewhat greater importance. - Room exists to further reduce the interest rate and resume FX purchases if needed to achieve price stability; circumstances will determine instrument choice. - No adjustments to monetary policy in either direction are needed at present. - SNB’s FX purchases have been modest in the past two years; intervention has been conducted only in the spot market and is apparent from sight deposits held at the SNB, available weekly and complemented by yearly intervention data in the SNB’s annual report. - Authorities note that side effects of monetary policy can be mitigated; low long-term interest rates reflect fundamentals including demographics, and macroprudential policies complement monetary policy. Additional numeric and contextual points: - Defined as monthly increases in sight deposits that exceeded the average by at least one standard deviation. - Due to tiering, the effective negative policy rate is around 0.3 percent. - Negative policy interest rates (as of May 2019): Switzerland -0.75; Denmark -0.65; Euro Area -0.40; Sweden -0.25; Japan -0.10. ### Fiscal Policy Background: - Switzerland’s fiscal position is strong. - The general government headline surplus averaged 0.6 percent of GDP since the mid-2000s following the introduction of DB rules by the federal government and most cantons around 2003. - General government gross debt has decreased by almost 18 percentage points during this period to 41 percent of GDP. - The federal DB 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 offset requirement exists for ex post underspending. - Fiscal surpluses in 2017–18 were 1.2 and 1.3 percent of GDP, respectively, partly due to an exceptional ¼ percentage point increase in withholding tax revenue. Staff’s views: - Fiscal policy has consistently overperformed the DB rule’s structural-balance objective, imposing a sustained drag on output. - Adjusting for cyclical conditions and exceptional withholding tax revenue in 2017–18, staff estimates structural surpluses averaged [text truncated in source]. *International Monetary Fund — Switzerland — 2019 Preliminary External Balance Assessment (For the year 2018; percent of GDP)* ### 0.5 percent of GDP since 2006 (cumulating to around ### 1cheea2019001 - 0.5 percent of GDP since 2006 (cumulating to around ### Fiscal policy and the debt brake (DB) rule - Findings: - Structural fiscal position has averaged a surplus of 0.5 percent of GDP since 2006 (cumulating to around 6 percent of 2018 GDP). - Overperformance relative to the DB rule reflects conservative forecasting of structural revenue, including generally overestimating the output gap, and under-executing expenditures to avoid breaching approved ceilings. - Systematic conservative implementation of the rule imposes an undesirable pull on growth during cyclical downswings. - Running a balanced structural position would nonetheless deliver the DB rule’s goal of a declining public debt ratio. - Policy recommendations / refinements: - Adopt a less-conservative implementation of the DB rule to make room for additional spending to address long-term economic trends (population aging, health care, upskilling). - Use surpluses to compensate cantons for any residual revenue loss from corporate tax reform to avoid canton spending cuts to comply with their DB rules. - Improve procedures for assessing the output gap and forecasting revenue to reduce systematic underestimation of structural revenue. - Increase the rule’s countercyclical function by estimating the cyclical position on the basis of GDP excluding the effects of biennial international sporting events. - Allow the rule’s ex post provision to operate symmetrically, permitting spending to catch up the following year to reduce systematic under-execution of the budget. - Authorities’ views: - The authorities consider the debt brake framework provides growth-enhancing and counter-cyclical support. - Part of recent revenue overperformance is likely temporary (withholding taxes associated with negative interest rates and the 2018 US tax reform). - Spending will likely continue to undershoot budgeted ceilings, leading to systematically better than budgeted fiscal outturns. - A 2017 expert group recommended not changing the debt brake rule for the time being and—if changes were made—to lower taxes rather than raise spending. - Switzerland does not have obvious public investment gaps; increasing fiscal spending could introduce inefficiencies. ### Financial stability and real estate exposure - Findings: - Persistent low growth, low inflation, and very-low interest rates intensify financial stability risks. - Prices of privately-owned apartments rose since 2017; prices of apartment buildings (investment properties) jumped sharply around 2015 and later declined slightly while vacancy rates have risen as construction outpaced demand. - Home-ownership rate is 40 percent. - Mortgages comprise 85 percent of banks’ domestic loans and more than 200 percent of GDP, and are increasing by about 5 percentage points of GDP per year. - Pension funds and insurance companies have allocated about a quarter of their resources to the real estate sector. - An SNB survey finds about 40 percent of banks’ new lending is mortgages for investment properties; these tend to be more risky with a greater incidence of both high loan-to-value and low loan-to-income characteristics. - With slower growth in nominal incomes, automatic debt dynamics will contribute less than in previous decades to passive reduction of very-high debt-to-income ratios, especially because mortgage interest rates have not decreased as much as the policy rate. - A large jump in interest rates could induce a drop in prices; given widespread exposure to real estate, any shock to property prices could resonate through the economy with significant financial stability, economic and social costs. - Staff’s views and recommendations: - Curtail buildup of risk in residential investment mortgages through tighter eligibility and amortization requirements (overdue). - Broaden the toolkit for mandated demand and capital-based macroprudential measures, accompanied by an accountability framework specifying expectations to act. - Policies encouraging high household leverage should be unwound: proposed elimination of taxation of imputed rent should be accompanied by removal of mortgage interest deductibility to preserve tax neutrality and avoid incentivizing further indebtedness and higher house prices. - Tighten existing amortization requirement on owner-occupied mortgages (currently, one-third of collateral value within 15 years, after which the loan becomes interest-only until maturity). - Authorities’ views: - Authorities agree new measures to curb imbalances in mortgage and real estate markets are needed and are being prepared. - FINMA has intensified supervision of income-producing residential real estate (IPRRE) and levied targeted capital surcharges on risky lending by individual banks. - Macroprudential measures targeting IPRRE are needed; self-regulation measures by the Swiss Bankers Association (SBA) could become binding if recognized by FINMA. - Government preparing changes to the Capital Adequacy Ordinance to raise risk weights on residential investment mortgages; implementation could be suspended if SBA self-regulation is sufficient. - Parliament is discussing options to remove the tax on imputed rent while in some instances also eliminating tax deductibility of mortgage interest payments. ### Banking supervision, FINMA governance, and financial safety nets - Findings: - Considerable progress made in strengthening banking sector resilience, but sustained low interest rates and high real estate exposure create risks. - Stress tests (FSAP) find institutions well-capitalized and liquid and resilient to severe shocks, though some banks would breach capital buffers under a very adverse scenario. - Important deficiencies remain in regulatory and supervisory frameworks and capacities (Annex III). - Recommendations: - FINMA should directly contract and pay audit firms for supervisory audits of banks and conduct more on-site inspections, especially of the largest banks. - Strengthen protections against cyber risk and increase oversight of fintech activity. - Strengthen the autonomy and governance of FINMA to preserve the international reputation of the Swiss financial system and limit contingent fiscal liabilities. - Further improve banks’ recovery and resolvability and create a public and fully-funded bank deposit insurance agency, in line with international norms. - Remedy important data gaps including on fintech. - Authorities’ views: - Authorities concur that amending supervision and regulation frameworks is needed; legislative approval required for allowing FINMA to contract, design and pay for supervisory audits. - An ordinance to more clearly specify FINMA’s mandate and affirm responsibilities has been prepared and is under consultation. - Support exists for increased pre-funding of deposit insurance, but concern that a government backstop fund could encourage moral hazard. - Switzerland welcomes innovation, including fintech, without compromising financial stability and integrity. ### Adapting to structural challenges: labor, automation, corporate tax and pensions - Cross-border wages and automation — findings: - Swiss wages are considerably higher than in neighboring regions; foreign workers account for about one-third of the Swiss labor force. - Employment rose strongly over the past decade; the ratio of the 90th to 10th percentile of the wage distribution for full-time employees narrowed marginally during 2008 to 2016 to 2.6. - Nearly half of Swiss jobs are at moderate or high risk of automation. - In 2016, Switzerland rejected a universal basic income initiative that would have paid CHF 2,500 per month to every adult. - Staff recommendations: - Maintain high-quality education and remain open to foreign labor to address skilled labor shortages. - Review social safety nets to ensure adequate support for more-frequent or longer-duration employment transitions while still encouraging job search. - Eliminate higher contribution rates for older workers under the second pillar pension scheme to reduce disincentives for employing older workers. - Corporate tax and pension reform — findings: - Recent referendum allows implementation in 2020 of the new CIT framework that abolishes preferential tax regimes in compliance with the OECD BEPS project and EU initiatives. - The referendum modestly increases funding for the first-pillar, pay-as-you-go public pension scheme, though current obligations would still fall short of current revenue even before the projected bulge in retirements. - Staff recommendations: - Reform the pension system: equalize male and female retirement ages and raise them over time; source additional tax revenue. - For the second pillar, improve sustainability by lowering the guaranteed conversion rate for annuities and linking it to market yields on long-term sovereign debt and life expectancy at retirement. - Promptly complete corporate income tax reform at the cantonal level to maintain competitiveness. - Authorities’ views: - Authorities welcomed approval of the referendum on corporate taxation and pensions; cantons will be partly compensated for revenue loss through higher revenue sharing of direct federal tax budgeted for 2020. - Revenue effects could be positive in the medium and longer term. - The approved first pillar pension financing package is a necessary first step; additional reforms needed for sustainability. ### Anti-corruption and AML/CFT - Findings: - Anti-foreign bribery enforcement has strengthened; the OECD WGB Phase 4 report (published March 2018) commends increases in prosecutions and convictions, including of legal persons. - Switzerland’s AML/CFT regime has strengths and challenges; FATF Mutual Evaluation Report (December 2016) identifies corruption as a main money laundering threat and notes risks highest among private banks, independent asset managers, fiduciaries, lawyers and notaries. - Swiss companies must maintain up-to-date registers of shareholders/partners and beneficial owners, but no criminal or administrative sanctions exist for non-compliance by shareholders. - Some shortcomings in maintaining confidentiality of MLA requests (financial intermediaries obliged to inform customers). - Recommendations: - Continue building on recent enforcement efforts; ensure sanctions for legal persons are effective, proportionate and dissuasive (maximum fine for legal persons currently CHF5 million). - Publish some elements of concluded cases resolved via summary punishment orders. - Promptly adopt a whistleblower framework in the private sector and strengthen protections for public whistleblowers. - Timely passage and effective implementation of pending draft laws: new sanctions regime for breaches of beneficial owner notification requirements; conversion of bearer shares in non-listed companies into nominal shares; subjecting lawyers, notaries and fiduciaries to AML/CFT measures regarding legal persons and arrangements; simplifying and speeding MLA via early transmission of information and permitting joint investigation teams; empower the FIU to request information from financial intermediaries based on a foreign request even without a STR in Switzerland. - Authorities’ views: - Authorities welcome IMF’s assessment and confirm strong improvements in implementing the OECD Anti-Bribery Convention. - Several important laws are before Parliament to further enhance detection and prosecution of corruption and related money laundering. ### Staff appraisal — outlook, policy balance, and priorities - Outlook and risks: - Prospects remain favorable after a temporary soft patch; GDP expected to expand in line with potential rate of around 1½ percent from 2020, with the output gap broadly closed and the current account largely unchanged. - Risks include intensification of international trade tensions, renewed global or regional risk aversion, low-for-longer interest rates accentuating real estate risks, and lack of clarity on long-term relations with the EU. - Key assessments and recommendations: - Switzerland’s external position is broadly in line with medium-term fundamentals; households’ large net creditor position and preference for domestic assets contribute to saving and compressed yields. - Redress current imbalance between monetary and fiscal policy utilization: limited room for further monetary accommodation; sustained fiscal surpluses and moderate-and-declining public debt indicate substantial fiscal space. - Shift from a sustained structural surplus to a balanced fiscal position through higher public spending in 2019 when growth is predicted to be subdued to provide a one-off boost to growth, create room for permanently-higher public spending to address structural challenges, and alleviate pressure on monetary policy. - Increase prominence of fiscal policy in supporting activity; modest reduction in policy rate possible but would accentuate need for tighter macroprudential policies and a more active fiscal stance. - Timely publication of foreign exchange intervention data is encouraged. - Strengthen stabilizing and growth-enhancing aspects of the debt brake rule by improving revenue forecasts, avoiding overly-strong assessments of cyclical positions, and eliminating the structural surplus to allow additional spending focused on technological change and population aging and to cover any revenue shortfalls from corporate tax reform. - New targeted macroprudential measures are needed to curtail further buildup of risk in banking and real estate sectors; remove tax policies that encourage high household leverage in a neutral manner and tighten amortization requirements. - Financial sector regulation and oversight should be proportionate to the size and complexity of the Swiss financial system: strengthen FINMA’s authority and autonomy, allow direct contracting and payment for supervisory audits, strengthen governance, uphold ability to set binding prudential requirements, strengthen financial sector safety nets, and close important data gaps. - Continue reforms to prepare for population aging and automation: reform first and second pension pillars, maintain high-quality education and investment in innovation, continue welcoming foreign workers, and review social safety nets to be compatible with new work arrangements and avoid contribution structures that penalize segments of the workforce. - Quickly resolve remaining gaps in meeting international commitments on corporate taxation, anti-corruption and AML/CFT. - Procedural recommendation: - Next Article IV consultation recommended on the standard 12-month cycle. *Source: IMF staff report excerpt on Switzerland.* ### Box 1. Corporate Tax and First Pillar Pension Funding (STAF) Reform ### Box 1. Corporate Tax and First Pillar Pension Funding (STAF) Reform ### Tax Reform: main elements - Abolishes cantonal preferential tax regimes that exempt qualifying “status companies” from cantonal and municipal CITs, which had significantly lowered their combined CIT rates toward the federal rate of 7.83 percent. - Provides cantons with three new bases for corporate tax relief, consistent with international standards: - patent box regimes, - super R&D tax deductions, - allowance for corporate equity (under certain condition). - Cantons retain their existing autonomy to set cantonal CIT rates; CIT bases and rates can differ across cantons. - Cantons are expected to respond by lowering their CIT rates. ### Tax Reform: fiscal and distributional effects - Authorities expect the overall reform to produce a static revenue loss at the general government level of around 0.3 percent of GDP (estimate uncertain and dependent on cantonal and firm decisions). - To partially compensate cantons for lower tax revenue, the reform raises their share of direct federal tax revenue from 17 to 21.2 percent. - Expected international competitiveness and rates: - Reform likely to raise taxes on existing status companies (by abolishing preferential regimes and subjecting them to the standard CIT rate) and lower taxes on non-status companies (owing to decreases in standard CIT rates). - Reform is likely to result in relatively competitive effective CIT rates from an international perspective, on the order of about 10 percent (taking into account tax relief), depending on the canton. - The current OECD average statutory CIT rate is 22.4 percent, higher than the expected unweighted Swiss cantonal average rate of 14.3 percent. ### Effective tax rate simulation and mechanics (chart notes) - Simulation assumptions: - Cantonal and municipal taxes are imposed on only 30 percent of pre-tax profit. - The federal tax is imposed on the entire pre-tax profit, and the tax amount is itself deductible. - The chart distinguishes: - Current effective combined rate, - Expected effective combined rate, - Expected effective combined rate in case of a 70% relief. - Firms’ effective taxation will be somewhere in the gray shaded area. - Most status companies currently face a CIT rate close to the federal CIT rate or above the federal rate but below the expected effective combined rate. - Canton-specific note: Canton Vaud (VD) lowered its CIT rate to 13.79 as of January 2019. A referendum in November 2018 in Bern rejected lowering its CIT rate. ### Pension Reform: structure of the Swiss pension system - Swiss pension system consists of three pillars: - First pillar: old age and survivors’ insurance (AHV) — a pay-as-you-go scheme where all employers, employees and the self-employed pay a mandatory contribution of 4.2 percent; other components include disability insurance and income compensation allowances; goal is to guarantee a “minimum existence”; fully organized by the federal government. - Second pillar: occupational pension scheme — mandatory for employees meeting certain criteria (optional for others including the self-employed); funded by mandatory contributions from employees and employers; employers can select the pension fund and may contribute above the mandatory contribution; together with the first pillar, the goal is to “maintain living standards.” - Third pillar: optional private pension schemes, financed by insured individuals, with tax incentives on some part of contributions. *Source: IMF staff calculation.* ### Box 1. Corporate Tax and First Pillar Pension Funding (STAF) Reform (concluded) ### Box 1. Corporate Tax and First Pillar Pension Funding (STAF) Reform (concluded) ### Reform details and financing measures - The new pension reform increases funding for the first pillar by CHF 2 billion (0.3 percent of GDP) annually. - The additional financing comes from: - raising mandatory social security contributions paid by employers and employees from 4.2 to 4.35 percent (1.2 billion CHF), and - increasing the federal transfer by CHF 0.8 billion (0. 3 billion from increasing the federal payment from 19.55 percent to 20.2 percent of pillar one expenditures, and 0.5 billion from earmarking VAT). - Source cited: Bundesamt für Sozialversicherungen (BSV). ### Remaining gaps and further reform needs - Further pension reforms will be needed, including: - increasing the retirement age, and - revisiting the pillar 2 conversion rate. - Without the STAF reform, cumulative financing shortfalls for pillar 1 would reach CHF 53 billion (about 8 percent of 2018 GDP) by 2030. - Even with the STAF reform, the financing gap is estimated at CHF 23 billion, calling for further measures to finance the pension system. ### Key figures and labels from the box - Annual additional first-pillar funding: CHF 2 billion (0.3 percent of GDP). - Contribution increase: from 4.2 to 4.35 percent (1.2 billion CHF). - Federal transfer increase component: CHF 0.8 billion (see full breakdown in source text). - Cumulative financing shortfall by 2030 without STAF: CHF 53 billion (about 8 percent of 2018 GDP). - Cumulative financing shortfall by 2030 with STAF: CHF 23 billion. - Chart label referenced: "Cumulative Annual Financing Gap of Pillar 1 (With and Without the STAF Reform)". *Source: Bundesamt für Sozialversicherungen (BSV); box text as provided in the source PDF.* ### 2017. Were real depreciation to ### 1cheea2019001 - 2017. Were real depreciation to ### Potential policy responses and macro framework - With a generally-balanced external position, macroeconomic policies should be geared to ensure 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 guidance: - continue to be directed at maintaining inflation within the definition of price stability; - foreign currency intervention reserved for addressing large exchange market pressures. - Macroprudential policy guidance: - use macroprudential policies to address excessive private credit (related to mortgages lending) and reduce financial sector risks. - Structural policy guidance: - reform the corporate income tax to encourage SME investment and reduce corporate net saving. - Operational note: - foreign currency intervention and reserves management should be used in response to large appreciation pressures. ### Current account (CA) assessment and underlying factors - Background: - Switzerland has run large CA surpluses, averaging nearly 10 percent of GDP since 2006. - The CA balance is estimated at 10.2 percent of GDP for 2018, up from a downwardly-revised surplus of 6.7 percent for 2017. - Ex post CA revisions are frequent, mainly due to changes in estimated investment income. - Surpluses on trade of goods and services (including merchanting) drive the overall positive CA balance. - Assessment (2018): - Cyclically-adjusted CA surplus: 10.4 percent of GDP. - EBA CA norm: 6.0 percent of GDP. - EBA CA Gap: 4.4 percent of GDP in 2018. - Domestic policy gaps contribution to CA gap: -1.0 percentage points (excessive private sector credit: -1.3; fiscal underspending: 0.4). - Policy gaps in the rest of the world: +0.2 percentage points. - Switzerland-specific factors not appropriately treated in the income account lower the CA gap: - (i) inclusion of estimated retained earnings on portfolio equity investment; - (ii) compensation for valuation losses on fixed income securities arising from inflation. - After accounting for these factors, staff estimates: - Staff adjustment: 3.5 (percent of GDP) reduction to the CA gap. - Staff CA Gap: 0.9 percent of GDP (with a range of ±2 percentage points). - Key numeric items: - Actual CA: 10.2 (percent of GDP) - Cycl. Adj. CA: 10.4 (percent of GDP) - EBA CA Norm: 6.0 (percent of GDP) - EBA CA Gap: 4.4 (percent of GDP) - Staff Adj.: 3.5 (percent of GDP) - Staff CA Gap: 0.9 (percent of GDP) ### Real exchange rate (REER) background and assessment - Background: - The CPI-based REER appreciated by 16 percent during 2008–18, including two episodes of rapid appreciation in response to safe-haven inflows. - The first spike occurred in July 2011 and led the SNB to establish a floor of 1.20 for the CHF-EUR exchange rate in September 2011. - After exiting the floor on January 15, 2015, the REER appreciated sharply then moderated due to partial unwinding of nominal overshooting and lower inflation in Switzerland than trading partners. - Average REER for 2018 weakened by 2.8 percent relative to the 2017 average. - As of March 2019, the REER had appreciated by 0.3 percent compared to the 2018 average. - Assessment: - The EBA REER index and level models suggest the average REER in 2018 was 11–17 percent overvalued, with policy gaps accounting for a modest amount of the total gap. - Measurement caveat: models may not fully capture secular improvement in productivity, especially in knowledge-based sectors. - Based on the CA gap, staff assesses the REER gap to have been in the range of [-6.5, +1.0] percent in 2018. ### Capital and financial accounts; FX intervention and reserves - Capital and financial flows: - Since 2007, cumulative net inflows amounted to about 75 percent of GDP. - To reduce attractiveness of inflows, since January 15, 2015 banks’ placements at the SNB (above a certain threshold) have been subject to a negative interest rate of 0.75 percent. - These inflows stopped in mid-2017 and foreigners reduced holdings of currency and deposits in 2018. - There are no restrictions on financial flows. - Assessment: financial flows are large and volatile, reflecting Switzerland’s status as a financial center and a safe haven, with inflows tending to accelerate during periods of heightened global and regional uncertainty. - FX reserves: - Foreign exchange reserves amounted to USD788 bn (114 percent of GDP) at end-2018, down USD24 bn (including valuation changes) since end-2017. - About 75 percent of reserves were accumulated during 2009–15, including to defend the previous exchange rate floor. - Since exiting the floor, the SNB has intervened periodically, purchasing sizable volumes in response to large appreciation pressures and more frequently but in smaller amounts. - Purchases dwindled since mid-2017, amounting to only CHF2.3 bn in 2018. - Assessment: reserves are large relative to GDP but more moderate when compared with short-term foreign liabilities. - Rationale: high reserves reflect monetary policy operations aimed at avoiding persistent undershooting of inflation (which averaged -0.15 percent during 2012–18) given limited scope for further easing (supply of domestic assets limited and marginal interest rate on banks’ deposits at the SNB is -0.75 percent). - Past interventions helped avoid potentially-large exchange rate overvaluation. ### Risk Assessment Matrix — key risks, likelihood, impact, and policy responses - Global Risks: - Weaker-than-expected global growth: - Relative Likelihood: High (Europe)/Medium (U.S., China) - Time Horizon: ST, MT - Expected Impact: High - Policy Responses: - Loosen fiscal policy to support domestic economy and reduce reliance on external demand. - Improve domestic productivity. - Temporarily suspend the fiscal rule to allow sustained countercyclical stimulus. - If needed, consider pre-announced regular foreign exchange purchases in case of excessive currency volatility. - Rising protectionism and retreat from multilateralism: - Relative Likelihood: High - Time Horizon: ST, MT - Expected Impact: High - Policy Responses: - Work with international partners to secure benefits of economic integration. - Increase geographical diversification of trade partners. - Strengthen supervision of bank and non-bank financial sector. - Make preparation for alternative EU banking “getaways.” - Consider fiscal loosening in case of growth downturn. - Sharp tightening of global financial conditions: - Relative Likelihood: Medium - Time Horizon: ST - Expected Impact: Medium - Policy Responses: - Pre-emptive slowing of bank lending to the private sector (which is expanding by 5 percentage points of GDP per year) through macroprudential measures to prevent further increase in vulnerabilities. - In event of growth slowdown, use substantial fiscal space for countercyclical discretionary fiscal stimulus. - Cyber-attacks on interconnected financial systems: - Relative Likelihood: Medium - Time Horizon: ST, MT - Expected Impact: Medium - Policy Responses: - Ensure adequate cyber-security defenses in vital infrastructure. - Develop strategies to limit financial stability risks from fintech developments. - Country-Specific Risks: - Resumption of safe haven inflows in response to renewed global risk-off sentiment: - Relative Likelihood: Medium - Time Horizon: ST, MT - Expected Impact: High - Policy Responses: - Use targeted foreign exchange purchases to prevent sharp appreciation. - Allow full operation of the structural-balance fiscal rule and allow temporary discretionary fiscal stimulus if downturn is deep and/or sustained. - Enhance anti-corruption and AML/CFT framework to protect financial sector against inflows from foreign illicit proceeds. - Prolonged low-growth and low-inflation environment: - Relative Likelihood: Medium - Time Horizon: MT - Expected Impact: High - Policy Responses: - Expand macroprudential toolkit to reduce financial sector vulnerabilities. - Strengthen banks’ buffers against property-related exposure. - Assess risks in the construction sector. - Consider changes to limits on portfolio allocations for pension funds (indicative) and insurance companies. - Political developments negatively affecting Swiss-EU relationships: - Relative Likelihood: Low - Time Horizon: MT - Expected Impact: High - Policy Responses: - Seek to preserve efficient flows of goods, labor and financial services with the EU. - Use “exceptional” circumstances clause in the fiscal rule to inject discretionary stimulus if needed. ### Debt Sustainability Analysis — summary, baseline, and stress tests - Summary: - Public debt sustainability risks remain contained due to strict implementation of fiscal rules and low stock of public debt. - Debt-to-GDP ratio edged up in 2017 due to a new valuation method for some bonds on the liabilities side of the statement of financial position. - Baseline scenario assumptions and projections: - Key assumptions: gradual but steady recovery of economic growth and continued adherence to federal and sub-federal fiscal rules. - Under the baseline, public debt projected to decline from 40.5 percent of GDP in 2018 to about 32 percent of GDP in 2024. - Gross financing needs are expected to remain slightly negative during the medium term. - Stress tests (scenario outcomes and assumptions): - Real GDP growth shock: - Assumption: Real GDP growth rates are one standard deviation (1.4 percent) below the baseline during 2020–21. - Outcome: debt-to-GDP ratio stays around 40 percent in 2021 (about 4 percentage points higher than the baseline). - Primary balance shock: - Assumption: Primary balance in 2020–21 is hit by a negative shock of 0.3 percent of GDP. - Outcome: debt-to-GDP ratio is about 1.3 percentage point above the baseline during 2020–24. - Real interest rate shock: - Assumption: Nominal interest rate increases by 200 basis points during 2020–24. - Outcome: debt-to-GDP ratio becomes slightly higher than the baseline but continues declining. - Real exchange rate shock: - Assumption: Nominal CHF/USD exchange rate increases by 9 percent in 2020 relative to its 2018 level. - Outcome: impact on public debt trajectory is minor. - Combined shock (simultaneous combination of the previous three shocks): - Outcome: debt-to-GDP ratio approaches 40 percent in 2021 (approximately 4 percentage points higher than the baseline); after 2021, debt starts declining on a trajectory almost parallel to baseline. - Selected numeric projections and indicators (as presented): - Nominal gross public debt: 43.3 (2017), 42.7 (2018), 40.5 (2019), 38.7 (2020), 37.3 (2021), 36.0 (2022), 34.7 (2023), 33.4 (2024), 32.1 (projection end). - Public gross financing needs: -0.5 (2017), -1.2 (2018), -1.3 (2019), -0.6 (2020), -0.5 (2021), -0.6 (2022), -0.9 (2023), -1.4 (2024), -1.6 (cumulative projection). - Real GDP growth (in percent): 1.4 (2017), 1.7 (2018), 2.5 (2019), 1.1 (2020), 1.6 (2021), 1.6 (2022), 1.6 (2023), 1.6 (2024). - Inflation (GDP deflator, in percent): 0.1 (2017), -0.4 (2018), 0.6 (2019), 1.2 (2020), 0.9 (2021), 0.9 (2022), 1.0 (2023), 1.0 (2024). - Nominal GDP growth (in percent): 1.5 (2017), 1.3 (2018), 3.2 (2019), 2.3 (2020), 2.5 (2021), 2.5 (2022), 2.6 (2023), 2.7 (2024), 2.6 (projection). - Effective interest rate (in percent): 1.7 (2017), 1.4 (2018), 1.3 (2019), 1.3 (2020), 1.2 (2021), 1.3 (2022), 1.3 (2023), 1.4 (2024). - Change in gross public sector debt (cumulative): -0.4 (2017), 0.9 (2018), -2.2 (2019), -1.9 (2020), -1.3 (2021), -1.4 (2022), -1.3 (2023), -1.3 (2024), -1.2 (projection), -8.4 (cumulative). - Primary (noninterest) revenue and growth: 32.4 (2017), 33.8 (2018), 33.4 (2019), 33.2 (2020), 32.4 (2021), 32.4 (2022), 32.4 (2023), 32.4 (2024), 32.4 (195.3 cumulative). - Primary (noninterest) expenditure: 31.5 (2017), 32.4 (2018), 31.9 (2019), 32.1 (2020), 31.9 (2021), 31.9 (2022), 31.9 (2023), 32.0 (2024), 31.9 (191.7 cumulative). - Automatic debt dynamics contribution (cumulative): 0.1 (2017), 0.1 (2018), -0.8 (2019), -0.4 (2020), -0.5 (2021), -0.5 (2022), -0.5 (2023), -0.4 (2024), -0.4 (total), -2.6 (cumulative). - Real interest rate contribution and real GDP growth contribution highlighted in automatic dynamics and footnotes. *Source: IMF staff.* ### Annex III . FSAP Main Recommendations ### Annex III . FSAP Main Recommendations ### Overview - This annex lists the main recommendations from the 2019 Switzerland Financial System Stability Assessment, with the responsible authority and timing for implementation. - Timing legend: - C = Continuous - I = Immediate (within one year) - ST = Short Term (within 1–2 years) - MT = Medium Term (within 3–5 years) ### Recommendations (numbered) - 1. Strengthen FINMA’s autonomy, governance, and accountability, and preserve the primacy of its prudential mandate (FDF/FINMA; ¶32–34)** - Timing: C - 2. Increase resources for high-quality data gathering and analysis of financial system risks, especially for the fast-moving fintech sector, and to advance recovery and resolution planning. (SNB/FINMA/ Oberaufsichtskommision (OAK BV); ¶18, ¶38, ¶41, ¶67; ¶72)** - Timing: MT ### Financial Stability Policy Framework - Macroprudential - 3. Expand the macroprudential toolkit with mandated supply- and demand-side tools, and strengthen accountability and expectations to act in decision-making (SNB/FINMA/FDF; ¶36)** - Timing: ST ### Banking - 4. Ensure that FINMA—rather than banks—contracts and pays directly for supervisory audits using ‘audit-level’ practices in critical areas (FDF/FINMA; ¶38)** - Timing: ST - 5. Focus supervisory audits and increase FINMA’s risk-based on-site inspections (FINMA; ¶38)** - Timing: ST - 6. Strengthen assessments of key risk management and control practices (FINMA; ¶39)** - Timing: MT ### Financial Market Infrastructures - 7. Strengthen recovery and resolution planning for financial market infrastructures (FMIs) (FINMA/SNB/SIX; ¶49)** - Timing: I - 8. Improve independence of FMIs’ governance arrangements (SNB/SIX; ¶48)** - Timing: ST ### Asset Management - 9. Better monitor and manage concentration risk of regulated funds, and empower FINMA to impose administrative fines (FDF/FINMA; ¶52–53)** - Timing: ST ### Fintech and Crypto-Assets - 10. Enhance the monitoring of activities and address regulatory gaps (FDF/FINMA; ¶58–59)** - Timing: ST ### Financial Safety Net and Crisis Management - 11. Enhance, expand, and expedite recovery and resolution planning, including resolvability (FDF/FINMA; ¶63, ¶65–66)** - Timing: ST - 12. Thoroughly reform the DIS with a public DIA that is included in the crisis management framework, ex-ante DIS funding, and the authority to use deposit insurance funds for resolution funding, subject to safeguards (FDF; ¶67–68)** - Timing: MT *Source: Annex III . FSAP Main Recommendations, 2019 Switzerland Financial System Stability Assessment* ### Annex IV. Status of Previous Recommendations ### 1cheea2019001 - Annex IV. Status of Previous Recommendations ### 2018 Article IV Recommendations — Status and Policy Actions - Fiscal Policy - Recommendation: Allow a larger (smaller) countercyclical response when debt is below (above) long-term sustainable levels. - Status: Overperformance of the federal-level debt brake rule has continued. An expert group recommended to use space from persistent underspending to reduce taxes. - Recommendation: Loosen fiscal policy to relieve pressure on monetary policy tools during low inflation period. - Status: The fiscal policy remained underutilized, as it should be used to caution against domestic rather than external shocks. - Recommendation: Improve pension system’s viability, including by linking the conversion rate for the second pillar to yields and life expectancy. - Status: Some changes to the pension system, in particular, a cut to the conversion rate, were approved in the May 2019 referendum. - Monetary Policy - Recommendation: Given the elevated uncertainty ahead, policy should remain data-dependent and well-communicated. - Status: The SNB continued accommodative policy as inflation hovered in the lower part of the 0–2 percent range and growth weakened. Interest rate has been kept flat at -0.75 percent since 2015. - Recommendation: Utilize foreign currency purchases only to address capital inflow surges. Allow some real appreciation. - Status: The SNB’s FX interventions were limited in 2018, amounting to CHF 2.3 billion, as volatility of capital flows reduced. - Financial Sector Policy - Recommendation: Reinforce the macroprudential framework for real estate. - Status: The Banking Association is considering tightening demand-side macroprudential tools as part of a self-regulation. The authorities proposed an introduction of higher risk weights for IPRE lending in case self-regulation is not implemented and/or insufficient to alleviate risks to financial stability. - Recommendation: Remove tax deductibility of mortgage interest payments together with elimination of imputed rental income’s taxation. - Status: Several proposals to remove tax deductibility are currently being considered. - Recommendation: Remove guarantees on cantonal banks. - Status: Guarantees for cantonal banks are a part of ongoing negotiations. - Structural Reforms - Recommendation: Meet international standards on CIT in a timely manner. - Status: Measures to bring the CIT in line with the international standards were approved in the May 2019 referendum. - Recommendation: Address shortcoming to AML/CFT regime identified in the 2016 FATF evaluation report. - Status: AML efforts are ongoing and some measures to address the shortcomings are being considered. Exchange of tax information with numerous countries—under the OECD’s initiative—is being implemented. *Source: IMF staff.* ### Fund Relations — Key Figures and Arrangements (As of April 30, 2019) - Membership Status: Joined May 29, 1992; Article VIII - Quota and Holdings - Quota: 5,771.10 SDR Million (100.00 percent quota) - Fund holdings of currency: 5,302.76 SDR Million (91.88 percent) - Reserve position in Fund: 468.40 SDR Million (8.12 percent) - New arrangements to borrow: 419.97 SDR Million - SDR Department - Net cumulative allocation: 3,288.04 SDR Millions (100.00 percent allocation) - Holdings: 3,256.13 SDR Millions (99.03 percent) - Outstanding Purchases and Loans: None - Financial Arrangements: None - Projected Payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs) - Charges/Interest: 2019: 0.27; 2020: 0.42; 2021: 0.41; 2022: 0.42; 2023: 0.42 - Total: 2019: 0.27; 2020: 0.42; 2021: 0.41; 2022: 0.42; 2023: 0.42 - Exchange Rate Arrangement - De jure: free floating - Notable event: On January 15, 2015, the SNB ended the exchange rate floor of CHF 1.20 per euro. - De facto: floating arrangement; exchange rate has been floating between 1.12 and 1.20 CHF per euro, with limited SNB intervention, over the last 12 months. - Notifications: On May 8, 2019, Switzerland notified the IMF of exchange restrictions imposed in accordance with relevant UN Security Council resolutions and EU regulations. - Latest Article IV Consultation: Last consultation concluded June 11, 2018; Switzerland is on the standard 12-month consultation cycle. - Technical Assistance: None - Resident Representatives: None - FSAP and ROSCs: 2019 FSAP missions held November 2018 and January 2019; FSAP update findings discussed during March 2019 Article IV consultations and presented to the Executive Board on June 17, 2019. Previous FSAP update report issued May 28, 2014. ROSC reports (Basel, IAIS, IOSCO) conducted 2013–14; report issued May 28, 2014. ### Statistical Issues — Data Adequacy and Standards (As of May 2019) - Assessment: Data provision is adequate for Fund surveillance. Switzerland publishes timely economic statistics and posts most data and documentation on the internet. - National Accounts - Timeliness: Quarterly national accounts published by State Secretariat for Economic Affairs; annual national accounts by Federal Statistical Office. - Note: GDP by canton and detailed disaggregation by industry published with significant lag (2017 data released in late 2019). - Price Statistics - CPI, producer and import price indices collected by Federal Statistical Office; published monthly with base period December 2015. - Additional producer price indexes for services and construction under development (currently published twice a year). - Government Finance Statistics - Compiled by the Federal Finance Administration. Data for general government finalized with eight months lag due to canton and commune fiscal account compilation delays. - Conceptual and methodological reconciliation with national accounts completed with publication of 7 September 2017 (except financial transactions in financial assets and liabilities). - Monetary and Financial Statistics - SNB reports monetary statistics for monetary authorities, deposit money banks, and other banking institutions for IFS, but data reported with a long lag and report forms not consistent with SRFs. - Migration to SRFs in progress; SRF 1SR and 2SR compiled and reported. SRF 2SR needs further improvement before IFS publication. STA working with authorities to fix issues. - Switzerland reports some Financial Access Survey series including two SDG Target 8.10.1 indicators. - Financial Sector Surveillance - Switzerland reports 11 of the 12 core Financial Soundness Indicators (FSIs) and 9 additional FSIs for deposit takers, and 4 FSIs for real estate markets. All FSIs reported annually; data and metadata posted on IMF’s FSI website. - External Sector Statistics - BOP and IIP statistics published based on BPM6; official data in BPM6 format available from 1999 onwards. - Reporting: annual CDIS; semi-annual and annual CPIS; monthly International Reserves and Foreign Currency Liquidity; quarterly external debt to World Bank database. - Data Standards and Quality - Switzerland subscribed to SDDS in June 1996; metadata posted on DSBB; in full observance of SDDS requirements. - Switzerland intends to adhere to SDDS Plus; implementation scheduled for 2020 with an interagency working group (SIF, SNB, FSO, FFA, FSIO, SECO, FINMA). ### Table of Common Indicators Required for Surveillance — Latest Observations (As of May 8, 2019) - Exchange Rates: Date of Latest Observation: Same day; Date Received: Same day; Frequency of Data/Reporting/Publication: D and M / M and M / D and M - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of Latest Observation: Mar 19; Date Received: Apr 19; Frequency: M / M / M - Reserve/Base Money: Mar 19; Apr 19; M / M / M - Broad Money: Mar 19; Apr 19; M / M / M - Central Bank Balance Sheet: Apr 19; May 19; M / M / M - Consolidated Balance Sheet of the Banking System: Apr 19; Apr 19; M / M / M - Interest Rates: Same day; Same day; D and M / M and M / D and M - Consumer Price Index: April 19; May 19; M / M / M - Revenue, Expenditure, Balance and Composition of Financing – General Government: 2017; Apr 19; A / A / A - Revenue, Expenditure, Balance and Composition of Financing – Central Government: 2017; Apr 19; A / A / A - Stocks of Central Government and Central Government-Guaranteed Debt: 2017; Apr 19; A / A / A - External Current Account Balance: Q4/18; Mar 19; Q / Q / Q - Exports and Imports of Goods and Services: Mar 19; Apr 19; M / M / M - GDP/GNP: Q4/18; Mar 19; Q / Q / Q - Gross External Debt: Q4/18; Mar 19; Q / Q / Q - International Investment Position: Q4/18; Mar 19; Q / Q / Q Notes: Frequency codes — Daily (D); weekly (W); monthly (M); quarterly (Q); annually (A); irregular (I); not available (NA). ### Statement by Swiss Authorities (Paul Inderbinen and Gilbert Heim) — June 17, 2019 - Outlook - Authorities broadly agree with staff on outlook: weaker global economy, Swiss GDP growth lost momentum in second half of 2018; growth accelerated in Q1:2019 driven by domestic demand and temporary factors. - Authorities expect GDP to grow at a below-average rate in 2019. - Risks: external environment (spiraling protectionist tendencies), global political uncertainty affecting investments, and the Swiss franc as a safe-haven asset if global risks materialize. - Domestic risk: imbalances in residential real estate sector with the risk of price corrections and macroeconomic repercussions. - Upside: domestic economy may grow more strongly than forecast due to favorable labor market. - Policy Mix - Authorities consider current policy mix appropriate. Fiscal policy contributed to stabilizing the economy over last decade. - Federal-level expenditure increases since 2006: education and research expenditure up around 44 percent; transport infrastructure expenditure up 38 percent. - Two infrastructure funds set up in 2016 and 2018; increased infrastructure expenditures. - Government decision in May 2019: not to adjust the debt brake fiscal rule; decided to simplify procedures for within-year supplementary budgets to reduce incentives for precautionary spending margins. - Fiscal Policy - General government debt: 40.5 percent of GDP. - Debt brake at federal level aims for structurally balanced budget. Structural surpluses in federal finances since 2006 allowed debt reduction and resilience strengthening. - Authorities not convinced that an increase in public spending would sustainably boost growth; no lack of public investment in their view. - Monetary Policy - Authorities concur accommodative monetary policy remains appropriate. - Swiss franc highly valued; recent appreciation against the euro shows fragility in FX market. - CPI inflation remains low and expected to increase only gradually. - Negative interest rate on sight deposits and SNB willingness to intervene in FX market remain essential to keep attractiveness of Swiss franc investments low and ease currency pressure. - External Sector Assessment - Authorities welcome staff analysis of external sector and current account. - Emphasize measurement and demographics issues, intangible assets’ impact on CA, and interaction of demographics and pension systems with savings. - Encourage staff to pursue work on disconnect between CA and REER and on REER models of the EBA methodology. - Structural Issues - Corporate Income Tax (CIT) reform: Federal Act on Tax Reform and AHV Financing (STAF) approved in referendum; new CIT framework effective starting from 2020 and compliant with international standards. - Pension reform: STAF package will provide additional financing for first pillar. Government to submit AHV 21 reform proposal in 2019 with objectives including: (i) unification of retirement age at 65, (ii) additional earmarked revenue, (iii) more flexibility in retirement age with incentives for working longer. - Authorities welcome staff’s assessment of progress in detection and repression of transnational corruption and commit to tackling remaining issues in line with international best practices. - Financial Sector Policies - Authorities welcome positive assessment of financial system stability; FSAP stress tests show strong resilience. - Reforms since 2014 FSAP: adoption of Basel III; strengthened ‘too-big-to-fail’ regime (more stringent than international standards); improved supervision; Federal Financial Market Infrastructure Act (FMIA) entry into force January 2016; FinSA and FinIA to enter into force in 2020. - Ongoing regulatory reform: FINMA pilot for small bank regime effective January 2020; proposed resolution regime for insurance companies expected to enter into force in 2021; review of insurance supervision to enshrine key SST features in binding legislation. - Authorities note risks from persistently low yields for business models and profitability; monitoring and potential regulatory/supervisory action ongoing. - Mortgage and real estate markets: authorities will continue close monitoring; options for additional macroprudential measures and strengthening existing measures will be considered as needed. Decision making for new tools to be formalized and responsibilities assigned. - Deposit insurance reform: public consultation initiated March 2019; proposed move to partially ex-ante funded system and more stringent pay-out deadlines. Authorities view DIS as integrated system (esisuisse, FINMA, liquidator) and consider Swiss DIS in conformity with IADI Core Principles. - Fintech: Switzerland welcomes innovation; FINMA supervises and enforces, informs public on risks (e.g., ICOs); AML/CFT regulations apply fully in fintech area. Government report published December 2018; legislative measures prepared for Parliament. *Source: IMF staff report and Swiss authorities’ statement.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2019/1cheea2019001.pdf_