## 1sweea2023001

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---

### Context and recent developments
- Sweden experienced a strong post-pandemic rebound in 2021–22 with GDP growth projected at around 3 percent in 2022.
- Inflationary pressures intensified in 2022 despite Riksbank actions:
  - Riksbank raised the policy rate from zero by 25 basis points (bps) in April 2022 and communicated a reduction path for its balance sheet.
  - By end-2022, the policy rate stood at 2.5 percent.
  - In 2022, the average HICP was 8.1 and core HICP was 5.6.
- Real estate and household balance-sheet developments:
  - House prices and total household debt in relation to income peaked in Q4 2021.
  - Residential real estate prices started to decline in the second half of 2022, registering a 16 percent decline by end-year from their March peak.
  - Shares of CRE firms listed in Stockholm lost more than 40 percent of their value in 2022.
  - CRE firms face rollover risks as maturing bonds need refinancing at higher interest rates.
- Fiscal outcome and public debt:
  - After a small fiscal deficit in 2021, a surplus of 0.7 percent of GDP is projected for 2022, double the fiscal surplus target.
  - Public debt fell to about 32 percent of GDP in 2022.

### Outlook and risks
- Growth and inflation:
  - A mild recession is expected in 2023 reflecting a slowdown in private consumption as households grapple with high inflation and greater debt servicing costs.
  - A slightly negative GDP growth and a moderate decline in inflation are expected in 2023.
  - Inflation is expected to decelerate towards its 2 percent target over the medium term, but uncertainty is high.
- External sector and exchange rate:
  - The current account surplus is projected to fall to around 3.8 percent of GDP in 2022 from 6.3 percent of GDP.
  - The krona depreciated by 6.5 and 12.4 percent against the euro and the US dollar (average, yoy, in December 2022), respectively.
  - The real effective exchange rate (ULC-based) depreciated, resulting in an undervaluation of about 11 percent (Annex II).
- Financial stability risks:
  - Banks are highly exposed to mortgages and CRE; pressures could rise if downside risks amplify.
  - CRE sector concentration increased as CRE companies took on more debt.

### Policy assessments and recommendations (Executive Directors and Staff)
- Monetary policy:
  - Maintain a tight monetary policy stance to stabilize prices.
  - Given exceptionally high uncertainty, continuously review appropriate pace and magnitude of monetary tightening, including ongoing tapering of the asset purchase program.
  - Positive early indications from constructive wage negotiations should reduce the risk of a wage-price spiral.
- Fiscal policy:
  - 2023 budget aims for a fiscal stance conducive to reducing aggregate demand pressures; fiscal stance should adapt to developments and allow automatic stabilizers to fully operate.
  - Energy support should be well-targeted and phased out as energy prices decline.
  - As inflation subsides, increase social and infrastructure investments to support a green transition and inclusive growth.
  - Given ample fiscal space, the pace of returning to the fiscal surplus target of 0.33 percent of GDP could be slowed to allow greater green and growth-enhancing expenditure.
  - Gradually increase the extremely low property tax to improve revenue structure, finance new investments, and reduce housing market distortions.
- Financial sector and macroprudential policy:
  - Welcome FSAP recommendations; closely monitor residential and commercial real estate markets and improve collection of household balance sheet data.
  - Consider expanding the macroprudential toolkit and higher capital buffers for banks’ exposure to commercial properties.
  - Gradually increase the mortgage amortization requirement and abolish interest rate deductibility to attenuate risks.
  - Continue actions to strengthen AML/CFT and crisis management frameworks.
- Structural reforms:
  - Address labor market shortcomings: reduce labor tax wedge, rationalize unemployment benefits, enhance education, and increase efficiency of programs and regional services to raise labor supply and employment—particularly for youth, foreign-born, and low-skilled.
  - Reform the rental market to address housing distortions.
  - Complement high carbon tax with increased investments in renewables and green technology infrastructure and enhance the electricity grid.
  - Welcome pension reform linking retirement age to life expectancy.

### Key statistics and projections (Selected Economic Indicators, 2020–28)
- Real GDP (percent change): 2020: -2.2; 2021: 5.1; 2022: 2.8; 2023: -0.3; 2024–2028: 1.4, 2.3, 2.3, 2.3, 2.3.
- Domestic demand (percent change): 2020: -2.3; 2021: 5.7; 2022: 4.2; 2023: -0.6.
- Private consumption (percent change): 2020: -3.2; 2021: 6.0; 2022: 2.8; 2023: -0.2.
- Gross fixed investment (percent change): 2020: 1.7; 2021: 6.4; 2022: 5.6; 2023: -2.3.
- HICP inflation (average): 2020: 0.7; 2021: 2.7; 2022: 8.1; 2023: 6.5; 2024: 3.0; 2025–2028: 2.3, 2.0, 2.0, 2.0.
- HICP core inflation (average): 2020: 1.5; 2021: 1.6; 2022: 5.5; 2023: 5.2; 2024: 2.6; 2025–2028: 2.2, 2.0, 2.0, 2.0.
- Unemployment rate (percent): 2020: 8.5; 2021: 8.8; 2022: 7.5; 2023: 7.7; 2024–2028: 8.0, 7.9, 7.9, 7.9, 7.9.
- Output gap (percent of potential): 2020: -2.6; 2021: 0.4; 2022: 1.3; 2023: -0.9; 2024: -1.1; 2025: -0.5; 2026–2028: 0.0, 0.0, 0.0.
- General government gross debt, official statistics (percent of GDP): 2020: 39.5; 2021: 36.3; 2022: 31.3; 2023: 31.1; 2024: 30.5; 2025: 29.5; 2026: 28.4; 2027: 27.2; 2028: 25.9.
- Current account (percent of GDP): 2020: 6.0; 2021: 6.3; 2022: 3.8; 2023: 3.6; 2024–2028: 4.0, 4.0, 4.2, 4.2, 4.2.
- CPIF inflation (average, memorandum): 2020: 0.5; 2021: 2.4; 2022: 7.7.
- Repo rate (percent, end of period): 2020: 0.0; 2021: 0.0; 2022: 2.5.
- Mortgage lending rate (percent, end of period): 2020: 1.4; 2021: 1.4; 2022: 3.4.
- M3 (year-on-year, percent change, eop): 2020: 17.8; 2021: 9.7; 2022: 2.4.
- Bank lending to households (year-on-year, percent change, eop): 2020: 5.5; 2021: 6.8; 2022: 3.5.
- Reserves coverage (months of imports of goods and services): 2020: 3.2; 2021: 2.8; 2022: 2.7.
- Net international investment position (percent of GDP): 2020: 8.8; 2021: 22.1; 2022: 25.9; 2023–2028: 29.5, 33.4, 37.5, 41.6, 45.8, 50.1.
- GDP per Capita (2021, USD): 60,029; Population (2021, million): 10.4.
- Key export markets: Germany, Norway, and Netherlands.

### Financial sector resilience and vulnerabilities
- Banking sector fundamentals:
  - Sector assets were around 300 percent of GDP at end–2021.
  - The five largest banks accounted for over 75 percent of deposits and lending.
  - Liquidity positions exceed regulatory minima of 100 percent in all banks.
  - The share of wholesale funding in the three major banks remains high at around 63 percent.
- Structural exposures:
  - Mortgages constitute about 40 percent of banks’ lending portfolios.
  - Lending to CRE constitutes about 20 percent of banks’ lending portfolios.
  - Low risk weights on mortgages imply capital buffers are not as high when measured in SEK.
  - High sensitivity to interest rates due to high indebtedness and short rate fixation.
- FSAP stress-test results and implications:
  - FSAP tested banks’ stability at house prices falling 38 percent in two years and interest rate at 4 percent.
  - FI recently conducted tests on new mortgages with rates going out to 7 percent assessing repayment capacity.
  - FSAP stress tests suggest banks could on average withstand severe shocks.
- Macroprudential recommendations:
  - By June 2023, the CCyB will be at 2 percent; recalibrate capital requirements for heightened risk environment and consider sectoral application for CRE if EU legislation permits.
  - Review regulation that results in very low RWAs in capital buffer calibration.
  - Current amortization requirements: 1 percent per year for loan-to-value (LTV) below 70 and 2 percent for LTV below 85 percent; recommend gradually increase amortization requirements and consider caps on mortgage length and DTI/DSTI ratios.
  - Improve household-level data collection to calibrate policies.
  - Consider higher capital requirements or sectoral CCyB or SRB for banks’ CRE exposures.
- Supervision, crisis management, and operational resilience:
  - Increase frequency and intrusiveness of onsite inspections; develop better analytical tools and dashboards.
  - Strengthen crisis management framework and cross-border supervisory arrangements.
  - Enhance fintech supervision and cyber resilience frameworks.
  - Strengthen bankruptcy framework to handle potential rise in bankruptcies.
- AML/CFT:
  - Continue enhancing ML/TF risk understanding and supervisory tools; FI to step up AML/CFT supervision of correspondent banking and Virtual Asset Service Providers.
  - Regional IMF Nordic-Baltic Technical Assistance Project on cross-border ML/TF threats and virtual assets due to be finalized in 2023.

### CRE sector vulnerabilities and corporate stress (Annex VI)
- CRE scale and funding:
  - CRE loans represent between 10 and 25 percent of banks’ private sector lending.
  - The share of CRE companies’ non-bank debt recently about 40 percent of total debt.
  - CRE bonds account for about half of corporate bond market value; foreign holdings of CRE bonds stand at 53 percent.
  - Average loan duration about 3.4 years; bond maturity about 5 years.
  - About 55 percent of bonds are in foreign currency against about 6 percent of bank lending.
- Revenue pressures and market trends:
  - Office vacancy rates rose from about 3 percent in 2019 to close to 8 percent in 2021 in Stockholm.
  - Declining yields and rising vacancies impair CRE firms’ credit ratings and rollover capacity.
- Stress-test outcomes:
  - Median ICRs fell below 1.5 under an adverse stress scenario and below 1 under a more severe scenario.
  - Severe scenario resulted in “a ¾ of firms with debt-at-risk.”1
  - Debt-at-risk fluctuated between 20–35 percent.
  - Key shocks include policy rates up to 400 basis points and a 38 percent decline in residential and commercial real estate prices after two years.
- Policy and data recommendations:
  - Strengthen monitoring of corporate liabilities and ownership; require improved CRE firm disclosures and contingency funding plans.
  - Enhance CRE data (rents, vacancies, transaction prices) and integrate into a single database.
  - Evaluate raising bank capital requirements for CRE exposures and plan crisis interventions tailored to limit moral hazard.

### Fiscal policy, budget measures, and investment needs
- New budget measures announced: 0.3 percent of GDP over three years.
- Gross impact on the budget reported: around 0.6 percent of GDP.
- Energy support to households in 2022–23: 1.1 percent of GDP; European average for household energy compensation: around 2 percent.
- Structural surplus expected to widen by an estimated 0.2 percentage point of potential GDP.
- Asset Purchase Program initiated in March 2020 sized at about 10 percent of GDP.
- Riksbank policy-rate related figures in staff scenarios:
  - Policy rate could be increased to slightly above 300 basis points in 2023–24.
  - Riksbank announced peak: 2.84 percent.
  - On February 9, Riksbank raised the policy rate by 0.5 percentage points to 3 percent.
- Riksbank monthly bond sales starting in April: nominal government bonds SEK 3 billion and real government bonds SEK 0.5 billion per month.
- Investment and infrastructure needs highlighted:
  - At least 1,400 schools, 700 elderly nursing compounds, and 93 healthcare facilities required.
  - Upgrading the electricity grid estimated cost: more than 10 percent of GDP.
- Electricity subsidies for energy-intensive businesses listed outside the budget: 0.04 percent of GDP, financed by Svenska Kraftnät congestion revenue surpluses (off-budget).
- Fiscal stance:
  - Slightly contractionary fiscal stance appropriate in the short term; automatic stabilizers should be allowed to operate fully.
  - If recession deepens, discretionary spending should be adjusted toward structural improvements promoting green transition, work incentives, and inclusiveness.
  - Permanently higher unemployment benefits flagged as not conducive to increasing employment; means-tested transfers recommended.
  - Phase out fuel tax cuts as energy prices decline.

### External sector and external balance assessment (Annex II)
- External position:
  - Based on preliminary estimates for 2022, the external position remains stronger than the level implied by fundamentals and desirable policies, despite current account falling to 3.8 percent of GDP.
  - Projected medium-term external balance stabilizes around long-term average of 3½ percent.
- Net IIP and sectoral holdings (2022):
  - NIIP: 25.1 percent of GDP; Gross Assets: 292.4; Debt Assets: 83.8; Gross Liab.: 267.3; Debt Liab.: 133.6.
  - Sectoral net foreign assets: Other financial institutions: 87 percent of GDP; Social Security Funds: 26 percent of GDP; Households: 20 percent of GDP; Riksbank: 12 percent of GDP.
  - Net external debtors: Non-financial corporations: 60 percent of GDP; Monetary financial institutions: 51 percent of GDP; Central government: 11 percent of GDP.
  - Currency composition: 50 percent of the IIP are in foreign currency.
- Real exchange rate and valuation:
  - Krona depreciated by about 6 percentage points in real effective terms (OECD-ULC based) to be equal to 91 points in 2022 relative to its average index in 2021.
  - Staff CA gap implies a REER gap of -9.4 percent (elasticity 0.34); IMF staff overall assessment: krona undervalued between -4.9 to -15.7 percent, midpoint -10.8 percent.
- Current account details:
  - Current account surplus dropped to 3.8 percent in 2022.
  - Gross savings declined by 0.5 percentage points to 31.7 percent of GDP; gross investment increased by 2.0 percentage points to 27.9 percent of GDP.
- Reserves and FX:
  - Exchange rate freely floating since 1993; no interventions since 2002.
  - Foreign currency reserves broadly constant at USD 56 billion in 2022; reserves equivalences: 15 percent of short-term external debt of monetary and financial institutions; about 9.3 percent of GDP; 2.7 months of imports.

### Public debt dynamics and baseline DSA (Annex I)
- Public debt (Actual/Projection series): 31.3 32.0 32.2 31.9 31.3 30.4 29.4 28.6 27.6 26.7 25.6 (selected projection path).
- Change in Public Debt (selected): -5.0 0.7 0.2 -0.3 -0.6 -0.8 -1.0 -0.8 -0.9 -1.0 -1.1.
- Memo macro assumptions:
  - Real GDP growth (percent): 2.8 -0.3 1.4 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3.
  - Inflation (GDP deflator; percent): 7.0 6.9 3.4 2.3 2.0 2.0 2.0 2.0 2.0 2.0 2.0.
  - Nominal GDP growth (percent): 10.0 6.5 4.9 4.7 4.3 4.3 4.3 4.3 4.3 4.3 4.3.
  - Effective interest rate (percent): 2.1 2.4 2.9 3.3 3.2 3.2 2.7 2.5 2.3 2.1 1.9.
- Staff commentary: Public debt expected to decrease gradually due to favorable growth dynamics and continuing small primary surpluses till 2028; after 2028 assume authorities adjust surplus target to zero.

### FSAP prioritized recommendations (selected)
- Systemic risk analysis: employ structural models for household and CRE, develop contingent liquidity tools. (Authority: FI; Priority: Immediate)
- Macroprudential: introduce interest-rate stress-test standards for mortgage applicants; study mortgage interest tax deductibility. (Authority: FI / MoF; Priorities: Short- to Medium-Term)
- Banking supervision: increase resources, strengthen offsite monitoring, augment onsite inspections, review IRB models. (Authority: FI; Priority: Immediate / Short-term)
- Cyber resilience: clarify roles, contingency plans, information sharing, database of essential service providers. (Authorities: FI, MoF, Riksbank, NCSC, MSB; Priority: Immediate)
- Crisis management and resolution: formalize watchlist, ensure resolution plans and MREL clarity, publish lender-of-last-resort policy framework. (Authorities: FI, NDO, Riksbank; Priority: Immediate)

### Structural reform and investment priorities
- Housing market: address dysfunctions via supply-side reforms, ease rental controls, simplify building codes, gradually remove interest rate deductibility, increase property taxes, and expand housing allowance.
- Labor market: reduce labor tax wedge, rationalize unemployment benefits, enhance education and vocational training, improve regional services to raise labor supply—focus on youth, foreign-born, and low-skilled.
- Climate and energy: complement carbon tax with investments in renewables, grid upgrades, and technology; electricity grid upgrade estimated at more than 10 percent of GDP; SWECO estimate for grid investments until 2045: 10.3 percent of GDP.
- Investment needs: at least 1,400 schools, 700 elderly nursing compounds, and 93 healthcare facilities required.
- E-krona: Phase 2 concluded in February 2021; Phase 3 to focus on technical design and legal requirements; further studies needed on financial disintermediation and cybersecurity risks.

_Italic: Source: 1sweea2023001 (IMF staff report materials and annexes provided in the supplied PDF excerpt)._

### 2022. Inflationary pressures intensified in 2022 despite several monetary policy actions.

### 2022. Inflationary pressures intensified in 2022 despite several monetary policy actions.

### Context and recent developments
- Sweden experienced a strong post-pandemic rebound in 2021–22 with GDP growth projected at around 3 percent in 2022.  
- Inflationary pressures remained elevated in 2022 despite the Riksbank’s actions:
  - The Riksbank raised the policy rate from zero by 25 basis points (bps) in April 2022 and communicated a reduction path for its balance sheet.
  - By end-2022, the policy rate stood at 2.5 percent.
  - In 2022, the average HICP was 8.1 and core HICP was 5.6.
- Real estate and household balance-sheet developments:
  - House prices and total household debt in relation to income peaked in Q4 2021.
  - Residential real estate prices started to decline in the second half of 2022, registering a 16 percent decline by end-year from their March peak.
  - Shares of CRE firms listed in Stockholm lost more than 40 percent of their value in 2022.
  - CRE firms face rollover risks as maturing bonds need refinancing at higher interest rates.
- Fiscal outcome and public debt:
  - After a small fiscal deficit in 2021, a surplus of 0.7 percent of GDP is projected for 2022, double the fiscal surplus target.
  - Public debt fell to about 32 percent of GDP in 2022.

### Outlook and risks
- Growth and inflation:
  - A mild recession is expected in 2023 reflecting a slowdown in private consumption as households grapple with high inflation and greater debt servicing costs.
  - A slightly negative GDP growth and a moderate decline in inflation are expected in 2023.
  - Inflation is expected to decelerate towards its 2 percent target over the medium term, but uncertainty is high.
- External sector and exchange rate:
  - The current account surplus is projected to fall to around 3.8 percent of GDP in 2022 from 6.3 percent of GDP.
  - The krona depreciated by 6.5 and 12.4 percent against the euro and the US dollar (average, yoy, in December 2022), respectively.
  - The real effective exchange rate (ULC-based) depreciated, resulting in an undervaluation of about 11 percent (Annex II).
- Financial stability risks:
  - Banks are highly exposed to mortgages and CRE; pressures could rise if downside risks amplify.
  - CRE sector concentration increased as CRE companies took on more debt.

### Policy assessments and recommendations (Executive Directors and Staff)
- Monetary policy:
  - Directors encouraged maintaining a tight monetary policy stance to stabilize prices.
  - Considering exceptionally high uncertainty, Directors urged continuous review of the appropriate pace and magnitude of monetary tightening, including the ongoing tapering of the asset purchase program.
  - Positive early indications from constructive wage negotiations should reduce the risk of a wage-price spiral.
- Fiscal policy:
  - The 2023 budget aims for a fiscal stance conducive to reducing aggregate demand pressures; Directors stressed the fiscal stance should adapt to developments and allow automatic stabilizers to fully operate.
  - Energy support should be well-targeted and phased out as energy prices decline.
  - As inflation subsides, Directors called on the authorities to increase social and infrastructure investments to support a green transition and inclusive growth.
  - Given ample fiscal space, the pace of returning to the fiscal surplus target of 0.33 percent of GDP could be slowed to allow for greater green and growth-enhancing expenditure.
  - Gradually increasing the extremely low property tax would help improve revenue structure, finance new investments, and reduce housing market distortions.
- Financial sector and macroprudential policy:
  - Welcomed FSAP recommendations; emphasized close monitoring of residential and commercial real estate markets and improved collection of household balance sheet data.
  - Saw merit in expanding the macroprudential toolkit and considering higher capital buffers for banks’ exposure to commercial properties.
  - Recommended gradually increasing the mortgage amortization requirement and abolishing interest rate deductibility to attenuate risks.
  - Called for continued actions to strengthen AML/CFT and crisis management frameworks.
- Structural reforms:
  - Need to address labor market shortcomings: reduce labor tax wedge, rationalize unemployment benefits, enhance education, and increase efficiency of programs and regional services to raise labor supply and employment—particularly for youth, foreign-born, and low-skilled.
  - Reforms in the rental market to address housing distortions.
  - To achieve climate goals, complement high carbon tax with increased investments in renewables and green technology infrastructure and enhancing the electricity grid.
  - Welcomed pension reform linking retirement age to life expectancy.

### Key statistics and projections (Selected Economic Indicators, 2020–28)
- Real GDP (percent change): 2020: -2.2; 2021: 5.1; 2022: 2.8; 2023: -0.3; 2024–2028: 1.4, 2.3, 2.3, 2.3, 2.3.
- Domestic demand (percent change): 2020: -2.3; 2021: 5.7; 2022: 4.2; 2023: -0.6.
- Private consumption (percent change): 2020: -3.2; 2021: 6.0; 2022: 2.8; 2023: -0.2.
- Gross fixed investment (percent change): 2020: 1.7; 2021: 6.4; 2022: 5.6; 2023: -2.3.
- HICP inflation (average): 2020: 0.7; 2021: 2.7; 2022: 8.1; 2023: 6.5; 2024: 3.0; 2025–2028: 2.3, 2.0, 2.0, 2.0.
- HICP core inflation (average): 2020: 1.5; 2021: 1.6; 2022: 5.5; 2023: 5.2; 2024: 2.6; 2025–2028: 2.2, 2.0, 2.0, 2.0.
- Unemployment rate (percent): 2020: 8.5; 2021: 8.8; 2022: 7.5; 2023: 7.7; 2024–2028: 8.0, 7.9, 7.9, 7.9, 7.9.
- Output gap (percent of potential): 2020: -2.6; 2021: 0.4; 2022: 1.3; 2023: -0.9; 2024: -1.1; 2025: -0.5; 2026–2028: 0.0, 0.0, 0.0.
- General government gross debt, official statistics (percent of GDP): 2020: 39.5; 2021: 36.3; 2022: 31.3; 2023: 31.1; 2024: 30.5; 2025: 29.5; 2026: 28.4; 2027: 27.2; 2028: 25.9.
- Current account (percent of GDP): 2020: 6.0; 2021: 6.3; 2022: 3.8; 2023: 3.6; 2024–2028: 4.0, 4.0, 4.2, 4.2, 4.2.
- CPIF inflation (average, memorandum): 2020: 0.5; 2021: 2.4; 2022: 7.7.
- Repo rate (percent, end of period): 2020: 0.0; 2021: 0.0; 2022: 2.5.
- Mortgage lending rate (percent, end of period): 2020: 1.4; 2021: 1.4; 2022: 3.4.
- M3 (year-on-year, percent change, eop): 2020: 17.8; 2021: 9.7; 2022: 2.4.
- Bank lending to households (year-on-year, percent change, eop): 2020: 5.5; 2021: 6.8; 2022: 3.5.
- Reserves coverage (months of imports of goods and services): 2020: 3.2; 2021: 2.8; 2022: 2.7.
- Net international investment position (percent of GDP): 2020: 8.8; 2021: 22.1; 2022: 25.9; 2023–2028: 29.5, 33.4, 37.5, 41.6, 45.8, 50.1.
- GDP per Capita (2021, USD): 60,029; Population (2021, million): 10.4.
- Key export markets: Germany, Norway, and Netherlands.

### Financial sector resilience and vulnerabilities
- Banks have structurally higher profitability than European peers, high regulatory capital, and liquidity positions exceeding regulatory minima.
- The banking sector is highly exposed to mortgages and CRE; potential pressure if downside risks materialize.
- FSAP recommends closer monitoring, expanded macroprudential tools, higher capital buffers for CRE exposures, and improved household balance-sheet data collection.

*Source: 1sweea2023001 - 2022. Inflationary pressures intensified in 2022 despite several monetary policy actions.*

### 0.3 percent of GDP over three years were announced as part of the new budget.

### 1sweea2023001 - 0.3 percent of GDP over three years were announced as part of the new budget

### Overview and headline figures
- New budget measures announced: 0.3 percent of GDP over three years.
- Gross impact on the budget reported: around 0.6 percent of GDP (Text Table 1).
- Energy support to households in 2022–23: 1.1 percent of GDP.
- European average for household energy compensation: around 2 percent.
- Structural surplus expected to widen by an estimated 0.2 percentage point of potential GDP.
- Asset Purchase Program initiated in March 2020 sized at about 10 percent of GDP.
- Riksbank policy-rate related figures:
  - Policy rate could be increased to slightly above 300 basis points in 2023–24 in staff scenarios.
  - Riksbank announced peak: 2.84 percent.
  - On February 9, Riksbank raised the policy rate by 0.5 percentage points to 3 percent.
- Riksbank monthly bond sales starting in April: nominal government bonds SEK 3 billion and real government bonds SEK 0.5 billion per month.
- Investment and infrastructure needs highlighted:
  - At least 1,400 schools, 700 elderly nursing compounds, and 93 healthcare facilities required.
  - Upgrading the electricity grid estimated cost: more than 10 percent of GDP.
- Electricity subsidies for energy-intensive businesses listed outside the budget to the tune of 0.04 percent of GDP, financed by congestion revenue surpluses of Svenska Kraftnät (off-budget).

### Energy sector developments and support measures
- Background
  - Nordic electricity companies faced unexpectedly higher margin calls after skyrocketing prices in September.
  - Swedish, Danish, and Finnish governments offered loan guarantees to avert defaults and stabilize the market.
- Budget and support specifics
  - 2023 budget mentions limited electricity subsidies for energy-intensive businesses: 0.04 percent of GDP (listed outside the budget and financed by Svenska Kraftnät congestion revenue surpluses).
  - Retroactive electricity support to households and companies in the south region is described as small, temporary, preserved price signals, but not means-tested.
- Fiscal assessment and recommendations
  - Compensation measures to households total 1.1 percent of GDP during 2022–23, below the European average of around 2 percent.
  - Many measures are not targeted; some impede energy conservation.
  - Fuel tax cuts affecting budgets over the next three years should be gradually phased out during this period as energy prices decline.
  - Recommendation: replicate better practices from other European countries by linking support to household income level (means-testing).

### Outlook, risks, and short-term macro dynamics
- Near-term growth and risks
  - GDP grew much above expectations in Q3 2022, but consumption and investment are expected to decline in 2023 as purchasing power and operating margins catch up with higher costs and possibly tighter financial conditions.
  - Higher-than-expected inventory build-up in Q3 could indicate weaker growth ahead.
  - Slowdown in external demand (notably from Germany) is a downside risk.
  - Markets expect house prices to decline by 15–20 percent from their peak but remain at their pre-pandemic level.
  - Corporate bankruptcies rising, mainly in construction, reflecting housing slump and higher financing and electricity costs.
  - Financial sector risks are balanced due to banks’ large buffers, but household debt and CRE vulnerabilities significantly weigh on the outlook.
  - A mild recession is anticipated in 2023.
- Inflation and labor market
  - Inflation likely to recede somewhat because of reduced domestic demand and global inflation.
  - Wage increases moderate so far; labor market could be losing steam.
  - Short-term inflation expectations somewhat elevated; long-term expectations remain anchored.

### Fiscal policy stance and budget composition
- Short-term stance
  - A slightly contractionary fiscal stance is appropriate in the short term; 2023 fiscal stance described as appropriate.
  - Automatic stabilizers should be allowed to operate fully; discretionary spending should be adjusted if the recession deepens.
  - If adjustments are made, they should concentrate on structural improvements promoting green transition, work incentives, and inclusiveness.
- Budget composition and concerns
  - The budget contains new measures and partial reversal of previous commitments; gross impact ~0.6 percent of GDP.
  - Notable items: energy support measures, support to regions and municipalities, permanently higher unemployment support, infrastructure investments, higher police and defense funding.
  - Permanently higher unemployment benefits cited as not conducive to increasing employment and hours worked; means-tested transfers recommended as more efficient.
  - Discontinuation of the climate bonus for electric cars and lower taxes on fuels could hinder meeting Sweden’s 2030 EU climate obligations.
- Medium-term priorities
  - As inflation decelerates, increase growth-enhancing infrastructure and social spending (education, elderly health care, green transition).
  - Next fiscal framework review (set to begin in 2024) should consider increasing such spending given substantial fiscal space and favorable debt dynamics.
  - Tax policy recommendations: gradually increase property taxes from their extremely low level; phase out mortgage interest deductibility; reduce labor taxation to make the tax mix more growth friendly.

### Monetary policy, asset purchases, and e-krona
- Policy tightening and guidance
  - Policy tightening started in April 2022; further action needed to arrest inflation pressures.
  - Staff analysis suggested policy rate should be slightly higher than Riksbank’s path; Taylor-rule implied rates somewhat higher.
  - Recommendation: policy rate could be increased to slightly above 300 basis points in 2023–24, then converge towards Riksbank’s announced peak of 2.84 percent.
  - Continuous review and data-driven approach recommended given high uncertainty.
  - Reliance on forward guidance should be reduced while preserving clear communication.
- Asset Purchase Program and balance-sheet policy
  - Riksbank purchase program about 10 percent of GDP started March 2020; purchases in 2022 focused on reinvestment and ceased by end-2022.
  - Holdings will decline as bonds mature; pace of decline should be revisited if needed to safeguard corporate liquidity.
  - On February 8, Riksbank decided to reduce asset holdings faster by selling nominal and real government bonds at SEK 3 billion and SEK 0.5 billion per month respectively starting in April.
- E-krona work
  - Riksbank continued exploration of e-krona; Phase 2 concluded in February 2021 with tests showing possible integration and off-line transactions.
  - Phase 3 focuses on technical design details (e.g., role of DLT and token-based solutions) and legal requirements.
  - More in-depth studies needed to limit risks including financial disintermediation and cybersecurity concerns.

### Structural reforms, investment needs, and policy recommendations
- Structural bottlenecks and reform priorities
  - Long-standing structural shortcomings: dysfunctional housing market, educational gaps, high unemployment among youth and foreign-born.
  - Recommended reforms: rationalize rent-control, increase property taxes, enhance active labor market policies, reduce labor tax wedge, monitor roll-out of new labor market reforms.
  - Increase funding for programs and regional services to better integrate less educated and foreign-born.
  - Timely upgrade of South-North electricity connections to improve energy security.
- Investment priorities and fiscal space
  - Medium-term use of fiscal space to increase infrastructure and social investment to boost potential growth and make it greener and more inclusive.
  - Specific investment needs: building at least 1,400 schools, 700 elderly nursing compounds, and 93 healthcare facilities.
  - Climate and grid upgrade needs estimated at more than 10 percent of GDP.
- Labor market and pension reforms
  - 2022 pension and labor market reform linking retirement age to life expectancy and reducing extensive employment protection are welcome; expected to reduce debt and increase labor supply in the long run.
- Policy implementation guidance
  - Fiscal policy should support monetary policy in reducing inflation.
  - Energy support measures should be better targeted and means-tested where appropriate.
  - Fuel tax cuts should be phased out as energy prices decline.
  - Any discretionary fiscal adjustments during a deeper recession should focus on structural, growth-enhancing priorities.

*Source: 1sweea2023001 - 0.3 percent of GDP over three years were announced as part of the new budget.*

### 20.      Sweden’s banking sector entered the current economic juncture with generally solid

### 20. Sweden’s banking sector entered the current economic juncture with generally solid fundamentals.

### Banking sector overview
- Sector assets were around 300 percent of GDP at end–2021.
- The five largest banks accounted for over 75 percent of deposits and lending.
- Liquidity positions exceed regulatory minima of 100 percent in all banks.
- Swedish banks are highly interconnected regionally (active across the Nordic-Baltic region, and the UK).
- Banks depend on international markets and domestic non-bank financial institutions for mortgage funding via covered bonds.
- The share of wholesale funding in the three major banks remains high at around 63 percent.

### Structural vulnerabilities and exposures
- Mortgages constitute about 40 percent of banks’ lending portfolios.
- Lending to CRE constitutes about 20 percent of banks’ lending portfolios.
- Low risk weights on mortgages imply capital buffers are not as high when measured in SEK.
- High sensitivity to interest rates of households and corporates due to:
  - High level of indebtedness.
  - Short rate fixation.
- Systemic risks are now elevated but remain manageable.
- Increased risks to financial stability stem from limited liquidity in the corporate bond markets, exposing especially the investment funds sector.

### FSAP stress-test results and implications
- FSAP stress tests suggest banks could on average withstand severe shocks.
- Scenario parameters and supervisory testing noted:
  - FSAP tested banks’ stability at house prices falling 38 percent in two years and interest rate at 4 percent.
  - The FI recently conducted tests on new mortgages with rates going out to 7 percent assessing repayment capacity.

### Macroprudential policy recommendations
- Countercyclical capital buffer (CCyB):
  - By June 2023, the CCyB will be at 2 percent.
  - Authorities should recalibrate the level of capital required in a more heightened risk environment.
  - Sectoral application could be considered for CRE, if EU legislation permits.
  - Review regulation that results in a very low level of risk weighted assets (RWAs) in the calibration of capital buffers, given low historical defaults on mortgages.
- Mortgages:
  - Current amortization requirements: 1 percent per year for loan-to-value (LTV) below 70 and 2 percent for LTV below 85 percent.
  - Recommendation to gradually increase amortization requirements as financial conditions stabilize to safeguard against greater borrowing and perpetual mortgages.
  - Introduce caps on the length of mortgage loans and/or debt-to-income (DTI) and debt-service-to-income (DSTI) ratios.
  - Collect better data on household assets and liabilities to improve calibration of macroprudential policies.
- CRE supervision:
  - Greater use of “soft powers” and joint communication by institutions comprising the Financial Stability Council to influence firms’ behavior.
  - Require CRE firms to disclose contingency funding plans in annual reports and bond prospectuses.
  - Consider higher capital requirements, or sectoral CCyB or Systemic Risk Buffer (SRB) for banks’ exposures to CRE risks.

### Supervision, crisis management, and operational resilience
- Improvements noted in banking and fintech supervision and crisis management framework, but further strengthening required:
  - Increase frequency and intrusiveness of onsite inspections.
  - Develop more efficient analytical tools and dashboards for offsite monitoring.
  - Crisis management framework needs greater clarity and guidance in multiple areas.
  - Regulation and cross-border supervisory arrangements need to adapt to changing structures.
- Fintech:
  - Rapid growth in size and relevance requires better understanding and supervision.
- Cybersecurity:
  - Cyber threats/attacks have become more prominent, hitting many Swedish financial institutions.
  - A framework for comprehensive operational and cyber resilience is needed.
- Bankruptcy framework:
  - Should be strengthened to handle a potential increase in bankruptcies by streamlining procedures, reducing barriers to restructuring, and lowering costs.

### AML/CFT and financial integrity
- Continue efforts to enhance understanding of money-laundering/terrorist financing risks and strengthen the AML/CFT framework.
- FATF recognized Sweden’s progress to broaden the scope and content of measures for fit and proper requirements.
- Priorities:
  - Further develop and increase resources for AML/CFT supervisory risk assessment tools.
  - Collect and analyze more granular data on transactions to deepen understanding of cross-border non-resident ML/TF risks.
  - Target AML/CFT supervisory activities to the highest ML/TF risk areas.
  - FI should step up AML/CFT supervision of correspondent banking activities and Virtual Asset Service Providers.
- Ongoing regional IMF Nordic-Baltic Technical Assistance Project on cross-border ML/TF threats and virtual assets due to be finalized in 2023.

### Gaps in household data (Box 2)
- No legal entity in Sweden has a mandate to collect household-level (HH) data on finances.
- Statistics Sweden (STA) is responsible but cannot show HHs’ assets and liabilities on a disaggregated level; individual expenditure data no longer available in tax returns due to the 2007 tax reform.
- Since 2016, STA publishes information on HHs’ total real and financial wealth broken down into a few asset and liability types.
- Detailed data on the distribution of wealth and debt would be more helpful to identify pockets of vulnerabilities.
- Since 2011, the Riksbank has made proposals to start collecting data; a government inquiry into HHs’ over-indebtedness during 2000s pointed to the same need.
- The 2016 FSAP recommended acting quickly to gather data on households’ balance sheets.
- A government-commissioned 2021 inquiry on producing individual-based statistics on households’ assets and liabilities is undergoing public consultation.
- FI has been able to collect HH data at the household-bank level, but not comprehensive household balance-sheet data.
- Participation in the Household Finance and Consumption Network exists, but no Swedish micro-level data are available in the shared dashboard.

### Authorities’ views
- The FSA did not see a current need to revisit the CCyB level:
  - Banks have internalized the need to raise additional capital.
  - Interest rate hikes are generating enough deleveraging to reduce risks.
- Authorities acknowledged low RWAs but attributed this to structural issues and noted relatively high capital ratios.
- Ongoing review of IRB models expected to harmonize risk weights and result in more conservative overall levels.
- No perceived need to increase residential mortgages’ amortization requirement; current household borrower-based measures seen as sufficient given market adjustments.
- Agreed on the need to address data gaps and make progress in aggregating total loan portfolios of borrowers and possibly savings, despite lack of household asset/debt register.
- Riksbank and FSA emphasized statistical constraints impacting analysis of financial stability and monetary policy.
- Onsite inspections: authorities noted current number assessed as few but considered supervisory outcomes sufficiently intrusive; increasing onsite inspections requires more personnel.
- Authorities saw merit in further strengthening the crisis management framework.
- Noted that resources for AML/CFT work have increased substantially and risk assessment tools are continuously improving.

### Structural policies (overview)
- Structural reform agenda guided by the Recovery and Resilience Plan (RRP); most commitments to be completed by end-2023.
- RRP commitments include reforms and investments to increase economic resilience by tackling demographic and educational challenges and addressing housing market dysfunctions.
- The “Tidö” Agreement complements the RRP and sets out the reform agenda for the next four years, focusing on health, climate and energy, crime, migration and integration, education, growth, households, and economy.
- Key deliverables under the RRP for 2022–23 include:
  - Entry into force of a law abolishing the reduction of energy tax on fuel in certain sectors.
  - At least 7,900 new study places created in vocational training and adult education.
  - Entry into force of changes in the employment protection framework and new regulations providing greater transition possibilities.
  - At least 18,400 buildings newly connected to broadband access.
  - Implementation of a new bank account and safe deposit box system that can be checked directly by the competent authorities.
  - Entry into force of a law setting better standards for housing construction.
- Policy recommendations to address housing market distortions:
  - Supplement supply-side reforms with lowering taxes on deferred capital gains.
  - Gradual removal of interest rate deductibility.
  - Increase the extremely low property taxes.
  - Provide social protection more efficiently, including expanding the housing allowance.
  - Ease rental controls and simplify building codes.
- Investments in digitalization:
  - High-speed and reliable broadband connectivity expansion, especially in less populated areas.
  - Expansion of e-government services to improve service provision.

*Source: 1sweea2023001 - 20. Sweden’s banking sector entered the current economic juncture with generally solid (excerpt).*

### 30.      The authorities shared staff’s views on the need to improve the functionality of the housing

### 1sweea2023001 - 30.      The authorities shared staff’s views on the need to improve the functionality of the housing

### Labor market, education, and housing policy
- Authorities agreed with staff on the need to improve the functionality of the housing market.
- Agreed on importance of supporting the youth and foreign born by improving the effectiveness of education and training programs to facilitate labor force entry.
- Authorities confident that the October 2022 reforms to the employment protection framework will be implemented beneficially for the labor market.
- Government remains committed to Sweden’s climate targets and plans to raise additional investments if necessary, including to help upgrade the energy grid.
- Intend to alleviate planning and permit difficulties for large investment projects.

### Labor market indicators and vulnerabilities
- Figure 7 highlights higher unemployment among foreign-born and under-25 cohorts (percent, seasonally adjusted) for selected countries (no additional numeric values provided in text).
- Staff appraisal notes strong employment so far should partly attenuate burdens from higher debt servicing, inflation, and house price declines.
- Identified vulnerabilities: high exposure of residential real estate (housing) and CRE to variable interest rates and high leverage.

### Fiscal policy assessment and recommendations
- Sweden expected to face a mild recession in 2023; inflationary pressures remain difficult to abate.
- Fiscal stance in 2023 described as slightly contractionary and supportive of monetary policy efforts.
- Recommended allowing automatic stabilizers to fully operate.
- Energy support measures described as swift and small compared to other European countries; could have been more targeted to vulnerable segments.
- Risks noted: discontinuation of the climate bonus for electric cars and lowering taxes on fuels risks reversing progress toward carbon emissions reduction and Sweden’s climate goals.
- Recommendations:
  - As inflation subsides, increase investments to support green transition and inclusive growth.
  - Gradually raise extremely low property taxes to help finance expenditures and make housing market more dynamic.
  - Further reduce the high labor tax wedge to increase labor supply and lower debt in the long run.
  - Given available fiscal space and favorable debt dynamics, allow a small deviation from the surplus target over the medium-term to permit additional growth-enhancing infrastructure and social spending.

### Monetary and financial sector policy
- Monetary policy:
  - Should continue to forcefully tackle inflation if it persists.
  - Recent increases in the policy interest rate have been appropriate; a more aggressive tightening path may be needed in the short run.
  - Ongoing tapering of the asset purchase program contributes to tightening but could be recalibrated in line with market and inflation conditions.
  - Avoiding policy surprises is essential to anchor inflation expectations.
- Financial sector:
  - IMF Financial Sector Assessment Program confirmed banks’ strong capital position and resilience to severe macroeconomic shocks, but identified pockets of vulnerabilities to higher interest rates.
  - Special attention needed on residential and commercial real estate developments.
  - Recommend increasing frequency and intrusiveness of onsite inspections given looming uncertainties.
  - Consider recalibrating CCyB level and other buffers to better reflect risks, and possibly tighten for CRE.
  - Enhance macroprudential toolkit on mortgages (e.g., gradually increasing mortgage amortization requirement).
  - Improve disclosure by CRE firms and collect better data on household assets and liabilities to calibrate macroprudential policy.
  - Clarify crisis management framework.
  - Further develop supervisory risk assessment tools to deepen analysis of cross-border risks.
- Financial Soundness Indicators (selected, years as in source):
  - Regulatory capital to risk-weighted assets: 26.9, 26.4, 21.6, 22.8, 23.5, 23.0, 22.6 (2016–2022).
  - Non-performing loans to total gross loans: 1.1, 1.1, 0.5, 0.6, 0.5, 0.4, 0.3 (2016–2022).
  - Total household debt (in percent of GDP): 83.5, 85.3, 86.3, 86.8, 91.0, 87.3, 88.4 (2016–2022).
  - Change in housing price index (in percent, year average): 8.2, 6.6, -0.9, 2.5, 4.2, 10.1, 4.9 (2016–2022).

### Structural reforms and climate policy
- Implementation of structural reforms essential to support growth, productivity, and improve social outcomes.
- Priorities:
  - Tackle education and skills gaps, especially for the foreign-born; increase efficiency of programs and regional services.
  - Education enhancements to focus on science, engineering, and vocational training.
  - Address housing market distortions: gradually ease rent controls and simplify building codes; substitute rent-controls with more efficient social protection.
  - Implement reforms to raise incentives to work to further increase labor market participation.
  - Complement high carbon tax with increased investments in energy supply and transmission, including renewables and the electricity grid.
- Expected effect: boost Sweden’s productivity and inclusive and green growth over the medium-term.

### Box 4 — Mortgage Tax Relief in the European Union (key findings)
- Mortgage interest tax relief favors owner-occupied housing and may not increase home ownership.
- EC country-specific recommendations have long advised gradually abolishing the benefit, considering macroeconomic stability risks.
- EC microsimulation (EUROMOD) study in 14 EU Member States finds the tax relief largely benefits households at medium to high income levels; its removal could help decrease income inequality in almost all MSs.
- Impact on government revenues is sizable in some MSs:
  - Netherlands: 1.8 percent of GDP.
  - Belgium: 0.4 percent of GDP.
  - Sweden: 0.25 percent of GDP.
- EC (2022) estimate: tax expenditures associated with interest deductibility alone amounts to around ½ percent of GDP.
- In Sweden, alongside low amortization rates and low recurrent property taxation, mortgage interest deductibility has been an important factor driving up house price growth and household debt.

### Staff appraisal summary and projections (selected numbers preserved)
- Projection context:
  - Mild recession expected in 2023.
  - HICP inflation (average): 2020 0.7; 2021 2.7; 2022 8.1; 2023 6.5; 2024 3.0; 2025 2.3; 2026 2.0; 2027 2.0; 2028 2.0.
  - HICP core inflation (average): 2020 1.5; 2021 1.6; 2022 5.5; 2023 5.2; 2024 3.6; 2025 2.2; 2026 2.0; 2027 2.0; 2028 2.0.
  - Unemployment rate (percent): 2020 8.5; 2021 8.8; 2022 7.5; 2023 7.7; 2024 8.0; 2025 7.9; 2026 7.9; 2027 7.9; 2028 7.9.
  - Real GDP (percent change): 2020 -2.2; 2021 5.1; 2022 2.8; 2023 -0.3; 2024 1.4; 2025 2.3; 2026 2.3; 2027 2.3; 2028 2.3.
- Public finances (percent of GDP, selected):
  - Net lending / Borrowing: 2020 -2.8; 2021 -0.1; 2022 0.7; 2023 0.0; 2024 -0.3; 2025 0.0; 2026 0.3; 2027 0.3; 2028 0.3.
  - Structural balance (percent of potential GDP): 2020 -1.7; 2021 -0.2; 2022 0.2; 2023 0.4; 2024 0.1; 2025 0.2; 2026 0.3; 2027 0.3; 2028 0.3.
  - General government gross debt, official statistics: 2020 39.5; 2021 36.3; 2022 31.3; 2023 31.1; 2024 30.5; 2025 29.5; 2026 28.4; 2027 27.2; 2028 25.9.
- Balance of payments (percent of GDP, selected):
  - Current Account Balance: 2020 6.0; 2021 6.3; 2022 3.8; 2023 3.6; 2024 4.0; 2025 4.0; 2026 4.2; 2027 4.2; 2028 4.2.
  - Trade balance: 2020 4.5; 2021 4.3; 2022 2.0; 2023 1.8; 2024 2.2; 2025 2.2; 2026 2.4; 2027 2.5; 2028 2.6.

### Sovereign risk and debt sustainability
- Overall risk of sovereign stress assessed as low.
- Debt is sustainable: strong growth, fiscal surpluses, and favorable interest rate/inflation dynamics have pushed debt lower than before the pandemic and projected to continue declining.
- Medium-term liquidity risks analyzed by GFN Financeability Module and Fanchart assessed as low.
- Long-term risks assessed as low; only under the pension and health scenario would debt increase substantially, but even then remain below the EU Maastricht debt threshold of 60 percent of GDP.
- New pension reform links retirement age to 2/3 of life-expectancy and is expected to ensure long-term fiscal sustainability.

*Source: IMF staff report content provided in the supplied PDF excerpt.*

### Annex I. Figure 2. Debt Coverage and Disclosures

### Annex I. Figure 2. Debt Coverage and Disclosures

### Debt coverage and institutional perimeter
- Debt coverage in the DSA: 1/CGGGNF PSCPSOther
- 1a. If central government, are non-central government entities insignificant? n.a.
- Commentary: In Sweden, the general government consist of the central government, the local government (which includes the regions and municipalities) and the social security funds.

### Subsections included in chosen coverage
- 1 Budgetary central government: Yes
- 2 Extra budgetary funds (EBFs): No
- 3 Social security funds (SSFs): Yes
- 4 State governments: No
- 5 Local governments: Yes
- 6 Public nonfinancial corporations: No
- 7 Central bank: No
- 8 Other public financial corporations: No

### Instrument coverage and accounting principles
- Basis of recording: Non-cash basis 4/; Cash basis (as applicable)
- Valuation of debt stock: Nominal value 5/; Face value 6/; Market value 7/ (only traded debt securities have observed market values)
- Note 2/: Stock of arrears could be used as a proxy in the absence of accrual data on other accounts payable.
- Note 3/: Insurance, Pension, and Standardized Guarantee Schemes, typically including government employee pension liabilities.

### Debt consolidation across sectors (selected holder–issuer entries; percent of GDP)
- Holder / Issuer sample cells (values preserved exactly as in source):
  - Budget. central govt: 60.2 70.4 35 6.5 43.1 53 0.2
  - Extra-budget. funds: 0 3
  - Social security funds: 0.3 0.3
  - Local govt.: 2.2 1.7 9.8 217.5 231.2
  - Nonfin pub. corp.: 245.3 24 5.3 245.3
  - Central bank: 210.2 00.3 210.5
  - Oth. pub. fin. corp: 109.9 109.9
  - Total: 212.7 061.9 070.7 n.a. 476.2 505.9 1327.4
- Reporting on Intra-government Debt Holdings: Non-consolidated CPS NFPS GG: expected CG Other acct. payable 2/

### Reporting detail labels present in source
- Municipalities and Regions; Debt securities; Loans; IPSGSs 3/; Currency & deposits; Total; Reporting on Intra-government Debt Holdings; Consolidated

*Sources: IMF staff calculations; Swedish Authorities: OEDC; and Bloomberg.*

---

### Annex I. Figure 3. Public Debt Structure Indicators

### Debt currency, holder, law, instrument, and maturity breakdowns (notes and commentary)
- Note: The perimeter shown is general government.
- Projection path shown for Foreign currency vs Local currency (years indicated: 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031); Commentary: The share of FX debt in overall debt will steadily decline due to Riksbank changing how it finances its foreign reserves. Starting in 2021, the Riksbank is gradually replacing reserves that are borrowed through the National Debt Office with direct purchases; government announced to reduces its FX debt gradually to zero as debt matures. This change also affects maturity profile and partly explains debt decline in 2021 as Riksbank took over responsibility for FX reserves management.
- Public Debt by Holder (percent of GDP): categories shown include External private creditors; External official creditors; Domestic other creditors; Domestic commercial banks; Domestic central bank.
- Public Debt by Governing Law, 2022 (percent): Domestic law; Foreign law ex. multilateral; Multilateral.
- Debt by Instruments (percent of GDP): Marketable debt vs Nonmarketable debt (projection series including 2018–2028).
- Public Debt by Maturity (percent of GDP): ≤ 1 year; 1-5 years; > 5 years. Residual maturity: 6. years

*Sources: IMF staff calculations; Swedish Authorities; OECD; and Bloomberg.*

---

### Annex I. Figure 4. Public DSA—Baseline Scenario

### Public debt and contributions (percent of GDP unless indicated)
- Public Debt (Actual/Projection rows): 31.3 32.0 32.2 31.9 31.3 30.4 29.4 28.6 27.6 26.7 25.6
- Change in Public Debt: -5.0 0.7 0.2 -0.3 -0.6 -0.8 -1.0 -0.8 -0.9 -1.0 -1.1
- Contribution of identified flows: -2.3 -0.5 -0.6 -0.8 -0.9 -1.0 -1.1 -0.8 -0.8 -0.9 -0.9
- Primary deficit: -1.0 -0.4 0.0 -0.4 -0.6 -0.6 -0.6 -0.3 -0.3 -0.3 -0.3
- Noninterest revenues: 47.1 46.5 47.4 47.7 47.7 47.7 47.7 48.0 48.0 48.0 48.0
- Noninterest expenditures: 46.1 46.2 47.4 47.3 47.1 47.1 47.1 47.7 47.7 47.7 47.7
- Automatic debt dynamics: -1.2 -1.0 -0.6 -0.4 -0.3 -0.3 -0.5 -0.5 -0.6 -0.6 -0.6
- Real interest rate and relative inflation: -1.4 -1.1 -0.1 0.3 0.4 0.4 0.2 0.1 0.1 0.0 0.0
  - Real interest rate: -1.6 -1.3 -0.2 0.3 0.4 0.4 0.2 0.1 0.1 0.0 0.0
  - Relative inflation: 0.3 0.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
- Real growth rate: -1.0 0.1 -0.5 -0.7 -0.7 -0.7 -0.7 a.-0.7 -0.6 -0.6 -0.6
- Other identified flows: 0.0 0.9 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
- Contingent liabilities: 0.0 0.9 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
- Contribution of Residual: -2.7 1.1 0.8 0.5 0.3 0.1 0.1 0.0 -0.1 -0.1 -0.2
- Gross Financing Needs: -0.7 12.8 5.1 6.2 5.3 5.0 5.3 4.6 3.6 4.0 3.3
  - of which: debt service: 0.7 12.6 5.5 6.9 6.2 5.9 6.2 5.1 4.2 4.6 3.9
  - Local currency: 0.6 10.7 5.0 5.6 5.1 5.1 5.6 4.8 3.9 4.2 3.8
  - Foreign currency: 0.1 1.9 0.4 1.3 1.2 0.8 0.6 0.4 0.3 0.4 0.1

### Memo: macro assumptions and projections
- Real GDP growth (percent): 2.8 -0.3 1.4 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3
- Inflation (GDP deflator; percent): 7.0 6.9 3.4 2.3 2.0 2.0 2.0 2.0 2.0 2.0 2.0
- Nominal GDP growth (percent): 10.0 6.5 4.9 4.7 4.3 4.3 4.3 4.3 4.3 4.3 4.3
- Effective interest rate (percent): 2.1 2.4 2.9 3.3 3.2 3.2 2.7 2.5 2.3 2.1 1.9

### Staff commentary and assumptions
- Staff commentary: Public debt is expected to decrease gradually due to a favorable growth dynamics and the assumption of continuing small primary surpluses till 2028 which is in line with the fiscal surplus target. After 2028 it is assumed that the authorities will adjust the surplus target to zero.
- Note: in 2023 we assume that the government will re-finance the Riksbank to the tune of SEK 60 bn under contingent liabilities. This still does not lead to an increase in debt to GDP.

*Sources: IMF staff calculations; Swedish Authorities; OECD; and Bloomberg.*

---

### Annex I. Figure 5. Realism of Baseline Assumption

### Realism diagnostics and historical comparators
- Sources and vintage notes: Projections made in the October and April WEO vintage.
- Comparator metrics shown: Forecast Track Record (t+1 t+3 t+5), Public debt to GDP, Primary deficit, r - g, Historical Output Gap Revisions (data from 1990 to 2019 for MAC advanced and emerging economies), Starting point reflects team’s assessment of initial overvaluation from EBA (or EBA-Lite).
- Laubach (2009) rule note: linear rule assuming bond spreads increase by about 4bps in response to a 1 ppt increase in the projected debt-to-GDP ratio.

### Key summary from commentary
- Commentary: Realism analysis does not point to major concerns: the projected fiscal adjustment and debt reduction are well within norms and slightly lower than in the past 5 years due to conservative assumptions.
- Distributional diagnostics (selected figures):
  - 3-year debt reduction: Distribution 3/; Max. 3-year reduction; 3-year debt reduction above 75th percentile (5.9 ppts of GDP); percentile rank 54.1
  - 3-year adjustment in cyclically-adjusted primary balance: Max. 3-year adjustment; 3-year adjustment above 75th percentile (2 ppts of GDP); percentile rank 51

*Sources: IMF staff calculations; Swedish Authorities; OECD; and Bloomberg.*

---

### Annex I. Figure 6. Medium-term Risk Analysis

### Summary indicators (percent of GDP unless otherwise indicated)
- Fanchart width: 28.8 0.4
- Probability of debt not stabilizing (pct): 0.0 0.0
- Terminal debt level x institutions index: 4.3 0.1
- Debt fanchart index: ... 0.5
- Average GFN in baseline: 6.6 2.3
- Bank claims on government (pct bank assets): 3.6 1.2
- Chg. in claims on govt. in stress (pct bank assets): 0.4 0.1
- GFN financeability index: ... 3.6
- G F N finaceability index (separate entry): 7.6 0.1, Low...0.3 2.1 17.9 0.5 0.1 0.4

### Probabilities and stress-test diagnostics
- Prob. of missed crisis, 2023-2028 (if stress not predicted): 0.0 pct.
- Prob. of false alarm, 2023-2028 (if stress predicted): 92.0 pct.
- Triggered stress tests: banking sector stress test was manually triggered by staff to assess risk from an extremely sever bank stress scenario.

### Sectoral and qualitative notes
- Commentary: Both medium-term tools point to low level of risk; the Debt Fanchart Module and the GFN Financeability Module show that debt is on a declining path.
- Banking sector size: about 300 percent of GDP, exposing the government to significant contingent liability risks.
- Mitigants: banks have thus far weathered tightening of financial conditions, reflecting strength of banking supervision and macroprudential policies; well functioning resolution system makes it very unlikely for the government to assume 10 percent of banking sector assets as a liability.

*Sources: Bloomberg; IMF staff calculations; Swedish Authorities; and OECD.*

---

### Annex I. Figure 7. Long-term Risk Analysis

### Long-run projection diagnostics and scenarios (selected outputs)
- Overall Risk Indication panels show GFN-to-GDP Ratio and Total Public Debt-to-GDP Ratio across Projection, Long run projection, Baseline with t+5, Baseline with t+5 and DSPB, Historical 10-year average, and Custom scenarios.
- Baseline headline long-run indicators (selected values preserved where shown):
  - Baseline: 2.0% ; -0.3% ; 2.0% ; 2.0%
  - Baseline Extension of Fifth Projection Year: 2.3% ; 0.6% ; 0.0% ; 2.0%
- Projection horizon shown across years: 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041 2043 2045 2047 2049 2051

### Demographics, pensions, health, and climate-change scenarios (customized runs)
- Demographics: Pension — Permanent adjustment needed in the pension system (pp of GDP per year) to keep pension assets positive for:
  - 0.00% — 50 years
  - 0.81% — Until 2100
  - 1.68% — 30 years
- Demographics: Health — scenarios labeled Health (Demographics) and Health (Demographics + ECG); ECG = Excess Health Care Growth (difference between avg. health care cost cpi and cpi)
- Climate Change: Adaptation — scenarios labeled With climate adaptation (standardized scenario) and With climate adaptation (customized scenario)
- Custom scenario note: Customized scenario assumes an additional increase in the primary balance by 0.1 percentage point over the forecast horizon.

*Sources: Bloomberg; IMF staff calculations; Swedish Authorities; and OECD.*

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### Annex II. External Sector Assessment (selected findings)

### Overall assessment and near-term outlook
- Overall Assessment: Based on preliminary estimates for 2022, the external position remains stronger than the level implied by medium-term fundamentals and desirable policies, despite a drop in the current account by 2.5 percentage points to 3.8 percent of GDP.
- Projection: The projected recession in 2023 and subsequent recovery are expected to bring the external balance further down before stabilizing at its long-term average of 3½ percent.
- Note: Assessment is preliminary pending full-year data for 2022. A complete analysis will be provided in the 2023 External Sector Report.

### Potential policy responses
- As inflation decelerates, scope exists to increase private and public investment in the green transition and the health sector, which would also lower Sweden’s external balance.
- Over the medium term, such investment would help Sweden attain climate goals and prepare for demographic challenges.

### Foreign asset and liability position (2022 and characterization)
- 2022 (% GDP) NIIP: 25.1 Gross Assets: 292.4 Debt Assets: 83.8 Gross Liab.: 267.3 Debt Liab.: 133.6.
- Background projection: Swedish net IIP is projected to reach 25.1 percent of GDP in 2022, an increase of 3.8 percentage points in line with the positive current account surplus.
- Gross liabilities projected to decrease to 267 percent of GDP in 2022, with about a half being gross external debt (169 percent of GDP).
- Sectoral holdings of net foreign assets (2022):
  - Other financial institutions: 87 percent of GDP
  - Social Security Funds: 26 percent of GDP
  - Households: 20 percent of GDP
  - Riksbank: 12 percent of GDP
- Net external debtors:
  - Non-financial corporations: 60 percent of GDP
  - Monetary financial institutions: 51 percent of GDP
  - Central government: 11 percent of GDP
- Currency composition: 50 percent of the IIP are in foreign currency.

### Assessment and risks
- Assessment: Net IIP is expected to rise further in the medium term, reflecting outlook for continued current account surpluses.
- Hedge: Sweden’s foreign currency assets are almost three times as high as its foreign currency liabilities providing a hedge against currency valuations.
- Data caveat: Projections are subject to uncertainty as Swedish IIP data includes large errors and omissions, which have averaged 2.2 percent of GDP in the past ten year.
- Vulnerabilities and mitigants: Although rollovers of external debt (including banks’ covered bonds) pose some vulnerability, risks are moderated by banks’ ample liquidity and large capital buffers. The net IIP level and trajectory do not raise sustainability concerns.

### Current account (2022 details)
- Background: Current account surplus dropped to 3.8 percent in 2022 on the back of lower net exports of goods (merchandise, manufactured goods, and mineral fuels) and high recovery-driven imports of services (especially in travel and other business services).
- Gross savings and investment in 2022:
  - Gross savings declined by 0.5 percentage points to 31.7 percent of GDP.
  - Gross investment increased by 2.0 percentage points to 27.9 percent of GDP.
  - The decline in gross savings mainly due to the private sector.
- Energy trade note: Sweden continues to be a net oil importer with the oil deficit widening from -1 to -

*Sources: IMF staff calculations; Swedish Authorities; OECD; and Bloomberg.*

### 2.2 percent  of  GDP.  Over  the  medium-term,  the  current  account  is  projected  to  return  to  its  long-run  ave

### 1sweea2023001 - 2.2 percent  of  GDP.  Over  the  medium-term,  the  current  account  is  projected  to  return  to  its  long-run  ave

### Current account: levels, cyclically adjusted assessment, and gap
- Est. CA: 3.8 percent of GDP (2022).
- Cycl. Adj. CA: 4.6 percent of GDP (2022).
- EBA Norm: 1.1 percent of GDP.
- EBA Gap: 3.5 percent of GDP.
- COVID-19 Adj.: -0.3 percent of GDP.
- Other Adj.: (blank in source).
- Staff Gap: 3.2 percent of GDP.
- IMF staff assessment: cyclically adjusted current account estimated at 4.5 percent of GDP in 2022, 3.4 percentage points above the cyclically adjusted EBA norm of 1.1 percent of GDP.
- IMF staff assesses the CA gap at 2.9 percent of GDP in 2022, with a model-estimated range of 2.5 to 3.3 percent of GDP.
- Policy contributions to the gap:
  - Fiscal policy: explains 0.3 percentage points; fiscal policy was much more contractionary compared to the rest of the world, accounting for 0.9 percent (presumably percent of GDP).
  - Health: -0.1 percent of GDP.
  - Reserves: +0.1 percent of GDP.
  - Credit: -0.6 percent of GDP.
- Majority of the CA gap remains unexplained.
- Complementary EBA tools suggest Sweden’s pension system could explain about [1.5] percentage points of the gap.

### Real exchange rate (REER) and valuation
- The krona depreciated by about 6 percentage points in real effective terms (OECD-ULC based) to be equal to 91 points in 2022 relative to its average index in 2021.
- Staff CA gap implies a REER gap of -9.4 percent (applying an estimated elasticity of 0.34).
- REER gap range (model uncertainty): between -8.2 to -10.6 percent.
- REER index and level models suggest gaps of −17.4 percent and −19.4 percent, respectively, for 2022.
- ULC-based REER index (OECD) depreciated and was 10.8 percent below its 30-year average (since the krona was floated in 1993) over the course of 2022.
- IMF staff overall assessment: krona undervalued between -4.9 to -15.7 percent, with a midpoint of -10.8 percent as guided by the ULC-based REER index and its standard deviation.
- Note on range derivation: the standard deviation of the ULC-based REER index is 5.9 percent; the upper and lower range are derived by subtracting the standard deviation from the average outcome (midpoint).

### Capital and financial accounts: flows and policy measures
- Financial account plunged by 4.0 percentage points in 2022 to 4.0 percent of GDP.
- Portfolio investments dropped from 10.4 to 2.2 percent of GDP (driven by a decrease in long-term debt securities).
- Direct investments improved from 1 to 1.6 percent of GDP.
- Context: banking sector is close to 300 percent of GDP.
- Policy and regulatory developments:
  - Authorities introduced liquidity coverage ratio requirements in foreign and domestic currency in addition to the overall liquidity coverage ratio.
  - Banks have improved their structural liquidity positions.
  - Recent FSAP found the Swedish banking system appears resilient to large liquidity shocks despite substantial wholesale funding.

### FX intervention and reserves level
- Exchange rate freely floating since 1993; no interventions since 2002.
- Foreign currency reserves broadly remained constant at USD 56 billion in 2022.
- Reserves equivalences:
  - 15 percent of short-term external debt of monetary and financial institutions (primarily banks).
  - about 9.3 percent of GDP.
  - 2.7 months of imports.
- Policy assessment:
  - Need for reserves reduced under floating regime, but important to maintain adequate reserves given high dependence of Swedish banks on wholesale funding in foreign currency and past disruptions.
  - Riksbank can quickly establish swap facilities when necessary (as seen during the pandemic).
  - A USD 60 billion swap facility was agreed with the Fed to address dollar funding risks related to the Covid-19 crisis; it was not utilized but provided a backstop function.

### Risk Assessment Matrix — selected risks, likelihood, impact, and policy responses
- Intensification of regional conflict(s) (e.g., escalation of Russia’s war in Ukraine)
  - Likelihood: H
  - Impact: Medium (Sweden is not energy dependent on Russia but exposed to trade and financial uncertainties)
  - Policy response: Fully use available fiscal space to provide targeted support to households and businesses to overcome high energy prices and liquidity needs.
- Abrupt global slowdown or recession
  - Likelihood: M
  - Impact: Medium (pressure on bank capital adequacy, credit tightening, higher unemployment)
  - Policy response: Stand ready to implement further policy support; maintain flow of credit through adequately targeted fiscal and financial policies.
- Europe: intensifying fallout from the war in Ukraine, worsening energy crisis, supply disruptions, monetary tightening
  - Likelihood: H
  - Impact: Medium
  - Policy response: Fully use available fiscal space to provide targeted support to households and businesses.
- Monetary policy miscalibration
  - Likelihood: M
  - Impact: High (Riksbank has started monetary policy normalization; additional tightening may have adverse spillovers)
  - Policy response: Maintain flow of credit via targeted financial policies; reintroduce guaranteed scheme for bank loans to businesses if needed; fiscal risks limited in response to rise in global risk premia.
- Significant property price decline
  - Likelihood: M
  - Impact: Medium (investment and collateral values could be undermined; lending could be curtailed)
  - Policy response: Monitor developments with better data; supervise banks' commercial real estate lending closely; provide monetary stimulus and funding support to banks if needed.
- Cyberthreats
  - Likelihood: M
  - Impact: Medium (highly digitalized economy, cyberattacks could impair financial system)
  - Policy response: Clarify roles/responsibilities for cyber security risk management; develop contingency plans and crisis protocols; enhance information sharing among agencies and with the financial sector; permanent forum and regular cyber threat intelligence reports recommended.

### Climate policy advances and challenges
- Sweden has adopted ambitious carbon reduction targets but meeting goals will require additional investment and reforms.
- Progress and gaps:
  - Sweden is among the top in the Climate Change Performance Index.
  - Sweden might not meet its EU 2030 climate goal and its own goal of net-zero emissions by 2045.
  - Swedish Environmental Protection Agency (2022) finds reforms as of March 2022 will support meeting Sweden’s 2030 goals without supplementary measures, but the 2045 target “will not be reached with current policy instruments, but that the distance to the target is significantly smaller than the previous year.”
- Key drivers and needs:
  - More effort required to reduce emissions from transport, industrial and agricultural sectors.
  - Sweden has one of the highest carbon tax rates in the world but lacks a clear strategy/roadmap for lowering emissions in high-emitting sectors in a cost-efficient way (OECD, 2021).
  - New government objective of achieving fossil-free electricity by 2040 (needs to be enacted) will require investments in nuclear plants, wind turbines, biofuel production, hydrogen power plants, electric vehicle charging stations, and power grid.
  - SWECO report: infrastructure investments for the national electricity grid could amount to 10.3 percent of GDP until 2045.
  - Fiscal Policy Council (2022): public financing is not the main impediment; need to streamline approval processes, stable and clear rules, and better national coordination.
  - Fiscal Policy Council suggests climate investment needs could range between 0.4–0.8 percent of 2022 GDP per year over the coming decades, in addition to planned climate-related public investment already in the 12-year investment plan.
  - IMF staff finds investment needs for climate adaptation could be large as well (up to 0.4 percent of GDP annually).
- Transition priorities and recommendations:
  - Four key areas for net-zero transition: a) more efficient use of energy and resources; b) zero-emissions electrifications; c) biomass from forestry and agriculture; d) carbon capture and storage.
  - New government expected to present a climate policy action plan focusing on accelerating the climate transition.
  - Climate Policy Council recommends improvements in governance, coordination and upskilling; strengthening goals and policy instruments; improving conditions for investments.
- Technological and infrastructure priorities:
  - Need to advance smart grid technologies, control, storage, and transmission; commercialize tested solutions.
  - February 2022 Government electrification strategy includes action plan for charging and tank infrastructure and upcoming district heating and cogeneration strategy.
  - New mandate for Svenska Kraftnät to expand the national transmission grid to areas within Sweden’s maritime territory.

### 2022 FSAP: key recommendations (selected and prioritized)
- Systemic Risk Analysis
  - Employ structural models (household and CRE) to complement bank stress tests; develop tools for contingent liquidity risks from derivatives loss of longer-term wholesale funding and corporate exposures. (Authority: FI; Priority: Immediate)
  - Require investment funds to offer redemption terms aligned with portfolio liquidity; consider swing pricing and gates; provide guidance on liquidity stress tests. (Authority: FI, MoF; Priority: Medium-Term)
- Macroprudential Policies and Systemic Risk Oversight
  - Introduce standards on interest rate stress-tests for mortgage loan applicants. (Authority: FI; Priority: Short-Term)
  - Commission independent study on costs and benefits of tax deductibility of mortgage interest. (Authority: MoF; Priority: Medium-Term)
  - Consider higher capital requirements and/or buffers for banks’ exposures to CRE risks. (Authority: FI; Priority: Short-Term)
- Banking Supervision and Regulation
  - Increase resources to improve supervision effectiveness and supervisory toolkit; enhance offsite monitoring, automate data collection and analysis, improve internal manuals, deploy risk dashboards. (Authority: FI; Priority: Immediate)
  - Enhance supervision through increased frequency and intrusion of onsite inspections, ongoing assessment of IRB models and internal stress tests, thematic reviews for smaller institutions, focus on small high-risk institutions. (Authority: FI; Priority: Short-term)
  - Continue integrating climate-related risks into supervisory processes and align with emerging international standards. (Authority: FI; Priority: Medium-term)
- Cyber Resilience
  - Clarify roles/responsibilities for cyber security risk management; develop contingency plans and crisis protocols; enhance information sharing. (Authorities: FI, MoF, the Riksbank, NCSC, MSB; Priority: Immediate)
  - Establish and maintain a database of essential service providers and outsourcing arrangements to identify concentrations and dependencies. (Authority: FI; Priority: Immediate)
- Financial Market Infrastructures
  - Strengthen legal frameworks for weakly regulated FMIs; strengthen regulation, oversight, and supervision of key service providers Getswish and Finansiell ID-Teknik BID AB. (Authorities: MoF, FI; Priority: Short-term)
- Crisis Management, Resolution and Safety Nets
  - Develop crisis management capacity and formalize a watchlist process to identify banks at risk of failure. (Authority: FI; Priority: Immediate)
  - Ensure bank resolution plans are fully operational; clarify MREL regulation and remove barriers to resolvability; publish approach for deploying bail-in and transfer tools and imposing losses on MREL holders. (Authorities: NDO & FI; Priority: Immediate)
  - Publish a policy framework describing lender of last resort bilateral liquidity facilities, including funding in resolution. (Authority: Riksbank; Priority: Immediate)
- CBDC and Fintech
  - Extensively test CBDC robustness and resilience; analyze financial safeguards and impact on payments and financial system. (Authority: Riksbank; Priority: Short-term)
  - Facilitate exchange of information between Fintech firms and supervisors; collect additional data and periodically review regulatory perimeter. (Authority: FI; Priority: Medium-term)

*SWEDEN — INTERNATIONAL MONETARY FUND*

### Annex VI. Sweden’s Corporate Vulnerabilities: Focus on

### Annex VI. Sweden’s Corporate Vulnerabilities: Focus on Commercial Real Estate

### CRE sector scale and funding structure
- CRE debt constitutes a large portion of total corporate debt and poses substantial funding and macro-financial spillover risks.
- CRE loans represent between 10 and 25 percent of banks’ private sector lending.
- The share of CRE companies’ non-bank debt has increased recently (about 40 percent of total debt).
- CRE bonds account for about half of corporate bond market value.
- Foreign holdings of CRE bonds stand at 53 percent.
- Among domestic investors, investment funds hold the largest share of CRE bonds, at around 21 percent.
- Average loan duration is about 3.4 years, and bond maturity is about 5 years.
- About 55 percent of bonds are in foreign currency against about 6 percent of bank lending.
- Ownership concentration has recently increased with some CRE firms buying into other CRE firms.

### Revenue-side pressures and market developments
- Renting—key source of CRE earnings—is under stress due to pandemic-induced hybrid working models.
- Office vacancy rates: from about 3 percent in 2019 to close to 8 percent in 2021 in Stockholm; similar trends in Gothenburg and Malmö.
- Declining office yields and rising vacancies are affecting CRE firms’ credit ratings and ability to roll over debt in the local bond market.

### Data, sample, and methodology
- Staff assessment uses publicly available company financial data from Orbis covering over 20 thousand Swedish CRE firms; not all series were available for all firms.
- Stress tests were conducted on a sample where the largest 100 companies hold aggregate assets of around 70 percent of GDP and debt of around 50 percent.
- Analysis focused on customary financial ratios under current and stressed conditions and applied shocks to interest rates, GDP (impact on revenues), and FX.

### Interest Coverage Ratio (ICR) framework and thresholds
- ICR is computed as EBIT/Interest Expense.
- ICR interpretation used:
  - ICR < 1 implies the firm cannot service debt without adjustments (reducing costs, drawing cash reserves, or borrowing more).
  - An ICR threshold of 1.5 times is applied to account for funding and earnings vulnerabilities; firms with ICR below 1 may have already been in distress.
- Debt is categorized into risk buckets by ICR level; lower ICR buckets imply higher probability of becoming non-performing.

### Stress test results and scenario impacts
- Under adverse shocks, the joint occurrence of shocks significantly weakened ICRs:
  - Median ICRs fell below 1.5 under an adverse stress scenario, and below 1 under a more severe scenario.
  - The severe scenario resulted in “a ¾ of firms with debt-at-risk.”1
- Debt-at-risk was found to fluctuate between 20–35 percent.
- The impact was most pronounced from:
  - an increase in advanced country policy rates (up to 400 basis points for the Swedish repo rate)
  - and a 38 percent decline in both residential and commercial real estate prices after two years.
- Medium and large-size firms were affected similarly.
- Amplification channels identified include concentration among CRE companies, opaque information leading to indiscriminate investor pullback, liquidity premia raising funding costs, redemptions from investment funds, asset liquidations lowering property values, and pressures on bank capital that could crowd out credit.

### Macro-financial implications and prudential considerations
- Given tightening financial conditions, broader spillover effects to the real economy are possible through:
  - declines in property values affecting consumption and investment,
  - provisioning and losses hitting bank capital and reducing credit supply.
- It is advisable to consider increasing capital requirements for banks with large exposures to CRE given:
  - the negative macro-outlook,
  - rising bankruptcies,
  - high uncertainty about future policy rates,
  - potential spillovers not captured by the FSAP stress test framework.

### Policy recommendations and data/monitoring actions
- Strengthen monitoring of corporate liabilities and ownership structure, especially in the CRE sector.
- Require improved disclosures from CRE firms, including contingency plans for market funding dry-ups.
- Request better disclosure of firms’ liabilities, especially foreign-currency liabilities, including in the bond issuance template.
- Enhance the comprehensiveness and periodicity of CRE data (e.g., on rents, vacancies, and transaction prices) and integrate multisource data into a single database.
- Improve transparency on ownership structure to identify interlinkages and associated vulnerabilities.
- Authorities should evaluate the need to raise capital requirements for banks for CRE exposures.
- Authorities should plan now for potential crisis interventions, designed to limit moral hazard and ideally targeted to areas with strongest negative links to the real economy.

*Source: Annex VI. Sweden’s Corporate Vulnerabilities: Focus on Commercial Real Estate (IMF staff estimates and analysis).*

### Annex VII. Authorities’ Response to Past IMF Policy

### Annex VII. Authorities’ Response to Past IMF Policy

### IMF 2021 Article IV Recommendations — Authorities’ Actions
- Fiscal Policy
  - IMF advice: "Fiscal policy should avoid returning to the surplus target prematurely. As the recovery takes hold, the eventual withdrawal of the support measures should be cautiously gradual in order to minimize scarring. Furthermore, there is room for increasing public expenditure, including on green outlays, over the medium term to enhance growth and achieve Sweden’s ambitious climate and inclusion objectives."
  - Authorities’ actions: "Pandemic support measures were phased out gradually by end-2021. The budget surplus was double the surplus target by 2022. The government increased support for green initiatives in the context of the EU RRF program, and its own Climate Leap and Industry Leap programs on top of already high public investments."
- Structural Reforms
  - IMF advice: Labor — "Further reforms, including of employment protection and public employment services, should support employment of the low-skilled and migrants, aided by enhanced education and training."
  - Authorities’ actions: "Reforms are ongoing."
  - IMF advice: Housing — "Making the rental market work; Taxing property to rebalance the housing market; Producing housing that is affordable; Protecting households in the transition."
  - Authorities’ actions: "Reforms have been insignificant due to housing being a politically contentious issue."
- Macro-Financial Issues
  - IMF advice: Data collection — "Household level data collection need to be enhanced to help evaluate supervisory effectiveness. Close review the adequacy of banks’ risk management along with the financial health of commercial property borrowers."
  - Authorities’ actions: "Some efforts are being made to collect data, but many shortcomings persist."
  - IMF advice: AML/CFT — "need for strong anti-money laundering and combating the financing of terrorism (AML/CFT) frameworks and for close regional cooperation."
  - Authorities’ actions: "New FSAP recommendations put a new focus on areas for strengthening the defenses. Regional AML/CFT is underway which will also identify areas for improvement."
  - IMF advice: e-krona — "The authorities should also explore regulatory options to ensure reliable and efficient private payments, such as standards for business continuity and regulation of fees."
  - Authorities’ actions: "Testing of the e-krona is ongoing."

### Fund Relations — Key figures (As of December 31, 2022)
- Quota: 4,430.00 (SDR Million)
- Fund holdings of currency (Exchange Rate): 3,140.79 (SDR Million) — 70.90 (Percent of Quota)
- Reserve Tranche Position: 1,209.69 (SDR Million) — 29.14 (Percent of Quota)
- New Arrangements to Borrow: 21.62 (SDR Million)
- SDR Department net cumulative allocation: 6,494.92 (SDR Million) — 100.00 (Percent Allocation)
- SDR Department holdings: 6700.10 (SDR Million) — 103.16 (Percent)
- Outstanding Purchases and Loans: None
- Latest Financial Arrangements: None
- Projected Payments to Fund (SDR million; based on existing use of resources and present holdings of SDRs) — Charges/Interest:
  - 2023: 0.08
  - 2024: 0.08
  - 2025: 0.08
  - 2026: 0.08
  - 2027: 0.08
- Exchange Rate Arrangements: "The Krona has been floating freely since November 19, 1992."
- Article IV Consultation cycle: 12-month
- FSAP Participation: Mandatory FSAP conducted in time for the 2023 Article IV consultation.

### Statistical Issues and Data Adequacy (As of December 31, 2022)
- General assessment: "Data provision is adequate for surveillance. The country has a full range of statistical publications, many of which are on the internet. The quality and timeliness of the economic database are generally very good."
- SDDS Plus subscriber since February 11, 2015.
- National Accounts: ESA 2010 since September 2014.
- Government Finance Statistics: Compiled on an accrual basis according to ESA 2010; reported to Eurostat quarterly and annually; GFSM 2014 framework reported through Eurostat convergence project.
- External Sector Statistics: BPM6 format since December 2014.
- Monetary and Financial Statistics: Timely and of good quality; based on ECB framework.
- Financial Soundness Indicators: Reported from 2005 up to 2022Q3 with metadata.
- Table of Common Indicators — notable latest observations and reporting frequencies:
  - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: latest observation 2022/12/30; date received 2023/01/05; Frequency: W
  - Reserve/Base Money: 2022/12/30; 2023/01/05; Frequency: W
  - Broad Money: 2022/12/30; 2023/01/05; Frequency: W
  - Central Bank Balance Sheet: 2022/12/30; 2023/01/05; Frequency: W (reporting), M (publication)
  - Consolidated Balance Sheet of the Banking System: 2022/12; 2023/01; Frequency: M
  - Consumer Price Index: 2022:12; 2023/01; Frequency: M
  - Revenue, Expenditure, Balance and Composition of Financing — General Government: 2022:Q3; 2022/12; Frequency: Q (reporting), A (publication)
  - GDP: 2022:Q3; date received 2022/12; Frequency: Q

### Authorities’ Macroeconomic Assessment and Outlook (Statement by Executive Director for Sweden and Advisor)
- Recent developments (2022)
  - "The Swedish economy developed strongly at the beginning of 2022" and "the labour market strengthened."
  - "The employment rate reached new record levels."
  - High external price pressures produced rapidly rising electricity and food prices during 2022; Russia’s full-scale invasion of Ukraine aggravated the situation.
  - Monetary policy was tightened rapidly to counter the upturn in inflation.
  - "Large price increases and rising interest expenditure had a significantly adverse effect on households’ purchasing power" and demand slowed in Q4 2022.
- Near-term outlook
  - Manufacturing: "still has large order stocks, but has seen a rapid decline in orders."
  - Exports and industrial production: "expected to be significantly weaker going forward."
  - Households: "expected to continue to reduce their consumption."
  - Consumer confidence and retail trade sales: "have fallen since spring 2022."
  - Housing: "both prices and construction have declined, and are expected to continue to decline in 2023."
  - Housing construction: "Compared with the peak in 2021, around 50 per cent fewer homes are expected to be built in 2024 and housing investment will thus weigh on growth in total gross investment in both 2023 and 2024."
  - Labour market: "employment is expected to fall gradually and unemployment will rise." Unemployment "is assessed to peak at the end of 2024, and then begin to fall back."
  - Government measures: "The Government will compensate households and companies retroactively for the high electricity prices which will contribute positively to household income and thus contribute to dampening the downturn in consumption."
  - Riksbank forecast: "households’ real disposable incomes will improve and both consumption and the housing market will recover during 2024 and 2025. This is expected to, together with rising demand abroad, lead to GDP growth increasing from the middle of 2024."

### Financial Stability, Prudential Supervision and Crisis Preparedness
- Authorities’ stance
  - Broad agreement with IMF team’s assessments and recommendations related to financial stability.
  - Noted progress since the 2016 FSAP in strengthening regulation, supervision, and crisis management.
  - Agreed that "highly leveraged commercial real estate companies constitute a key risk."
  - Measures: introduction of risk weight floors on CRE and residential real estate exposures; reciprocation of measures by Norway and Denmark.
  - FSAP bank solvency stress tests: "indicate that the banking system appears resilient against potential shocks emanating from the CRE sector."
  - Authorities concurred macroprudential policies can help attenuate cyclical and structural risks.
  - Households: authorities agree with IMF risk assessment given high indebtedness but "did not see a need to strengthen the amortization requirement."
- Data and surveillance gaps
  - Authorities acknowledge high-quality micro data collections (mortgage survey, consumer loan survey, commercial real estate loan survey, KRITA) but agree "there are still data gaps, particularly for indebted households’ assets and debts."
- Fintech and cyber risks
  - Authorities agree on vigilance for risks from the growing financial technology sector, including increased cyber risks.
  - Plan: framework for comprehensive operational and cyber resilience; strengthen legal framework for FMIs to enforce PFMI compliance and manage outsourcing risks in payments.
- AML/CFT supervision
  - Finansinspektionen (FI) established a new operational section for AML/CFT supervision effective 1 March, 2023, elevating AML/CFT to a stand-alone department.
- Crisis readiness and resolution
  - Cooperation "has historically functioned well"; progress since 2016 noted but further efforts needed.
  - Work required to make new crisis management framework fully operational, including further development of the published "open bank" bail-in mechanic and work on a policy for funding in resolution.

### Monetary Policy (Riksbank views and actions)
- Inflation and policy reaction
  - "CPIF inflation is now over 9 per cent and thus far above the inflation target."
  - Policy rate hikes: "raised its policy rate at every meeting since April 2022, in total from zero per cent to 3.0 per cent in February 2023."
  - Asset holdings: "the Riksbank's monetary policy motivated asset holdings have declined since the first quarter of 2022." Purchases ceased at end-2022.
  - In February (year not restated in source), Executive Board decided to reduce holdings of government bonds through sales.
- Forward guidance and risks
  - "The Riksbank's forecast is that the policy rate will probably need to be raised somewhat further going forward."
  - The Riksbank assesses the risks of tightening too little in the near term to be greater than risks of tightening too much.
  - Noted a higher sensitivity to interest rates in Sweden due to "households’ increased indebtedness and the short interest-rate fixation periods on their mortgages."

### Fiscal Policy (Government views)
- Policy stance
  - Government agrees fiscal policy should support monetary policy in reducing inflation.
  - 2023 budget: "meaning a broadly neutral fiscal stance for 2023 overall."
- Energy support
  - Energy support package targeted to offer "the greatest relief to those who saw the greatest increase in their electricity bills."
- Medium- and long-term agenda
  - Government’s reform agenda in the Tidö agreement includes employment, energy, climate, healthcare, and schooling system; aims to increase employment and productivity long term.
  - Government will consider lowering the wage tax wedge during its term; "however, there is no political support for higher property taxes."
  - Fiscal policy: "will be carefully calibrated to strike the right economic balance both in the short- and long term."

### Structural Issues: Labour and Housing Policy
- Labour market
  - Structural reforms to raise employment and productivity are key priorities.
  - Sweden has "comparatively high unemployment, partly due to high labour force participation."
  - Vulnerable groups: foreign born (newly-arrived), low-education individuals, and women with non-European background face particular difficulties.
  - Government measures: consider "well-targeted tax cuts, reforms to the benefit system, as well as strengthening the possibilities for individuals to transition into the labour force."
  - Government supports improving effectiveness of education and training programs; views October 2022 reform to employment protection framework as beneficial.
- Housing policy
  - Authorities acknowledge the linkage between household indebtedness and housing market functioning.
  - Government intends to implement reforms to increase incentives for construction, simplify building permit rules, and increase access to buildable land.
  - Note: "the process for building permits in Sweden is 7.5 weeks shorter than the EU average, according to the World Bank report. The same report states that Swedish building rules are accessible and transparent."
  - On tax changes: "it is of particular importance to maintain stable and predictable rules in the housing market. Any measure in this area must be seen in a long-term perspective."

*Source: Annex VII. Authorities’ Response to Past IMF Policy — Sweden staff report materials and authorities’ statement (as provided).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1sweea2023001.pdf_