## 1cheea2022001 ## Source details **Canonical URL:** [1cheea2022001](https://www.imf.org/-/media/files/publications/cr/2022/english/1cheea2022001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2022/english/1cheea2022001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2022/english/1cheea2022001.pdf.json) --- ### COVID-19 context and recent developments - Switzerland’s strengths: diversified manufacturing and services, well-capitalized banks, high household wealth, abundant liquidity, ample fiscal space. - SNB policy tools used: negative policy rates and foreign exchange intervention (FXIs). - Vaccination: "wide vaccination (70 percent/43 percent boosted through April)". - Growth and output: - GDP growth: "3.7 percent" in 2021. - Output: "1 percent higher than in 2019" but "2 percent below pre-Covid trends". - Sector outcomes and external surplus: - Strong exports (pharmaceuticals, watches) and merchanting raised current account surplus to "9.3 percent of GDP in 2021" (2020: "2.8 percent"). - Refugees: "nearly fifty-thousand refugees had come from Ukraine" (mid-May). - Inflation: - Headline inflation averaged "0.6 percent" in 2021 (2020: "-0.7 percent"). - CPI was "2.5 percent" in April (highest since 2008). - Core inflation: "1.5 percent" in April. - Labor market: - Unemployment: seasonally-adjusted "2.2 percent" in April (peak "3.5 percent" in May 2020). - Short-time work: "50,000—1 percent of the active labor force" on support in February (April 2020: "1.3 million"). - Wage pressures: muted despite inflation pickup. ### Monetary policy, SNB balance sheet, and external reserves - SNB policy rate: "-0.75 percent". - SNB Covid-19 refinance facility: CHF "11.2 billion" (end-2020) → CHF "8.7 billion" (end-March). - FX purchases: CHF "110 billion" in 2020 ("15.6 percent of GDP") and CHF "21 billion" in 2021 ("2.8 percent of GDP"). - Official reserves: "$1,110 billion" at end-2021 ("137 percent of GDP"). - NEER and REER moves: - Average NEER appreciated by "2.6 percent" in Q1:2022 vs 2020 (average). - CPI- and PPI-based real EERs depreciated by "2.3" and "17.1 percent", respectively. - SNB balance-sheet and liquidity: - Sight deposits at end-2021: CHF "727 billion" (~100 percent of GDP); CHF "174 billion" drew interest of "-0.75 percent". - SNB reported a CHF "32.8 billion" loss in Q1:2022 ("4.4 percent of GDP"). - SNB total equity: CHF "171.4 billion" (end-March; "23 percent of GDP"); distribution reserves CHF "90.9 billion". - Policy considerations: - Policy-rate changes are likely the most effective tool for normalization; may need to be accompanied by FX purchases if hikes attract excessive inflows or volatility. - Large liquidity stock and sight deposits imply challenges for tightening via FX/SNB-bill sales alone. ### Financial sector resilience and risks - Banking metrics: - Tier 1 capitalization: "19 percent". - ROA: "0.5 percent" (December 2021). - NPLs: "0.66 percent" (December 2021). - Credit Suisse specifics: - CHF "1.7 billion" loss with Archegos-related charges of CHF "4.8 billion"; CET1 ratio improved from "12.9" to "14.4 percent". - Mortgage and real-estate risks: - Mortgage market size: "150 percent of GDP". - Banking sector size: "500 percent of GDP". - Staff stress test: losses could reach CHF "27.6 billion" over 3 years (15 percent of CET1), with aggregate CET1 ratio declining by "230 basis points" to "14 percent". - Staff estimate: a quarter (half) of mortgage loans could become unaffordable if rates increase to "3 percent" ("5 percent"). - Macroprudential actions and needs: - Sectoral CCyB reactivated at maximum "2.5 percent" (effective September 2022). - Recommendations: expand macroprudential toolkit early; limit mortgages at high LTV‑DSTI ratios or require larger amortization; supply-side measures to address high home prices and rents; consider taxation adjustments (abolition of imputed-rent taxation, phasing out mortgage-interest relief). - Fintech, cryptoassets, and cyber risks: - Continue conservative fintech regulation; enhance VASP supervision; implement BIS/crypto prudential standards proactively. - Conduct cost-benefit analysis of tokenized financial ecosystem transition. - Advance resolution plans for systemic FMIs; strengthen margining and monitoring of concentration risks in asset management. ### Fiscal policy stance, challenges, and recommendations - 2021 general government finances: - Overall deficit narrowed from "-3 percent of GDP" (2020) to "-0.7 percent of GDP" (2021). - Covid-19 spending: broadly unchanged (~"2 percent of GDP"). - Public debt declined to "41½ percent of GDP". - 2022 fiscal outlook and measures: - Overall deficit expected to narrow by a further "½ ppt." in 2022 to "-0.3 percent of GDP". - Authorities provided provisions "0.2 percent of GDP" to support Ukrainian refugees; forecasted arrivals raised to "80,000–120,000"; FC will reimburse cantons up to CHF "18,000/person" plus CHF "3,000" for language courses. - No offsetting of refugee support elsewhere. - Debt-brake rule and offsets: - Offsetting of extraordinary spending should ordinarily occur over six years; staff note this may be too short given outlays (≥ "3½ percent of GDP by end-2022"). - FC proposal: extend offsetting period and earmark expected extra SNB dividends. - Staff view: FC proposal preserves framework thrust; suggested improvements include enhancing revenue forecasts and limiting underspending to mitigate surplus bias. - Policy guidance under risks: - Accommodate adverse revenue/spending spillovers via automatic stabilizers; provide targeted, timebound, non-distortionary support (e.g., energy-bill support) if needed. - Articulate a clear medium-term plan addressing aging, climate, energy security, defense, and tax-reform impacts under the debt‑brake rule. - Fiscal numeric estimate: - Authorities’ November 2021 projections suggest aging could require adjustment of "0.8–1.1 percent of GDP" to stabilize debt ratios at 2019 levels by 2050. - DSA baseline projections (As of May 03, 2022): - Nominal gross public debt (percent of GDP): 2020: "41.0"; 2021: "42.6"; 2022: "41.4"; 2023: "40.5"; 2024: "39.3"; 2025: "38.2"; 2026: "37.4"; 2027: "36.4"; final: "35.7". - Public gross financing needs (percent of GDP): 2020: "3.6"; 2021: "7.2"; 2022: "4.9"; 2023: "4.7"; 2024: "4.2"; 2025: "4.5"; 2026: "4.5"; 2027: "4.4"; final: "4.3". - Debt ratios projected to decline from 2022 onward with cumulative projected reduction of "-5.7 percent of GDP" over the projection horizon. ### External position assessment and current account - 2021 external position: assessed as broadly in line with medium-term fundamentals and desirable policies. - Current account (percent of GDP): - 2017: "6.3"; 2018: "6.1"; 2019: "5.4"; 2020: "2.8"; 2021: "9.3"; 2022: "6.3"; 2023: "7.0"; 2024: "7.4"; 2025: "7.0"; 2026: "7.4"; 2027: "7.0". - EBA and staff gap estimates (2021): - CA: "9.3"; Cycl. Adj. CA: "9.8"; EBA Norm: "6.7"; EBA Gap: "3.1"; COVID-19 Adj.: "-0.6"; Other Adj.:"-3.4"; Staff Gap: "-0.9". - Staff assess REER gap in 2021 in range "+0.2 percent" to "+3.6 percent" (overvalued), midpoint "+1.9 percent". - NIIP and reserves: - NIIP (end-2021): "89.8" percent of GDP. - Official reserve assets including gold: US$ "1,110 billion" ("137.4 percent of GDP") at end-2021. - SNB FXIs: CHF "21 billion" net in 2021 (CHF "110 billion" in 2020). ### Outlook and risks - Growth forecasts: - 2022: expected at "2¼ percent" (above medium-term potential of "1½ percent"). - 2023: projected to slow to "1½ percent". - Output gap: projected at "-0.6 percent" in 2022, closing by 2024. - Inflation forecasts: - Expected to average "2½ percent" in 2022 and "1.6 percent" in 2023. - Main risks (tilted to the downside): - War in Ukraine (scope/duration/spillovers). - De-anchoring of inflation expectations in the U.S. or other advanced economies. - Adverse Covid-19 developments and cyberthreats. - Real estate imbalances and sharp rate rises. - Lack of clarity on EU relations. - Policy responses in severe scenarios: use of the debt‑brake rule, extraordinary outlays, and targeted FXIs to mitigate safe-haven pressures. ### Policy priorities and staff recommendations (select) - Fiscal: - Monitor and be ready to use fiscal space for targeted, timebound, non-distortionary support if adverse developments materialize. - Articulate a medium-term fiscal plan to manage aging, climate transition, energy security, and tax reform impacts; use spending reviews to identify savings. - Monetary: - Prepare the SNB for possible normalization: review tools, transmission channels, sequencing, communications; consider policy-rate changes supported by FX purchases if needed. - Policy-rate changes likely the most effective instrument for normalization. - Financial stability: - Consider expanding the legally-mandated macroprudential toolkit early; assess limits on loans or tighter amortization requirements. - Strengthen supervision, resolution planning, and financial-integrity frameworks; enhance monitoring of concentration risks in asset management and FMIs. - Structural: - Advance pension reforms: link retirement age increases to life expectancy; extend 65+ employment via training/upskilling and wage flexibility; further second-pillar conversion-rate adjustments; improve PF efficiency, governance, and investment performance. - Continue green transition and energy-security measures, and strengthen climate-related disclosures and sustainable-finance frameworks. - Strengthen AML/CFT supervision (FINMA on-site and off-site) and anti-bribery enforcement. ### Climate, energy, and sustainable finance - Post-referendum approach: - Authorities extending pre-vote measures/targets through "2024": annual "1.5 percent" emissions reduction; CO2 tax exemptions for companies committed to emissions reduction; fuel-importer offset requirement. - Revising "2025–30" proposals and devising "2030–50" plans. - No new/additional carbon-pricing mechanisms currently contemplated. - Sustainable finance and disclosure: - Binding large-company implementation of TFCD planned in "2024" (exceeding TCFD via dual-materiality). - FINMA amended disclosure circulars (July) requiring large banks/insurers to describe climate risks and governance. - Authorities will develop a green-bond issuance framework in "2022". - Staff recommendations: introduce a sustainable-finance taxonomy; strengthen guidance to prevent greenwashing; adopt standardized disclosure; broaden mandatory disclosure; extend climate stress-tests to D-SIBs. - Energy security recommendations: - Secure short-term supplies/storage; revisit pooling/transmission; create hydropower reserves; build reserve dual-fuel plants; speed regulatory processes; encourage building refurbishment; tighten electrical-device standards. - Authorities’ stance: prioritize regulation, incentives, and investment; binding TFCD implementation for large firms from "2023" under current proposals (large firms: "> 500 employees"). ### Labor market, inclusion, pensions, governance, and EU relations - Labor market policies: - Facilitate reallocation from Covid‑affected sectors; well-targeted ALMPs; expanded training, counseling, and mentorship; incentives to increase participation of older workers and women. - Policy tools: lower early-retirement incentives; improve childcare support; ease tax disincentives for dual-earner families; immigration policies focused on skilled workers. - Pension reforms and needs: - Recent measures: harmonization of male-female retirement age (passed); additional first-pillar VAT funding (passed). - Further measures needed: retirement-age increases linked to life expectancy; further second-pillar conversion-rate cuts and flexibility; efficiency/governance improvements in pension funds. - EU relations: - Negotiations on a common institutional framework stalled (Swiss termination May 2021); ongoing uncertainty affects investment/location decisions. - Authorities pursuing a new “vertical” approach embedding institutional issues in individual bilateral agreements. ### FSAP implementation, AML/CFT, anti-bribery, and governance - FSAP (2019) implementation: progress mixed; priority areas include FINMA autonomy, data/resources for fintech and FMIs, macroprudential toolkit expansion, recovery-and-resolution planning, asset-management concentration monitoring, and potential DIS reform. - AML/CFT and anti-bribery: - Three parliamentary packages adopted in 2021 to strengthen AML/CFT framework. - Sectoral risk assessments published; update of national report issued last October. - OECD WGB findings: of recommendations from Phase 4 follow-up, Switzerland fully implemented "11", partially implemented "18", and not implemented "17". - Outstanding AML gap: AMLA still does not apply to certain lawyers, notaries, fiduciaries in non-transactional roles. - Expected WGB progress report adoption in June 2022. ### Inflation analysis and scenarios (Annex III) - Recent levels and drivers: - Headline inflation through April: "2.5 percent" (Switzerland) vs "7.5 percent" (EA) and "8.3 percent" (U.S.). - Swiss PPI-inflation differential in 2021: "1.2 percent" vs EA "9.7 percent". - Administered non-energy prices weight: Switzerland "27.6 percent"; EA "10.5 percent". - Public-salary increase at confederation level for 2022: "0.5 percent"; SNB company survey wage increase expected "1.6 percent" in 2022. - Scenario forecasts: - ARIMA model constant-price assumption suggests inflation averaging "2.1 percent" in 2022 (Scenarios 1 and 3). - If another trough-to-peak rise occurs as in prior 12 months, 2022 average inflation close to "3 percent" (Scenario 2). - Medium-term projections under Scenarios 1 and 2 imply inflation within "0–2 percent" band from month T+13 to T+24, but risks from war, Covid in China, and inflation expectations could keep upward pressures. ### Risks matrix (select entries) - High-likelihood / short-term risks: - Russia’s invasion escalation → flight to safety, CHF appreciation, competitiveness and growth effects. Policy: targeted FXIs; temporary fiscal stimulus if needed. - Rising and volatile food and energy prices → depressed incomes; policy: monetary normalization consideration; support to low-income households; accelerate green transition. - Medium-likelihood risks: - Real-estate correction → significant stress for highly-exposed players. Policy: strengthen macroprudential toolkit; tighten self-regulation; ensure banks use buffers. - De-anchoring of inflation expectations abroad → possible capital inflows and CHF appreciation; policy: tighten monetary policy if needed; targeted FXIs for sharp/volatile inflows. - Other risks: lethal Covid-19 variants, geopolitical tensions/de-globalization, political developments affecting Swiss‑EU relations (likelihood low but material). *Source: IMF staff report — "1. COVID-19 Pandemic" (Switzerland), extracted from the provided PDF content.* ### 1. COVID-19 Pandemic __________________________________________________________________________ 21 ### 1. COVID-19 Pandemic ### Context - The Swiss economy is diverse and competitive, with strengths in manufacturing and services, well-capitalized banks, high household wealth, abundant liquidity, and ample fiscal space supporting resilience. - The Swiss National Bank (SNB) has used negative policy rates and foreign exchange intervention (FXIs) to mitigate downward price pressures, with side effects on mortgage lending, housing prices, and profitability. - Inflation rose globally in 2021–22; Switzerland’s favorable energy mix and nominal appreciation kept inflation relatively low, although it has risen above the 0–2 percent stability range. - Major challenges include spillovers from the war in Ukraine, aging, climate change, and European Union relations. - Implementation of past IMF advice has been good (Annex I): supportive fiscal, monetary, and financial policies during Covid-19; first-pillar pension reforms; close monitoring of real-estate risks; reactivation of the sectoral buffer (CCyB) in January 2022. Progress on 2019 FSAP recommendations has been mixed (Annex II). ### Recent developments (impact and indicators) - Vaccination: "wide vaccination (70 percent/43 percent boosted through April)". - Growth: GDP growth was 3.7 percent in 2021; output was 1 percent higher than in 2019 but 2 percent below pre-Covid trends. - Sectoral outcomes: Hospitality positive growth but below full recovery; strong exports (pharmaceuticals, watches) and merchanting raised the current account surplus to 9.3 percent of GDP in 2021 versus 2.8 percent in 2020. - Refugees: As of mid-May, "nearly fifty-thousand refugees had come from Ukraine." - Inflation: - Headline inflation averaged 0.6 percent in 2021 (2020: -0.7 percent). - CPI was 2.5 percent in April (highest since 2008). - Euro area inflation cited at 7.5 percent and U.S. at 8.3 percent for comparison. - Core inflation was 1.5 percent in April, up from -0.8 percent in June 2020. - General government finances: - Overall deficit narrowed from -3 percent of GDP in 2020 to -0.7 percent in 2021. - Covid-19 spending remained broadly unchanged (~2 percent of GDP). - Public debt declined to 41½ percent of GDP. - Labor market: - Seasonally-adjusted unemployment reached 2.2 percent in April (peak was 3.5 percent in May 2020). - Employment recovered to pre-crisis levels; contact-intensive sectors still down. - 50,000—1 percent of the active labor force—were on short-time work support in February (April 2020: 1.3 million). - Wage pressures have been muted despite inflation pickup. ### Monetary policy and external reserves - SNB policy rate remained at -0.75 percent. - SNB Covid-19 refinance facility declined from CHF 11.2 billion at end-2020 to CHF 8.7 billion at end-March. - FX purchases: CHF 110 billion in 2020 (15.6 percent of GDP) and CHF 21 billion in 2021 (2.8 percent of GDP). - Official reserves reached $1,110 billion at end-2021 (137 percent of GDP). - Average NEER appreciated by 2.6 percent in Q1:2022 compared to 2020 (average); CPI- and PPI-based real EERs depreciated by 2.3 and 17.1 percent, respectively (driven by inflation differentials). ### Financial sector resilience and risks - Banking sector capitalization: Tier 1 at 19 percent. - Profitability: ROA edged up to 0.5 percent in December 2021. - NPLs: 0.66 percent in December 2021. - Credit Suisse specifics: CHF 1.7 billion loss with Archegos-related charges of CHF 4.8 billion; CET1 ratio improved from 12.9 to 14.4 percent (new capital, de-risking). - Pass-through of negative rates to clients alleviated half of expenses from negative rates. - Sectoral CCyB was reactivated at the maximum 2.5 percent, effective September 2022 (it had been de-activated at the beginning of Covid-19, when it was 2.0 percent). ### External position assessment - 2021 external position assessed as broadly in line with medium-term fundamentals and desirable policies. - Current account (CA) developments: - CA surplus increased due to reversal of Covid-related shocks (watches, precious metals), strong pharmaceutical exports, and a surge in merchanting. - With a CA norm of +6.7 percent and adjustors for Switzerland-relevant factors and Covid-related transitory impacts, the CA gap is assessed to be -0.9 percent of GDP. - Corresponding REER gap estimated in a range of +0.2 percent (overvalued) and +3.6 percent (overvalued), with a midpoint of +1.9 percent. - CA is expected to moderate to 6.3 percent of GDP in 2022, reflecting higher energy prices and weaker global demand. ### Outlook and risks - Growth forecasts: - 2022 growth expected at 2¼ percent (above medium-term potential of 1½ percent) but dampened by war spillovers. - 2023 growth projected to slow to 1½ percent. - Output gap projected at -0.6 percent in 2022, closing by 2024. - Inflation forecasts: Expected to average 2½ percent in 2022 and 1.6 percent in 2023 (Annex III discussion). - Main risks (tilted to the downside): - War in Ukraine: scope, duration, and spillovers; escalation could trigger sharply higher commodity prices, supply disruptions, and lower/negative regional/global growth, affecting financial markets and refugee flows. - De-anchoring of inflation expectations in the U.S. or other advanced economies leading to tighter global financing conditions and intensified flight to the franc. - Adverse Covid-19 developments and cyberthreats. - Real estate imbalances: sharp rate rises could trigger price corrections impacting households, banks, and activity. - Lack of clarity on EU relations. - In severe scenarios, policy responses could involve full operation of the debt-brake rule, extraordinary outlays, and FXIs to mitigate safe-haven pressures. ### Authorities’ views - Authorities broadly concurred with the external assessment and viewed the franc as highly valued. - They noted measurement challenges for some CA and IIP items and cautioned against direct interpretation of PPI-based REER depreciation since PPI differentials were largely driven by energy products. - They highlighted that much of the higher 2021 goods-trade surplus (merchanting) was driven by global factors (commodity prices), not Swiss fundamentals/policies. - Authorities had more positive views on growth and inflation relative to staff: - Federal Expert Group projected growth of 3.0 and 1.7 percent in 2022 and 2023 (mid-March forecasts). - SNB conditional forecasts for headline inflation: 2.1 percent in 2022 and 0.9 percent in 2023, while acknowledging risks of higher/more-sustained inflation. - Authorities expect recovery and sustained labor demand to reduce unemployment in 2022–23. ### Policy discussions and recommendations - Transition from Covid-19 policies to green-digital transformation while accounting for war-related challenges was a central theme. - Broad agreement that Covid-19 support should be reduced while monitoring stresses. - Recommendation for a clear medium-term plan to clarify how spending needs (aging, climate, energy security, defense) and tax reforms would be managed under the debt-brake rule (structural balance over the cycle). - Assess modalities for monetary policy normalization, as time for normalization may be approaching. - Financial-stability priorities: reduce real estate vulnerabilities and contain risks from war and fintech. - Continue pension and labor reforms; refocus climate policies, ensure energy security, and clarify EU relations. ### Fiscal policy details and options - Authorities are phasing out Covid-19 support and providing budgetary outlays in response to the war in Ukraine. - Overall deficit expected to narrow by a further ½ ppt. in 2022 to -0.3 percent of GDP, with Covid support still sizable and no change in the underlying non-Covid surplus (implying a broadly-supportive stance). - Authorities made provisions (0.2 percent of GDP) to support Ukrainian refugees, without offsets in other areas. - Policy advice: accommodate further adverse spillovers on revenues and spending (automatic stabilizers); if needed, provide targeted, timebound, non-distortionary support to households (e.g., energy bills) and firms. - Fiscal framework: - Offsetting of extraordinary spending should ordinarily take place over six years, but this may be too short given magnitude of outlays (≥ 3½ percent of GDP by end-2022). - Federal Council (FC) proposal: extension of the offsetting period and earmarking of expected extra SNB dividends. - Staff view: FC proposal preserves framework thrust (structural balance over cycle, emergency provisions) while limiting netting and additional effort/headwinds from higher surpluses. - Suggested improvements: enhance revenue forecasts, limit underspending to mitigate surplus bias. - Refugee support specifics: authorities raised forecast of arrivals to 80,000–120,000; FC will reimburse cantons up to CHF 18,000/person plus CHF 3,000 for language courses. - Notes on SNB profits and amortization options: - Pre-pandemic surplus/buffer of CHF 4.3 billion at end-2019 and extraordinary revenues (including SNB dividends of CHF 1.3 billion in 2021–22) reduce offset requirements. - Dedicated amount proposal: federal dividends over CHF 0.6 billion, possibly up to CHF 1.3 billion (0.2 percent of GDP) in line with a government-SNB agreement; SNB retains bulk of profits due to balance-sheet risks. *Source: IMF staff report — "1. COVID-19 Pandemic" (Switzerland), extracted from the provided PDF content.* ### 17. Looking ahead, fiscal policy is encountering key challenges. Outlays on aging, climate, ### 17. Looking ahead, fiscal policy is encountering key challenges. Outlays on aging, climate, energy security, digital transformation, and defense are expected to increase. ### Fiscal policy: challenges and recommendations - Outlays expected to increase on aging, climate, energy security, digital transformation, and defense. - Tax reforms: - Focus on implementation of global CIT reforms and capital-market deepening. - Some measures—partial abolition of financial-withholding taxes and elimination of industrial tariffs—may lower revenues. - Revenue losses may total CHF 0.7 billion (0.1 percent of GDP). A popular vote on the partial abolition of withholding tax appears likely. - Debt-brake rule: - Mandates budget balance over the cycle — higher expenditures/lower revenues must be compensated elsewhere. - Large legally-mandated expenditures and planned use of future surpluses and SNB dividends to offset Covid-19 outlays limit room. - Framework is difficult to modify, requiring constitutional change. - Staff recommendations: - Prepare a medium-term plan showing how needs will be addressed alongside possible revenue losses. - Tax reforms should bolster revenues to ensure that aging does not crowd out other areas. - Spending reviews to identify savings. - Joint federal-cantonal efforts on CIT reforms; compensatory measures to maintain business-location attractiveness should be limited in scope. - Numeric estimate: - November 2021 projections by the authorities suggest that aging could require adjustment of 0.8–1.1 percent of GDP to stabilize debt ratios at 2019 levels by 2050. - The National Council recently voted to increase defense spending from 2023. *Authorities’ Views (fiscal)* - Agreed with the assessment and underscored uncertainties. - Stressed that the debt-brake rule performed well during Covid-19, keeping underlying finances on track while facilitating extraordinary outlays. - Supported proposal to lengthen the offset period to limit drag and adjustments to the rule. - Agreed that outlays related to the war in Ukraine should be accommodated. - Agreed that a plan to explain how medium-term expenditure and revenue pressures would be addressed would be helpful. ### Monetary and exchange policy: stance, risks, and tools - SNB stance in 2021–early 2022: - Appropriately maintained an accommodative stance, with fine-tuning. - Reflected inflation returning to the 0–2 percent stability range from below, but uncertain pandemic and recovery prospects. - Fine-tuning included allowing Covid-refinancing and U.S.-dollar facilities to diminish, while reducing FXIs, as safe-haven pressures eased, low-inflation pressures subsided, and inflation differentials contributed to REER depreciation. - Safe-haven pressures resumed with the outbreak of the war in Ukraine, with small FX purchases in March based on staff’s estimates. - Current stance and context: - Current stance: -0.75 percent policy rate and FXIs as needed; in place since 2015. - Although inflation is expected to return below 2 percent in early 2023, there are risks that it may remain elevated or increase. - Accommodative stance brought side-effects: balance-sheet expansion, profitability pressures, higher housing prices. - Policy space and normalization: - Policy space for rate cuts has been limited. - SNB should consider adjusting the policy mix given risks from the war in Ukraine, Covid battles in China, and rising inflation expectations. - Whether to normalize depends on domestic inflation and growth prospects, actions by other central banks, market responses, and fiscal policy. - In the event of continued robust recovery and signs of sustained higher demand-side inflation, the SNB should consider tightening, including to reclaim policy space. - Fed/ECB rate hikes would present an opportunity for action; market rates have risen in recent months. - Inflation differentials suggest room for appreciation to ease inflation pressures; medium-term inflation expectations appear well anchored. - Normalization by other major central banks could lead to higher financial market volatility and fluctuations; this could impact SNB finances, given its large balance sheet and exposures. - Tools and sequencing: - SNB’s tightening toolkit: policy-rate changes, FXIs, repos/bills, and communications. - SNB may work with the FC and FINMA on complementary macro/microprudential measures. - Large stock of liquidity/SNB sight deposits suggests challenges to generating significant tightening through sales of FX/SNB bills. - Large FX sales may be complicated unless linked to changes in global interest rates or other exogenous changes in franc desirability. - Policy-rate changes are likely the most effective tool; they may need to be accompanied by FX purchases if hikes attract excessive inflows or if there is volatility. - Considerations should be explained to markets and the public. - Key central-bank and balance-sheet figures: - Sight deposits at end-2021 were CHF727 billion (~100 percent of GDP); CHF174 billion drew interest of -0.75 percent, the rest zero. - SNB reported a CHF 32.8 billion loss in Q1:2022 (4.4 percent of GDP), driven by losses on interest-bearing paper, equities, and ER changes. - SNB total equity was CHF 171.4 billion (23 percent of GDP) at end-March, including distribution reserves of CHF 90.9 billion. - Use of FXIs for QE is linked to limited CHF-denominated assets. *Authorities’ Views (monetary)* - Broadly agreed with staff’s assessment and recommendations; noted complexity given uncertainties and risks. - SNB sees the inflation pickup as mostly supply driven and temporary, while acknowledging risks of higher sustained demand-side pressures. - SNB monitoring inflation prospects internationally and stands ready to act. - Inflation differentials are large, allowing room for nominal appreciation to limit price pressures. - Communications are important; clear communication does not mean forward guidance. - Interest-rate hikes would help regain policy space but are at most a secondary consideration. - Actions of other central banks and fiscal policy should be assessed for their impact on price stability and economic developments in Switzerland. - SNB noted the size of its balance sheet is not a constraint; adequate capital buffers and sensible profit distributions are key. ### Macroprudential and financial policies: risks and policy actions - Financial stability risks: - Credit growth has been strong; NPLs are low. - Asset quality could deteriorate as Covid support is reduced, but bank exposure to most-affected sectors is limited. - Profitability resilient, though compressed by negative interest rates. - Housing prices have risen relative to fundamentals; overvaluation estimates are 5–30 percent for apartments. - A sharp tightening could trigger sell-offs in investment-led segment and increase affordability concerns. - Domestic banks vulnerable to interest-rate shocks due to duration gaps. - Largest banks exposed to international clients (leveraged and Lombard loans), counterparty credit risk in derivative and trading activities, market and basis risk, and business risk from lower asset management flows linked to the war in Ukraine. - Risks related to cryptoassets and cyberattacks have increased with the war; sanctions have increased compliance and financial-integrity risks. - Macroprudential progress and remaining needs: - Capital rules being amended to implement the Basel III finalization package expected in 2024 (including an output floor for IRB models and RE exposures). - FINMA has: - Established a cross-sectoral governance barometer. - Advanced recovery-and-resolution planning for too-big-to-fail institutions. - Set up dedicated onsite teams and is providing licenses to individual asset managers. - Parliament approved revisions of the AML Act (detailed provisions on beneficial-owner identity and obligations for updating client data). - FC announced intentions to introduce a public liquidity-backstop to bolster liquidity under resolution, linked to enhanced special liquidity requirements for SIBs from July. - FINMA should have power to require ex ante restrictions for banks driven by supervisory risk-management and governance assessments. - For asset managers (AMs), FINMA should heighten monitoring of concentration risk, enhance data collection, and consider administrative fines. - Real-estate and systemic risk: - Mortgage market is large at 150 percent of GDP; banking sector size is 500 percent of GDP. - Staff stress tests: losses could reach CHF 27.6 billion over 3 years (15 percent of CET1 capital), with aggregate CET1 ratio declining by 230 basis points to 14 percent. - The sectoral CCyB reactivation at 2.5 percent would absorb 25 percent of losses, but some banks would breach capital buffers. - Staff estimates that a quarter (half) of mortgage loans could become unaffordable if rates increase to 3 percent (5 percent). - Low diversification and geographical concentration of some domestically-focused banks could amplify pressures in some cantons. - Policy recommendations: - Early consideration of expanding the legally-mandated macroprudential toolkit. - Limit number of mortgages at high LTV-DSTI ratios or require more substantial mortgage repayment to reduce potential losses. - Supply-side actions to address high home prices and rents, together with adjustments to taxation (e.g., abolition of imputed-rent taxation, phasing out mortgage-interest relief). - Consider targeted subsidies, more social housing, and addressing constraints (zoning flexibility, infrastructure investment). - Fintech, cryptoassets, and cyber: - Authorities should continue conservative fintech regulation and accelerate FSAP implementation. - Contagion, legal, and reputational risks in fintech and cryptoassets are important, along with cyberattack and money-laundering vulnerabilities. - Recommendations: - Ensure robust margining by banks, AMs, and FMIs. - Continue enhancing VASP supervision. - Advance resolution plans for systemic FMIs. - Proactively implement global prudential standards for cryptoassets (BIS, 2021). - Conduct a thorough cost-benefit analysis of transitioning to a tokenized financial ecosystem. - Progress noted: successful experiments on digital-asset settlement on new platforms. - Authorities should implement outstanding 2019 FSAP advice, particularly on data/resource gaps, FINMA autonomy/supervision intensity, macroprudential framework, fintech oversight, and FMIs. - Supervisory and enforcement developments: - In the wake of CS losses (Greensill, Archegos), FINMA focused on enhanced supervisory intensity, de-risking, strengthened risk controls, and governance assessments. Enforcement proceedings are underway. - Authorities reviewing “Suisse Secrets” leaks for improprieties. - Plans to introduce RRPs for insurers and possibly non-SIBs; proposed framework to advance funding-in-resolution for SIBs. No plans to overhaul deposit insurance. *Authorities’ Views (macroprudential and financial)* - Authorities share concerns over rising real estate risks and are monitoring these and other areas. - SNB/FINMA view mortgage and real-estate market vulnerabilities as risks for financial stability given materiality of exposures. - Noted sectoral CCyB reactivation in January will maintain and strengthen sector resilience. - Further tightening via self-regulation may be called for; rising vulnerabilities warrant early consideration of expanding the legally-mandated macroprudential toolkit. - Flagged efforts to strengthen regulatory framework, enhance supervisory intensity, take remedial action to address risk-control failures, advance resolution plans and liquidity arrangements for systemic institutions, monitor AML/CFT risks in fintech, and continue efforts to deepen understanding of CBDC benefits/risks. ### Climate change and energy: policy stance and priorities - Post-referendum approach: - Authorities advancing alternative climate approaches after last year’s referendum defeat. - Extended pre-vote measures/targets through 2024: annual 1.5 percent emissions reduction, CO2 tax exemptions for companies committed to emissions reduction, requirement for fuel importers to offset emissions from transport. - Initiated work on revised 2025–30 proposals and 2030–50 plans. - Focus on regulation, incentives, and investment (e.g., heating systems, charging infrastructure). - No new/additional taxes or carbon-pricing mechanisms are being contemplated—a departure from the previous proposal. - Specific measures: - Fuel importers will bear an increased offset burden via purchase of certificates for demonstrated emissions reductions, with costs passed to consumers. - Canton-level measures are being enhanced (e.g., in 2021, Zurich voters approved a 95-percent reduction of heating-system emissions (vs. 1990) by 2040). - Sustainable finance: - In 2024, authorities will establish binding large-company implementation of the Task Force on Climate-related Financial Disclosures (TFCD), exceeding TCFD via a dual-materiality principle. - Last July, FINMA amended circulars on disclosures, requiring large banks and insurers to describe climate risks, business impacts, risk-management processes, and governance arrangements. - SNB/FINMA are assessing transition risk of G-SIBs (UBS, CS). - Authorities will develop a green-bond issuance framework in 2022. - Staff recommendations: - Introduce a sustainable-finance taxonomy. - Strengthen guidance to prevent greenwashing. - Adopt a standardized disclosure framework for in-scope firms. - Broaden mandatory disclosure to additional firms. - Extend climate stress-tests to D-SIBs. - Under current proposals, binding climate reporting will apply for large firms (> 500 employees) from 2023; SMEs (< 250 employees) account for 99 percent of firms and 60 percent of turnover. - Energy security and transition: - Promoting green transition/energy security will require review of energy strategies, collaboration with neighbors, and public support. - War in Ukraine and supply risks have focused attention on energy security. - Major energy-mix contributions from hydro and nuclear power and timing for electricity-price adjustments have so far shielded consumers from price spikes. - Denuclearization will gradually change the mix, along with a shift to renewables under the 2050 Energy Strategy. - Switzerland’s denuclearization is flexible—it provides for continued operation of reactors, rather than mandated closure dates. - Changes to EU cross-border electricity regulations (from 2025 neighbors reserve 70 percent of cross-border capacity for other EU members) are a risk to winter imports. - Complex/lengthy approval procedures and NIMBY concerns may affect expansion of renewables. - Resilience measures recommended: - Secure short-term supplies/storage, revisit pooling and transmission, and improve storage arrangements. - Create hydropower reserves and improve reservoir management. - Build reserve dual-fuel (gas-diesel) plants. - Speed regulatory processes, encourage building refurbishment, and tighten electrical-device standards. *Authorities’ Views (climate and energy)* - Authorities are advancing alternative approaches after the referendum defeat and have extended measures through 2024 while working on revised proposals for 2025–30 and plans for 2030–50. - Focus remains on regulation, incentives, and investment rather than new/additional carbon pricing. - Authorities plan binding TFCD implementation for large companies in 2024 and a green-bond issuance framework in 2022, and are strengthening disclosures and assessments of transition risks for major banks and insurers. *Italic: IMF staff summary of chapter content.* ### 32. The authorities assign high priority to reducing emissions, supporting green transition, ### 1cheea2022001 - 32. The authorities assign high priority to reducing emissions, supporting green transition, ### Climate, green transition, and energy security - Authorities assign high priority to reducing emissions, supporting green transition, and energy security. - In view of the 2021 referendum result, they are developing short- and medium-term climate measures acceptable to voters. - A new framework for government green bonds is expected to set standards for other borrowers (cantons, private sector). - Work is advancing on disclosures and comparable transparency in support of a market-based approach to sustainable finance. - Authorities share concerns on energy security and place high importance on near- and medium-term measures to alleviate risks. - Policy measures under consideration or underway for energy security include: - securing short-term supplies, - encouraging demand reduction, - boosting hydro capacity and reservoir management, - building back-up stations and fuel reserves, - speeding regulatory processes for new projects. - Extension of current CO2 law measures and targets for 2022–24, revising 2025–30 proposals, and devising policies for 2030–50 are welcomed. ### Labor market, inclusion, and pensions — near-term focus and reforms - Near-term focus: facilitating reallocation of workers from Covid-19-affected sectors. - Covid-19 support should continue where needed, but prolonged assistance might delay restructuring/mobility. - Support for reallocation/reemployment calls for well-targeted labor policies (ALMPs), focused on upskilling for jobs with high future demand. - Expanded training, counseling, and mentorship will smooth transitions. - Increasing participation, closing skill gaps, and reducing inequality are additional priorities: - Promote broader/longer participation given the rapidly-aging population. - Improve equality for women and lower-skilled workers. - Policy tools: lowering early-retirement incentives; removing disincentives for hiring/retaining older workers; further improving childcare support; easing tax disincentives for dual-earner families. - Address skill gaps via raising participation of older workers, ALMPs targeting skill acquisition, and immigration policies focused on skilled workers. - Pension reforms implemented and needed: - Reforms in 2021/early-2022 considered and passed measures: gradual male-female retirement age harmonization (passed), additional first-pillar VAT funding (passed). - Other proposals included: cuts in second-pillar annuity-conversion rates, post-retirement-age employment incentives, and lower pension-system entry age, wage thresholds, and coordination deduction to shore up pension fund (PF) finances and/or pension adequacy for lower-income and multi-job workers. - Reforms may be subject to referendum; even if they pass, financing gaps will reemerge around 2030. - Further retirement age increases are needed, linked to life expectancy, along with actions to extend 65+ employment through training/upskilling and wage flexibility. - Further second-pillar conversion-rate cuts and flexibility are needed (beyond proposals to date). - Measures to improve PF efficiency, governance, and investment performance are also needed. ### Authorities’ views (labor, pensions, governance, EU relations) - Authorities agree efforts to improve labor-market resilience, pension-system sustainability, equality, and the business environment should continue. - Switzerland performs well in labor and business-environment areas; authorities intend to sustain competitiveness and dynamism. - Recent reforms highlighted: tax adjustments, additional childcare support, Pillar 1 and 2 pension reforms. - Consensus-building is often challenging, especially on pensions; some reforms advance gradually due to referendum prospects. - EU relations: - Swiss-EU relations are wide-ranging and complex; the way forward is unclear. - Over the past decade, the EU called for a common institutional framework for agreements governing Switzerland’s access to the EU internal market. - Swiss consultations on a 2018 draft identified outstanding issues: application of the EU Citizens’ Rights Directive, preservation of working conditions/wages, and state aid. - Negotiations resumed but were terminated by the Swiss side in May 2021. - Since then, the EU has not agreed to update agreements and indicated it will not sign new accords (except where it has specific interests), leading to progressive erosion of EU-market access as agreements are not updated (e.g., medical-device mutual recognition) and lower involvement in EU programs (e.g., Horizon research). - Uncertainty is likely to affect investment and location decisions over time; beneficial to establish arrangements that give stability and predictability to relations. Compensatory measures should be limited (targeted, timebound). - Authorities have restarted engagement with the EU and developed a new “vertical” approach embedding institutional issues in individual bilateral agreements; they are also working to identify and address existing regulatory differences with the EU. - Governance and Covid-19 response oversight: - High priority on ensuring efficiency, transparency, and accountability in Covid-19 response. - Government (Federal Office for Public Health, Federal Chancellery, SECO) and SNB have completed and are conducting crisis-management reviews. - Federal Audit Office and Parliament have completed and are conducting evaluations on pandemic handling, including procurement (which should include publication of beneficial-ownership information). ### Governance: AML/CFT, anti-bribery, and enforcement - AML/CFT framework strengthening: - After a 2020 FATF report, three packages were adopted in 2021 by parliament: - (i) revision of the AML/CFT Act and other acts in March; - (ii) other measures to strengthen the fight against terrorism and organized crime in July; and - (iii) changes in the AML/CFT ordinance on crypto assets in August. - Since a 2015 national assessment report, sectoral risk assessments have been published for non-profits, legal persons, cryptoassets, crowdfunding, cash-usage, corruption, fraud, and phishing. - An update of the national report was issued last October. - FINMA’s AML/CFT supervision (on-site and off-site) should be reinforced; further efforts are needed to strengthen the role of financial intermediaries, in line with a risk-based approach. - Anti-bribery enforcement: - While Switzerland is an active enforcer of the OECD Anti-Bribery Convention, further efforts are needed. - A 2020 OECD Working Group report noted a high number of discontinued cases and a decrease in newly-investigated and ongoing cases in 2018–20. - Progress has been made: resources for the Money-Laundering Reporting Office (MROS), revision of the Law on Public Procurement, and efforts to raise awareness of bribery issues. - Recommended further strengthening: maximum fines, whistleblower protection, conditions governing appeals, and extension of the AML law to lawyers, notaries, and fiduciaries providing non-financial services. ### Staff appraisal — risks, fiscal stance, monetary policy, financial sector, and policy recommendations - Key risks and uncertainty: - Recovery is expected to continue, but new challenges have emerged, especially from the war in Ukraine; uncertainty and risks are high. - Direct links to Russia and Ukraine are limited, but indirect exposures may be substantial through commodity prices/supplies, financial exposures (via commodity traders, wealth management), and lower regional/global growth. - Escalation of the war is a major risk and uncertainty. Adverse developments could reignite safe-haven flows. - Other important risks: Covid-19 and real-estate imbalances. - Fiscal stance and recommendations: - The authorities’ fiscal stance for 2022 is appropriate, although flexibility is needed given uncertainty/risks. - The debt-brake framework delivered robust finances prior to Covid and flexibility in response. - The underlying position is expected to remain unchanged, appropriate under the baseline. - Sizable Covid outlays provide insurance; accommodation of refugee support is welcome. - Authorities should monitor the situation closely and draw on ample space in response to adverse developments; options include targeted, timebound, non-distortionary support to households and firms, and operation of stabilizers. - The proposed extension of the offset period for extraordinary outlays is welcome; it creates neither headwinds nor departs significantly from established arrangements. - The pace/magnitude of cost-cutting/fee hikes at hard-hit enterprises (e.g., railways) should be reviewed to avoid undermining service provision. - A medium-term plan is needed to address fiscal challenges like aging, climate transition, energy security, and tax reforms. - There is ample space to run deficits, but the framework requires constitutional change to be modified; new priorities will need to be offset. - Articulation of a medium-term plan to facilitate increased priority spending and manage possible revenue losses from tax reforms will be important. - Tax changes should make the system less distortive and bolster revenues. Spending reviews will help identify savings. - Monetary policy and normalization: - After a long stretch of accommodative monetary policy, the time to start normalization may be approaching. - Inflation pickup is still relatively benign and may be temporary, but there are risks that inflation may rise further and be more persistent. - The SNB should closely monitor developments and prospects, including internationally. - To prepare for possible normalization, the SNB should review its tools, transmission channels, sequencing of steps, and communications, and adjust when needed. - Policy-rate changes are likely the most effective tool; they may need to be accompanied by FX purchases if there is excessive volatility. - Considerations should be explained to the public. Normalization would help address side effects of extra-accommodative monetary policy. - The 2021 external position is assessed as broadly in line with medium-term fundamentals and desirable policies. - Financial sector resilience and measures: - The financial sector has remained resilient through Covid-19, with strong buffers; still, wide-ranging risks call for continued attention and action. - House prices have risen relative to fundamentals, with search-for-yield and robust mortgage lending. - Tighter self-regulation since 2020 and reactivation of the CCyB requirement are helpful, but rising vulnerabilities warrant further action, including early consideration of expanding the legally-mandated macroprudential toolkit. - Possible measures: limits on loans or tighter amortization requirements, based on assessment of effectiveness. - Taxation adjustments and addressing supply constraints could help affordability. - Indirect exposures from the war in Ukraine (counter-party credit and collateral risk; risks from commodity finance, derivatives, wealth-management flows, financial integrity, cyberattacks) should be kept under close watch. - Authorities should continue efforts to strengthen supervision, resolution planning, financial integrity, fintech regulation, climate reporting, and green finance. - Strengthen ex ante evaluation of governance and risk and move proactively. - Enhanced liquidity requirements and a public backstop for SIBs will help ensure resolvability. - Improve monitoring of concentration risks in asset management, ensure resolvability of systemic FMIs, strengthen fintech regulation (while fostering innovation), proactively implement global cryptoasset prudential standards, and address novel regulatory and risk issues from digital trading/settlement systems. ### Summary of policy priorities and recommendations (select) - Monitor and be ready to use fiscal space for targeted, timebound, non-distortionary support if adverse developments materialize. - Articulate a medium-term fiscal plan to manage aging, climate transition, energy security, and tax reform impacts; use spending reviews to identify savings. - Prepare the SNB for possible monetary normalization: review tools, transmission channels, sequencing, communications; consider policy-rate changes supported by FX purchases if needed. - Consider expanding macroprudential toolkit early; assess limits on loans or tighter amortization requirements; review taxation and supply constraints to improve housing affordability. - Advance pension reforms further: link retirement age increases to life expectancy; extend 65+ employment via training/upskilling and wage flexibility; further second-pillar conversion-rate adjustments; improve PF efficiency, governance, and investment performance. - Continue advancing green transition and enhance energy security through CO2 law extensions (2022–24), revisions for 2025–30, policies for 2030–50, and short-/medium-term energy-security measures. - Strengthen AML/CFT supervision (FINMA on-site and off-site), extend AML law coverage where appropriate, and bolster anti-bribery enforcement measures. *Source: IMF country material.* ### 51. It is recommended that the next consultation takes place on the regular 12-month ### 1cheea2022001 - 51. It is recommended that the next consultation takes place on the regular 12-month cycle. ### Consultation timing - It is recommended that the next consultation takes place on the regular 12-month cycle. ### COVID-19 pandemic: epidemiology, restrictions, and mobility (Figure 1) - The Omicron wave has peaked. - Vaccination has lagged Europe’s leaders. - Hospitalization and fatalities have declined. - Testing has followed the broad European trend. - All federal restrictions were lifted by end-March 2022. - Omicron has affected mobility, but less than Delta. - Charts and indicators shown: New Weekly Covid-19 Cases (7-day moving average cases per million people), Total Covid-19 Vaccine Doses per Person (Including boosters), Daily Covid-19 Hospitalization and Deaths (7-day moving average per 1 million people), New Covid-19 Tests (7-day average tests per thousand persons), Stringency Index (0 least restrictive to 100 most restrictive), Google Mobility Indicators (Percent deviation from baseline). ### High-frequency and leading economic indicators (Figure 2) - Recovery is continuing with a weakened momentum. - Retail was strong in late 2021, but is moderating. - Activity receded with Omicron and the war in Ukraine. - Confidence indicators and purchasing managers indexes show weakening, including in services. - Indicators referenced: Weekly Economic Activity Index (GDP, % yoy WEA), Retail Sales (3mma) Growth (Annual growth, % yoy), KOF Economic Barometer (Index, 2009-2018 LT average = 100), Swiss Economic Confidence Indicator (SECO), Procure.ch PMI and Procure.ch Services PMI. ### Key macroeconomic indicators and drivers (Figure 3; Table 1) - Contributions to Real GDP Growth (percent): Consumption, Construction, Fixed investment, Net exports, Inventories and others (charts referenced). - 2021 drivers included exports, investment, and consumption boosting growth; higher net exports of goods supported the BOP; manufacturing was a key driver of the recovery. - Public debt remains moderate; unemployment trended down after a Covid-19 spike; appreciation pressures have moderated. - Selected projections from Table 1 — Real GDP (Percent Change): - 2017: 1.7 - 2018: 2.9 - 2019: 1.2 - 2020: -2.5 - 2021: 3.7 - 2022: 2.2 - 2023: 1.4 - 2024: 1.8 - 2025: 1.2 - 2026: 1.8 - 2027: 1.2 - Nominal GDP (billions of Swiss francs) series (selected years): - 2017: 693.9 - 2018: 719.8 - 2019: 727.9 - 2020: 705.9 - 2021: 742.5 - 2022: 773.8 - 2023: 795.2 - 2024: 817.7 - 2025: 836.8 - 2026: 861.5 - 2027: 881.7 - Savings and Investment (Percent of GDP): - Gross national saving: 2017: 31.3; 2018: 30.8; 2019: 30.7; 2020: 31.3; 2021: 33.0; 2022: 30.9; 2023: 31.7; 2024: 32.1; 2025: 31.7; 2026: 31.9; 2027: 31.6 - Gross domestic investment: 2017: 25.0; 2018: 24.8; 2019: 25.2; 2020: 28.5; 2021: 23.8; 2022: 24.6; 2023: 24.7; 2024: 24.6; 2025: 24.7; 2026: 24.5; 2027: 24.6 - Current account balance (Percent of GDP) series: - 2017: 6.3 - 2018: 6.1 - 2019: 5.4 - 2020: 2.8 - 2021: 9.3 - 2022: 6.3 - 2023: 7.0 - 2024: 7.4 - 2025: 7.0 - 2026: 7.4 - 2027: 7.0 - Employment and slack measures: - Unemployment rate (in percent): 2017: 3.1; 2018: 2.5; 2019: 2.3; 2020: 3.1; 2021: 3.0; 2022: 2.6; 2023: 2.7; 2024: 2.8; 2025: 2.8; 2026: 2.8; 2027: 2.8 - Potential output growth: 2017: 1.8; 2018: 1.8; 2019: 1.8; 2020: -0.5; 2021: 2.8; 2022: 1.2; 2023: 1.3; 2024: 1.3; 2025: 1.5; 2026: 1.5; 2027: 1.5 ### Monetary policy, SNB balance sheet, and liquidity (Figure 4; Table 3) - Policy and short-term rates have remained around -0.75. - Exchange rates have been fairly stable; FX reserves increased by less in 2021 than in 2020. - Cash in circulation has recovered from a Covid-19 hit. - Loan rates remain low and stable, especially mortgages; banks are gradually passing through negative rates. - SNB balance sheet (Total assets, Millions of Swiss francs — selected years): - 2012: 499,434 - 2013: 490,382 - 2014: 561,202 - 2015: 640,152 - 2016: 746,502 - 2017: 843,306 - 2018: 817,069 - 2019: 860,956 - 2020: 999,028 - 2021: 1,056,776 - Foreign currency reserves (Millions of Swiss francs — selected years): - 2012: 432,209 - 2013: 443,275 - 2014: 510,062 - 2015: 593,234 - 2016: 696,104 - 2017: 790,125 - 2018: 763,728 - 2019: 794,015 - 2020: 910,001 - 2021: 966,202 - Currency in circulation (banknotes) (Millions of Swiss francs — selected years): - 2012: 61,801 - 2013: 65,766 - 2014: 67,596 - 2015: 72,882 - 2016: 78,084 - 2017: 81,639 - 2018: 82,239 - 2019: 84,450 - 2020: 89,014 - 2021: 90,685 - Monetary base (Currency in circulation and sight deposits of domestic banks) (Millions of Swiss francs — selected years): - 2012: 284,381 - 2013: 360,765 - 2014: 375,305 - 2015: 455,863 - 2016: 504,140 - 2017: 551,849 - 2018: 549,374 - 2019: 564,161 - 2020: 674,297 - 2021: 725,618 ### Inflation, import prices, and labor cost pressures (Figure 5) - Inflation has picked up, albeit from negative readings. - Imports and energy products are leading inflation increases. - Changes are not coming from the euro exchange rate. - Pressures on labor costs remain relatively muted. - Real rates have declined with higher inflation, including the real policy rate. - CPI (y/y percent change) and core inflation charts indicate pickup in 2021–22. - Unit labor costs (y/y percent change) remain modest. - Interest Rates (percent): charts show target/policy rate and real target/policy rate trends. ### Financial sector and markets (Figures 6–7; Table 6) - Exchange rate developments have seen limited action. - Stock markets trended up with Covid-19 and down with the war in Ukraine. - Long-term government bond yields have turned positive. - Mortgages have spiked since Covid-19. - Short-term rates have remained near the policy rate; government bond yields have risen across maturities. - Indicators for global systemic banks (Credit Suisse and UBS capture Swiss numbers): - Risk weights of Swiss banks have trended downward; de-risking and de-leveraging measures supported this. - Swiss banks have strong liquidity buffers but rely a bit more on wholesale funding than peers. - Bank soundness indicators (Table 6, selected series): - Regulatory Tier I capital as percent of risk-weighted assets: 2011: 15.4; 2012: 15.7; 2013: 17.8; 2014: 16.1; 2015: 16.6; 2016: 15.6; 2017: 15.7; 2018: 18.2; 2019: 18.3; 2020: 19.0; 2021: 19.3; 2021 (end row) 19.1 (as reported) - Regulatory Tier 1 capital as percent of assets: 2011: 5.5; 2012: 5.5; 2013: 6.1; 2014: 6.9; 2015: 7.3; 2016: 7.1; 2017: 8.0; 2018: 8.3; 2019: 8.6; 2020: 8.1; 2021: 7.9 - Non-performing loans as percent of total gross loans: 2011: 0.8; 2012: 0.8; 2013: 0.8; 2014: 0.7; 2015: 0.7; 2016: 0.7; 2017: 0.6; 2018: 0.7; 2019: 0.6; 2020: 0.8; 2021: 0.7 - Liquidity Coverage Ratio: 2011: 33.9; 2012: 35.4; 2013: 47.4; 2014: 47.4; 2015: 47.4; 2016: 140.3; 2017: 152.7; 2018: 150.9; 2019: 158.3; 2020: 160.6; 2021: 179.2; 2021 reported 177.6 in table - Sectoral distribution of bank credit to the private sector (percent) — households largest share: 2011: 67.3; 2012: 66.9; 2013: 66.2; 2014: 66.6; 2015: 67.6; 2016: 67.4; 2017: 67.6; 2018: 67.2; 2019: 66.9; 2020: 66.1; 2021: 66.1 ### External account and balance of payments (Figure 8; Table 2) - The current account has remained in surplus, supported by exports of chemicals and watches. - Net investment income has remained low; the secondary income balance remains negative. - NIIP positions are balanced across USD, euro, and other; SNB flows remain the key driver of the NIIP. - Selected Balance of Payments (In billions of Swiss francs) — Current Account and components (Table 2): - Current Account (levels): 2017: 43; 2018: 44; 2019: 40; 2020: 20; 2021: 69; 2022: 49; 2023: 56; 2024: 61; 2025: 58; 2026: 63; 2027: 62 - Goods balance (levels): 2017: 63; 2018: 71; 2019: 71; 2020: 58; 2021: 103; 2022: 89; 2023: 99; 2024: 102; 2025: 109; 2026: 117 - Exports (levels): 2017: 324; 2018: 338; 2019: 340; 2020: 330; 2021: 395; 2022: 442; 2023: 471; 2024: 499; 2025: 529; 2026: 560; 2027: 594 - Imports (levels): 2017: 260; 2018: 267; 2019: 270; 2020: 272; 2021: 292; 2022: 353; 2023: 382; 2024: 403; 2025: 427; 2026: 451; 2027: 477 - Current Account (percent of GDP) series reproduced: - 2017: 6.3; 2018: 6.1; 2019: 5.4; 2020: 2.8; 2021: 9.3; 2022: 6.3; 2023: 7.0; 2024: 7.4; 2025: 7.0; 2026: 7.4; 2027: 7.0 - Net primary income (percent of GDP): 2017: -0.7; 2018: -3.1; 2019: -2.7; 2020: -1.9; 2021: -1.9; 2022: -3.9; 2023: -2.8; 2024: -2.9; 2025: -3.4; 2026: -3.6; 2027: -4.0 - Official reserves (billions of Francs, end-period) series (Table 2 memorandum): 2017: 79.2; 2018: 77.6; 2019: 82.6; 2020: 95.4; 2021: 101.4 ### Housing markets and household debt (Figure 9) - Prices continue to rise in all segments; some locales show stronger growth than others. - PTI ratios now 30 percent higher than historical averages. - Mortgage-to-GDP has reached very high levels; household debt is high by international standards. - Real residential property transaction prices indexes (2007 Q1=100) show increases across privately owned apartments, single-family houses, and residential investment property. - Mortgages (Percent of GDP) time series show a rising trend; Total Household Debt (Percent of gross household disposable income) comparative chart places Switzerland among high-debt advanced economies. ### General government finances (Tables 4–5) - General Government (Table 4, selected levels in billions of Swiss francs): - Revenue (2018–2027 selected): 2018: 234; 2019: 239; 2020: 237; 2021: 251; 2022: 255; 2023: 258; 2024: 263; 2025: 267; 2026: 275; 2027: 282 - Expenditure (2018–2027 selected): 2018: 225; 2019: 229; 2020: 258; 2021: 256; 2022: 257; 2023: 257; 2024: 262; 2025: 267; 2026: 275; 2027: 282 - Net lending/net borrowing (billions): 2018: 9; 2019: 10; 2020: -21; 2021: -5; 2022: -3; 2023: 1; 2024: 0; 2025: 0; 2026: 0; 2027: 0 - General Government Gross Debt (percent of GDP): 2018: 39.3; 2019: 39.1; 2020: 42.6; 2021: 41.4; 2022: 40.1; 2023: 38.9; 2024: 37.8; 2025: 36.9; 2026: 35.8; 2027: 35.0 - Historical general government finances (Table 5, selected series, in billions of Swiss francs and percent of GDP): - Revenue (2011–2021, levels): 2011: 204.2; 2012: 205.3; 2013: 210.3; 2014: 212.6; 2015: 220.5; 2016: 221.5; 2017: 229.9; 2018: 234.5; 2019: 238.9; 2020: 236.5; 2021: 250.6 - Expenditure (2011–2021, levels): 2011: 199.9; 2012: 203.8; 2013: 213.1; 2014: 214.2; 2015: 216.9; 2016: 219.8; 2017: 222.2; 2018: 225.3; 2019: 229.3; 2020: 257.5; 2021: 256.1 - Net Lending/Borrowing (levels): 2011: 4.3; 2012: 1.5; 2013: -2.8; 2014: -1.6; 2015: 3.6; 2016: 1.6; 2017: 7.7; 2018: 9.2; 2019: 9.6; 2020: -21.0; 2021: -5.5 ### External and memorandum observations - NIIP and sectoral NIIP charts indicate the SNB as a key driver of NIIP; NIIP positions by currency and sector are detailed in figures. - Exchange rate indexes (NEER, CPI-based REER) and effective exchange rate charts presented (index 2010=100). Italic line: *Source: IMF staff compilation from the provided Switzerland chapter content unit (figures and tables).* ### Annex I. Status of Previous Article IV Recommendations ### Annex I. Status of Previous Article IV Recommendations ### 2021 Article IV Recommendations — Fiscal Policy - Recommendation: Avoid early withdrawal of fiscal support, with adjustments under the fiscal framework (longer offset for COVID-19 spending, limiting spending underruns). - Covid support continued in 2021: "1.9 percent of GDP, compared to 2.1 percent in 2020". - Planned scaling back in 2022, but support to remain "0.9 percent of GDP". - The Federal Council (FC) proposed using future financial surpluses to amortize Covid-related extraordinary expenditures, extending the deadline to "2035". - Recommendation: Keep fiscal policy accommodative until there are signs of sustained recovery; expand support if needed. - Fiscal policy has been accommodative since the outbreak of the pandemic. - Outlays related to the war in Ukraine (e.g., to support refugees) included in 2022. - Recommendation: Enhance fiscal support for green-digital transition, with attention to low-income earners. - No provisions for additional spending were made, but measures proposed to: - Supplement the existing CO2 levy with targeted incentives and investment, especially in transport and the building sector. - Prepare a framework for green government bonds. - Update the “Framework Conditions for the Digital Economy” report. ### 2021 Article IV Recommendations — Monetary Policy - Recommendation: Keep monetary policy accommodative, in light of uncertainties and risks of an extended period of very low or negative inflation. - The SNB kept monetary policy accommodative in 2021 with a policy rate of "-0.75 percent". - Adjustments included allowing the Covid-19 refinance facility and USD liquidity support to diminish, and adjusting FX market operations. - Recommendation: Continually review the monetary framework and tools to consider adjustments to targets and instruments. - The SNB has been continually reviewing its monetary policy framework, instruments, and developments and prospects of monetary conditions. ### 2021 Article IV Recommendations — Financial Sector Policy - Recommendation: Closely monitor financial sector risks (Covid-19 losses, search-for-yield, leveraged exposures, residential and commercial real estate), with new measures as needed. - FINMA and SNB closely monitored risks. - The CCyB for residential mortgages was reactivated and increased. - Remedial actions taken following recent high-profile cases; enforcement proceedings ongoing. - Enhanced special liquidity requirements introduced for systemically-important banks (SIBs). - A proposal for a public liquidity backstop has been planned. ### 2021 Article IV Recommendations — Structural Reforms - Recommendation: Protect labor (limit scarring and inequality) and focus on mobility and flexibility. - Covid-related short-time work scheme adjustments and compensation for self-employed kept in 2021 and to be phased out in 2022. - Measures proposed or adopted to increase labor force participation: - Changes to individual income taxation for married people. - Higher limit of the tax deduction for third-party childcare expenses. - Financial aid for supplementary family childcare. - A vocational consultation program for people over 40. - Recommendation: More decisive pension reforms to head off emerging financial gaps. - Efforts continued on Pillar 1 and Pillar 2 reforms (planned or legislative process): - Pillar 1: increase retirement age for women "64 to 65", additional VAT financing, flexibility in retirement, incentives to work after 65. - Pillar 2: reduction of minimum conversion rate "6.8 to 6", reduction of entry threshold (age, income) and coordination deduction, adjustment of old-age credit rates. - Recommendation: Put in place a clear, monitorable action plan to support long-term climate strategy. - Authorities advancing emission-reduction actions after the revised CO2 law was rejected in 2021: - Extending pre-vote measures and targets for "2022–24". - Revising proposals for "2025–30". - Devising plans for "2030–2050". - 2025–30 proposals focus on regulation, incentives, subsidies, and investment. *Source: IMF staff.* ### Annex II. Implementation of FSAP (2019) Recommendations — Key Points - Overall summary: - Authorities continue to implement 2019 FSAP advice. - FINMA should progress on risk-focused, in-depth, forward-looking supervision; fill resource gaps; step up system-wide analysis of fintech, AM, and FMIs. - Strengthen macroprudential framework to address real estate and mortgage vulnerabilities. - Fill gaps in recovery and resolution planning of too-big-to-fail institutions, including FMIs (post-launch of SDX). - Monitor and manage asset management concentration risk and pension fund systemic risks. - Operationalize a public liquidity backstop for funding under resolution for systemically important banks. - Selected recommendations and implementation status (timing codes: C = Continuous; I = Immediate; ST = Short Term; MT = Medium Term): - 1. Strengthen FINMA’s autonomy, governance, and accountability. (FDF/FINMA; ¶32–34) — Status: C — "Partly taken into account in the 2020 Ordinance to the Financial Market Supervision Act. Further steps are needed." - 2. Increase resources for high-quality data gathering and analysis, especially fintech; advance recovery and resolution planning. (SNB/FINMA/OAK BV; ¶15, ¶29, ¶36 ¶41, ¶51, ¶54, ¶58, ¶63) — Status: MT — "Progress has been made in some areas... but gaps remain." - 3. Expand macroprudential toolkit with mandated supply- and demand-side tools. (SNB/FINMA/FDF; ¶35–36) — Status: ST — "New mandated tools have not been introduced... adjustments will be considered in the context of Basel III implementation." - 4–6. Supervisory audits, on-site inspections, and risk management assessments. — Status: ST/MT — Mixed progress: FINMA can contract audits but banks pay; increased number of on-site inspections; formalized internal risk assessment processes; additional measures needed. - 7–8. Strengthen recovery and resolution planning for FMIs and improve FMI governance independence. — Status: I/ST — Progress: recovery plans for SIX x-clear and SIX SIS approved subject to conditions; preferred resolution strategy for SIX x-clear defined; final approvals and governance autonomy work ongoing. - 9. Better monitor concentration risk of regulated funds; empower FINMA to impose administrative fines. (FDF/FINMA; ¶52–53) — Status: ST — Legislation with additional risk monitoring requirements approved by Parliament; authorities do not intend to empower FINMA to impose fines. - 10. Enhance monitoring of fintech and crypto; address regulatory gaps. (FDF/FINMA; ¶58–59) — Status: ST — Supervision stepped up; DLT Act entered into force in 2021, recognizing transfer of ledger-based securities and allowing DLT-based FMIs to admit non-financial intermediaries; provides legal certainty in insolvency law by regulating segregation of cryptoassets in bankruptcy. - 11. Enhance, expand, and expedite recovery and resolution planning, including resolvability. (FDF/FINMA; ¶63–66) — Status: ST — Partial progress: FINMA approved GSIB recovery plans; FDF to submit new incentive setting for GSIBs to public consultation in 2022; emergency plans for other systemic banks not ready. - 12. Thoroughly reform the DIS with a public DIA, ex-ante DIS funding, and authority to use deposit insurance funds for resolution funding. (FDF; ¶67–68) — Status: MT — "Current reforms fall short of international norms... authorities do not intend to overhaul the DIS as recommended." FC plans a "public liquidity backstop". ### Annex III. Inflation in Switzerland — Key Findings and Scenarios - Recent inflation context: - Headline inflation through April was "2.5 percent" in Switzerland versus "7.5 percent" in the EA and "8.3 percent" in the U.S. - The contribution of energy has been smaller in Switzerland due to lower basket-weight, larger share of administered energy prices, and electricity generation mix. - 2021 PPI-inflation differential: Switzerland "1.2 percent"; Euro area "9.7 percent". - Drivers and structural factors: - Global drivers: recovery to pre-Covid levels for air travel/hotels; global bottlenecks for computer chips/vehicles; higher costs for commodities and shipping. - Administered prices: Swiss non-energy administered prices weight "27.6 percent" vs. EA "10.5 percent". Swiss non-energy administered prices declined by "1.2 percent" on average during "2014–21", while EA increased by "10.2 percent". - Producer-price inflation trended up in March similar to EA, but electricity, gas, steam and air-conditioning prices in EA were "10x higher" than in Switzerland; manufacturing prices in EA increased "4x more" than in Switzerland. - CHF appreciation trend and well-anchored expectations supported lower inflation. - Wage pressures: public salaries increase of "0.5 percent" in 2022 agreed at confederation level; SNB company survey expects average wage increase of "1.6 percent" in 2022. - Forecasts and scenarios: - ARIMA model and constant-price assumption suggest inflation averaging "2.1 percent" in 2022 (Scenarios 1 and 3). - If both domestic and import prices experience another trough-to-peak rise as in the previous 12 months, 2022 average inflation will be close to "3 percent" (Scenario 2). - Medium-term ARIMA projections under Scenarios 1 and 2 imply inflation will remain within the "0–2 percent" band from month T+13 to month T+24, but risks (war in Ukraine, Covid in China, rising inflation expectations) could keep upward pressures. - Comparative administered-price table (selected entries): - Energy: Switzerland index Dec. 2014 "99.4" → Dec. 2021 "106.2" (Inflation "6.8"); Euro Area: "101.77" → "123.64" (Inflation "21.5"); weights in HICP basket in parentheses: Switzerland ("2.7"), EA ("2.8"). - Non-energy: Switzerland index Dec. 2014 "100" → Dec. 2021 "98.8" (Inflation "-1.2"); Euro Area: "98.95" → "109.01" (Inflation "10.2"); weights: Switzerland ("27.6"), EA ("10.5"). ### Annex IV. External Sector Assessment — Assessment and Policy Responses - Overall assessment: - Switzerland’s external position in 2021 assessed as broadly in line with level implied by medium-term fundamentals and desirable policies. - Complex measurement issues and data lags complicate the assessment. - Potential policy responses to maintain broadly-balanced external position: - Fiscal policy should remain broadly balanced in structural terms, in line with the authorities’ debt-brake rule framework, while accommodating additional spending related to the war in Ukraine and continuing Covid-19 support to vulnerable households/firms where needed. - The required offset of extraordinary Covid-19-related spending via future fiscal surpluses should be extended to avoid excessive headwinds to sustained recovery. - With risks rising of persistently higher inflation, the SNB should closely monitor inflation developments and prospects, including internationally, and stand ready to adjust FX market operations and policy interest rates if needed. - Inflation gaps versus the euro area and the U.S. suggest possible room for franc appreciation to ease inflation pressures. - If significant downside risks materialize (e.g., large safe-haven inflows, deep and/or sustained downturn), consider targeted FXIs to mitigate disruptive volatility, and allow full operation of the structural-balance fiscal rule and/or temporary discretionary fiscal stimulus. - Macroprudential policies should focus on containing real estate imbalances and reducing financial sector risks. - Medium-term policies should ensure balanced domestic and external contributions to growth and improve the public-private mix in financial outflows to ease pressures on the franc. - Foreign asset and liability position (end-2021, percent of GDP): - NIIP: "89.8" - Gross Assets: "753.1" - Reserve Assets: "136.5" - Gross Liab.: "663.3" - Debt Liab.: "205.6" - Current account: - Background: CA surpluses averaged "7.2 percent of GDP" during "2011–20". - 2021 CA surplus: "9.3 percent of GDP", up from "2.8 percent" in 2020. - Drivers: reversal of some Covid-linked shocks (watch exports, precious metals trade), strong pharmaceutical sector performance, surge in merchanting trade likely related to commodity-price rises. - 2022 CA surplus expected to moderate to "6.3 percent of GDP". - EBA CA norm: "6.7 percent of GDP". *Source: IMF staff.* ### 9.8 percent and the norm, the overall EBA-estimated CA gap equaled +3.1 percent of GDP in 2021. ### 1cheea2022001 - 9.8 percent and the norm, the overall EBA-estimated CA gap equaled +3.1 percent of GDP in 2021. ### Current Account and EBA-Estimated CA Gap - 2021 (% GDP): CA: 9.3; Cycl. Adj. CA: 9.8; EBA Norm: 6.7; EBA Gap: 3.1; COVID-19 Adj.: -0.6; Other Adj.:-3.4; Staff Gap: -0.9. - The overall EBA-estimated CA gap equaled +3.1 percent of GDP in 2021. - Domestic policy gaps account for -1.8 percentage points and include: - excessive private sector credit: -1.7 pp - fiscal overspending: -0.2 pp - Policy gaps in the rest of the world contribute +1.3 pp. - Adjustments for Switzerland-specific income account factors and COVID-19 transitory impacts reduced the gap to -0.9 percent of GDP (±0.8 percentage points). Specific adjustments include: - valuation losses on fixed-income securities arising from inflation: -3.3 - retained earnings on portfolio equity investment: -0.1 - transitory impacts of the COVID-19 pandemic: -0.6 - Note: Part of the positive EBA CA gap may reflect institutional pension features in Switzerland rather than economic policy gaps. ### Real Exchange Rate (REER) Assessment - Background movements: - Relative to 2020, average NEER stayed virtually unchanged; CPI-based REER depreciated by 2.4 percent; PPI-based REER depreciated by 8.9 percent. - In Q1 2022: average NEER appreciated by 2.7 percent; CPI-based REER appreciated by 0.6 percent; PPI-based REER depreciated by 9.6 percent. - Long-term (since 2010): NEER appreciated by 38 percent; CPI-based REER appreciated by 6 percent; PPI-based REER depreciated by 9 percent. - Assessment: - The staff CA gap implies REER overvaluation of 1.9 percent in 2021 (applying an elasticity of 0.47). - EBA REER index and level models suggest average REER in 2021 was overvalued by 11.6 and 16.3 percent, respectively. - Staff assess the REER gap in 2021 to be in the range of +0.2 percent and +3.6 percent (overvalued), with a midpoint of +1.9 percent. - Measurement caveat: Results may not fully capture a secular improvement in productivity, especially in knowledge-based sectors. ### Capital and Financial Accounts: Flows and Policy Measures - Net financial outflows totaled 3.7 percent of GDP in 2021. - This includes private inflows of 2.3 percent of GDP and an increase in SNB reserve assets of 6.0 percent of GDP. - Historical averages (2009–20): - Net private inflows averaged 2.9 percent of GDP. - Average annual increase in SNB reserves was 10.5 percent of GDP. - Assessment: Financial flows are large and volatile, reflecting Switzerland’s status as a financial center and safe haven. Prior sizable net private outflows declined and on average turned into net capital inflows, adding to appreciation pressures. ### FX Intervention and Reserves Level - Official reserve assets (including gold) amounted to US$1,110 billion (137.4 percent of GDP) at end-2021, up US$26 billion from end-2020 (including valuation changes). - The SNB purchased CHF21 billion of FX (net) through FXIs in 2021, down from CHF110 billion in 2020. - Assessment: - Reserves are large relative to GDP, but more moderate compared with short-term foreign liabilities. - High reserves reflect monetary operations to avoid persistent undershooting of inflation as a result of FX inflow surges and limited scope for further easing. - The marginal interest rate on bank deposits at the SNB is –0.75 percent. - The SNB’s initiation of quarterly publication of (net) FXI information in 2020 enhanced transparency. ### Annex V — Possible Implications of the War in Ukraine - Exposures: - Direct exposure to Russia and Ukraine is modest via energy, merchanting, and the financial sector. - Imports from Russia (goods excluding precious metals) were CHF 270 million in 2021; Russian data showed exports to Switzerland of USD 2.8 billion. - Outstanding claims of Swiss banks on Russian borrowers were $3.9 billion (0.5 percent of GDP; 0.1 percent assets). - The Swiss Banking Association suggested Swiss financial institutions may hold CHF150–200 billion of Russian-client funds (~2½ percent of AuM). - Overall exposure to traders (Russia/non-Russia) was CHF 3.3 bn at UBS (0.9 percent of loans), and CHF 14.6 bn at CS (5 percent). - Sanctions: - Switzerland has adopted nearly all EU sanctions on Russia/Belarus, including travel bans, asset freezes, financing restrictions on the Russian government and central bank, sanctions on Russian banks and SOEs, prohibitions on sale/supply/transfer/export of certain goods/technologies/services, and airspace closure. Merchanting is largely excluded. - Authorities have activated a special status for Ukrainian refugees. - Impacts: - Expected downward pressures on growth, higher inflation, and a lower current account surplus. - Immediate impact included market volatility, flight to safety, and CHF strengthening. - About 50,000 refugees were registered by mid-May. - Risks: - Downside risks from a protracted/wider conflict, potential resumption of flight to safety and CHF appreciation pressures. - Rising food and energy/commodity prices or supply disruptions could depress activity; higher commodity prices and volatility may benefit traders. - Full embargo on commodities from Russia could severely affect traders and merchanting firms and, through their bank borrowing, could affect the banking system. - Public and private buffers appear sufficient to mitigate impacts. ### Annex VI — Risk Assessment Matrix (selected entries) - Russia’s invasion of Ukraine leads to escalation of sanctions and disruptions. - Relative Likelihood: High - Time Horizon: ST - Expected Impact: Flight to safety, CHF appreciation pressures, deflationary pressure, competitiveness and growth effects, impacts via energy prices and financial sector. - Policy Response: Use targeted FXIs; provide temporary discretionary fiscal stimulus if downturn is deep or sustained; enhance anti-corruption and AML/CFT framework; rely on strong financial sector buffers. - Rising and volatile food and energy prices. - Relative Likelihood: High - Time Horizon: ST - Expected Impact: Depressed profit margins and consumer prices transmission; decreased household incomes; hit poor households hard. - Policy Response: Consider normalization of monetary policy; provide support to low-income households; prepare contingency plans for energy supplier liquidity; accelerate green energy transition. - Outbreaks of lethal and highly contagious Covid-19 variants. - Relative Likelihood: Medium - Time Horizon: ST - Expected Impact: Lower GDP growth, larger sales losses, higher likelihood of bankruptcy concentrated in contact-intensive sectors and transport. - Policy Response: Allow countercyclical support; implement targeted measures for affected households and companies; monitor and relieve liquidity stress and solvency risk. - De-anchoring of inflation expectations in the U.S. and/or advanced European economies. - Relative Likelihood: Medium (US), Medium/Low (Euro area) - Time Horizon: ST - Expected Impact: Possible capital inflows, CHF appreciation pressures; inflationary spillovers. - Policy Response: Tighten monetary policy if needed; allow franc appreciation; conduct targeted FXIs if sharp/volatile inflows occur. - Geopolitical tensions and de-globalization. - Relative Likelihood: High - Time Horizon: ST, MT - Expected Impact: Disruptions to trade and capital flows; flight to safety and CHF appreciation pressures. - Policy Response: Diversify trade partners; strengthen monitoring of banks and nonbank financial sectors; consider FXIs; consider fiscal loosening if downturn occurs. - Correction in real estate market and other financial risks (Switzerland-specific). - Relative Likelihood: Medium - Time Horizon: ST, MT - Expected Impact: Significant stress for players with large balance sheet exposure; risks to economic and financial sector stability. - Policy Response: Strengthen macroprudential toolkit; consider regulatory limits on mortgages; coordinate with Swiss Banks Association to tighten self-regulation; strengthen bank buffers; assess risks to non-banks; ensure banks use buffers to absorb losses and keep credit flowing. - Political developments affecting Swiss-EU relations. - Relative Likelihood: Low - Time Horizon: ST, MT - Expected Impact: Potential undermining of trade, investment, and labor relations with the EU. - Policy Response: Preserve efficient flows of goods, labor, and financial services with the EU; continue discussions with European authorities. *Source: IMF staff assessment as presented in the Switzerland country report excerpt (2021–2022 data and annexes).* ### Annex VII . Debt Sustainability Analysis ### Annex VII . Debt Sustainability Analysis ### Baseline projections and key public debt indicators (As of May 03, 2022) - Nominal gross public debt (in percent of GDP): 2020: 41.0; 2021: 42.6; 2022: 41.4; 2023: 40.5; 2024: 39.3; 2025: 38.2; 2026: 37.4; 2027: 36.4; (final column) 35.7. - Public gross financing needs (in percent of GDP): 2020: 3.6; 2021: 7.2; 2022: 4.9; 2023: 4.7; 2024: 4.2; 2025: 4.5; 2026: 4.5; 2027: 4.4; (final) 4.3. - Net public debt (in percent of GDP): 2020: 41.0; 2021: 42.6; 2022: 41.4; 2023: 40.5; 2024: 39.3; 2025: 38.2; 2026: 37.4; 2027: 36.4; 35.7. - Real GDP growth (in percent): 2020: 1.9; 2021: -2.5; 2022: 3.7; 2023: 2.2; 2024: 1.4; 2025: 1.8; 2026: 1.2; 2027: 1.8; (final) 1.2. - Inflation (GDP deflator, in percent): 2020: -0.2; 2021: -0.5; 2022: 1.4; 2023: 2.0; 2024: 1.3; 2025: 1.0; 2026: 1.1; 2027: 1.1; 1.1. - Nominal GDP growth (in percent): 2020: 1.6; 2021: -2.9; 2022: 5.2; 2023: 4.2; 2024: 2.8; 2025: 2.8; 2026: 2.3; 2027: 3.0; 2.3. - Effective interest rate (in percent): 2020: 1.2; 2021: 0.7; 2022: 1.0; 2023: 1.0; 2024: 0.9; 2025: 1.0; 2026: 1.1; 2027: 1.2; 1.4. - Sovereign spreads (EMBIG (bp) / 5Y CDS (bp)): EMBIG: 0; 5Y CDS: 13 (as reported). ### Contribution to changes in public debt (selected flows; in percent of GDP) - Cumulative change in gross public sector debt by year: 2020: -0.2; 2021: 3.5; 2022: -1.2; 2023: -0.9; 2024: -1.2; 2025: -1.1; 2026: -0.8; 2027: -1.0; (final) -0.7; cumulative projection: -5.7. - Identified debt-creating flows (total): 2020: -0.9; 2021: 4.4; 2022: -1.1; 2023: -1.1; 2024: -0.9; 2025: -0.8; 2026: -0.6; 2027: -0.7; (final) -0.4; cumulative: -4.6. - Primary deficit (in percent of GDP): 2020: -0.7; 2021: 2.9; 2022: 0.6; 2023: 0.2; 2024: -0.2; 2025: -0.1; 2026: -0.1; 2027: -0.1; (final) -0.1; cumulative: -0.5. - Primary (noninterest) revenue and grant (in percent of GDP): 2020: 32.0; 2021: 33.3; 2022: 33.5; 2023: 32.7; 2024: 32.2; 2025: 31.9; 2026: 31.7; 2027: 31.7; 31.7; cumulative: 191.9. - Primary (noninterest) expenditure (in percent of GDP): 2020: 31.2; 2021: 36.2; 2022: 34.1; 2023: 32.9; 2024: 32.0; 2025: 31.7; 2026: 31.6; 2027: 31.6; 31.6; cumulative: 191.4. - Automatic debt dynamics (contribution, in percent of GDP): 2020: -0.2; 2021: 1.5; 2022: -1.7; 2023: -1.3; 2024: -0.7; 2025: -0.7; 2026: -0.5; 2027: -0.6; (final) -0.3; cumulative: -4.1. - Of which: real interest rate (contribution): 2020: 0.6; 2021: 0.5; 2022: -0.2; 2023: -0.4; 2024: -0.2; 2025: 0.0; 2026: 0.0; 2027: 0.0; (final) 0.1; cumulative: -0.5. - Of which: real GDP growth (contribution): 2020: -0.8; 2021: 1.0; 2022: -1.5; 2023: -0.9; 2024: -0.6; 2025: -0.7; 2026: -0.4; 2027: -0.7; (final) -0.4; cumulative: -3.6. - Exchange rate depreciation (contribution): 0.0 for observed and projected years (no values reported). - Other identified debt-creating flows: 0.0 across reported years. - Residual, including asset changes (in percent of GDP): 2020: 0.7; 2021: -0.9; 2022: -0.1; 2023: 0.2; 2024: -0.3; 2025: -0.3; 2026: -0.3; 2027: -0.3; (final) -0.3; cumulative: -1.1. ### Alternative scenarios and composition (underlying assumptions and scenario inputs) - Baseline scenario underlying assumptions (in percent): - Real GDP growth: 2022: 2.2; 2023: 1.4; 2024: 1.8; 2025: 1.2; 2026: 1.8; 2027: 1.2. - Inflation: 2022: 2.0; 2023: 1.3; 2024: 1.0; 2025: 1.1; 2026: 1.1; 2027: 1.1. - Primary Balance: 2022: -0.2; 2023: 0.2; 2024: 0.1; 2025: 0.1; 2026: 0.1; 2027: 0.1. - Effective interest rate: 2022: 1.0; 2023: 0.9; 2024: 1.0; 2025: 1.1; 2026: 1.2; 2027: 1.4. - Historical scenario assumptions: - Real GDP growth: 2022: 2.2; 2023: 1.6; 2024: 1.6; 2025: 1.6; 2026: 1.6; 2027: 1.6. - Inflation: 2022: 2.0; 2023: 1.3; 2024: 1.0; 2025: 1.1; 2026: 1.1; 2027: 1.1. - Primary Balance: 2022: -0.2; 2023: 0.2; 2024: 0.2; 2025: 0.2; 2026: 0.2; 2027: 0.2. - Effective interest rate: 2022: 1.0; 2023: 0.9; 2024: 1.1; 2025: 1.4; 2026: 1.7; 2027: 2.0. - Constant Primary Balance scenario assumption: - Primary Balance held at -0.2 across 2022–2027. - Other macro assumptions follow the baseline (Real GDP growth and Inflation as in baseline; Effective interest rate identical to baseline). ### Key interpretative points from the Annex figures and tables - Debt ratios begin to decline from 2022 onward in the baseline projections, with cumulative projected reduction in gross public sector debt of -5.7 percent of GDP over the projection horizon. - Automatic debt dynamics (interest-growth differential and growth effects) are a persistent contributor to debt reduction in the projections (automatic debt dynamics cumulative: -4.1 percent of GDP). - Primary balances are small in magnitude across projections, with primary (noninterest) revenue at 32.0–33.5 percent of GDP and primary (noninterest) expenditure at 31.2–36.2 percent of GDP over the observed years. - Exchange-rate effects and other identified debt-creating flows are negligible in the reported projections (reported as 0.0). *Source: IMF staff.* ### 6. Increasing interrelations among fintech, banks, and SIX Group could contribute to ### 6. Increasing interrelations among fintech, banks, and SIX Group could contribute to ### Systemic risk from interconnectedness and new technologies - Interconnectedness among fintech, banks, and SIX Group may mitigate market fragmentation but could fuel transmission under stressed conditions from volatile cryptoassets or fintech firms to intermediaries. - Use of leverage could amplify risk. - New technologies could increase financial-system vulnerability to cyber risk or unanticipated operational risk. - The successful launch of SDX has the potential to unlock global liquidity based on DLT, but also presents new risks and regulatory issues, including potential spillovers to SIX Group’s traditional clearing, settlement, and custody platforms. - Custody of virtual assets with omnibus-wallet structures is considered equivalent to deposit-taking, subject to FINMA-prudential supervision. Other VASPs not prudentially-supervised by FINMA are subject to AML-supervision by self-regulatory bodies supervised by FINMA. - The ‘travel rule’ applies requirements for wire transfers to ‘virtual asset transfers’—transaction originators and beneficiaries must be identifiable. - Investor lawsuits can have large impacts, shown by CS’s CHF 1.6 billion loss linked to the Greensill default. - Example transaction: The bond comprised digital (CHF 100 million) and traditional (CHF 50 million) components; it was oversubscribed several times and attracted a broad Swiss institutional-investor base. ### wCBDC experiments, Project Jura and Project Helvetia Phase II - Completion timing: - “Project Jura” completed in December 2021. - “Project Helvetia Phase II” completed in January 2022. - Jura explored direct CHF and euro wCBDC transfer among French and Swiss commercial banks on a single DLT platform operated by SDX. - SDX currently settles transactions of digital assets using tokenized commercial-bank money. - Jura demonstrated that a wCBDC could facilitate cross-border payment and settlement of digital assets more efficiently by allowing different wCBDCs to co-exist on a single platform and providing non-resident institutions with access to wCBDC. - Transition to a tokenized ecosystem raises challenges: - (i) smooth functioning of money markets as instant gross-settlement requires prefunding of asset and cash legs; - (ii) design of the cash-leg of tokenized asset transactions (e.g., intraday wCBDC, tokenized commercial-bank money or stablecoins, or an RTGS-link using traditional reserve balances); - (iii) increased settlement complexity as platforms multiply; - (iv) operational challenges from integration of trading and settlement. - By integrating wCBDC into core central-bank and commercial-bank systems and running transactions end-to-end, ”Project Helvetia Phase II” established interoperability between DLT-based and traditional systems. It also tested settlement of monetary-policy transactions through issuance/redemption of wCBDC against tokenized assets. ### Infrastructure and regulatory implications - SIX Group operates three systemically-important infrastructures: SIX x-clear (CCP), SIX SIS (an SSS and CSD), and SIX Interbank Clearing (SIC) (an RTGS system), as well as a trade repository, securities exchange, and multilateral trading facilities. - In March 2022 FINMA approved the recovery plans of SIX s-clear and SIX SIS for the first time subject to conditions and is coordinating the resolution strategy of SIX x-clear. - BIS regulatory initiatives to tighten prudential treatment of crypto asset exposures could increase capital requirements for Swiss banks due to the rise in risk weights for group 2 cryptoassets (from 800 to 1,250 percent) and its conservative approach to hedges. ### Policy recommendations - Sustain a conservative approach to fintech regulation, including VASP supervision, and to enforcement activities through data collection, inspections, and sanctions. - Safeguard independence of systemic FMI governance arrangements from other business lines (SIX Group). - Maintain a strong stance regarding observance of regulatory requirements of FMIs. - Ensure that risk models are robust (including conservative margining practices). - Continue advancing recovery plans and resolution strategies to support continuity of critical services, even under extreme scenarios. - Be proactive in implementing upcoming global cryptoassets prudential regulations (BIS, 2021) to encourage sustainable innovation while maintaining Switzerland’s attractiveness as a leading global financial center. *International Monetary Fund* ### 2. The authorities are encouraged to deploy more efforts to strengthen the framework ### 2. The authorities are encouraged to deploy more efforts to strengthen the framework further. ### OECD Working Group on Bribery findings and implementation status - The OECD Working Group on Bribery (WGB) called for several important reforms that have not been executed, including reforms "in relation to the maximum amount of fines for legal persons, whistleblower protection, the conditions governing appeals by interested persons in the framework of mutual legal assistance or accounting standards." - Based on the 2020 Written Follow-up Report, the WGB concluded that Switzerland has: - fully implemented 11 recommendations, - partially implemented 18 recommendations, and - not implemented 17 recommendations. - Information relating to supply-side corruption in this section draws on the Phase 4 Report of Switzerland (2018) and the Summary and Conclusions on the Phase 4 Written Follow-Up Report of Switzerland (2020). ### Specific legal and anti-money laundering (AML) gaps noted - The WGB noted that "the Law on Anti-Money Laundering (AMLA) still does not apply to lawyers, notaries, fiduciaries where their roles are restricted to preparing acts that do not involve any financial transactions for their clients (such as acts relating to the creation of companies and legal arrangements)." ### Follow-up and expected actions - "A progress report on some of these outstanding issues is expected to be adopted by the WGB in June 2022." - The IMF Legal Department prepared the text in line with the IMF Framework for Enhanced Engagement on Governance and Transparency; the text was coordinated with the OECD and approved by the OECD’s Working Group on Bribery in International Business Transactions. *Italic: Source — Extract from STAFF REPORT FOR THE 2022 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX (Switzerland).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1cheea2022001.pdf_