## 1cheea2024001

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### Labor market, recent developments, and outlook
- Growth slowed to 0.8 percent in 2023, down from 2.7 percent in 2022.
- Employment growth: 2.3 percent in 2023 (2.2 percent for males and 2.5 percent for females).
- Registered unemployment: 2.0 percent in 2023; increased to 2.3 percent in March (headline unemployment series).
- Vacancy-to-unemployment ratio declined in 2023 but remains above historical averages; firms report recruitment difficulties partly due to skills shortages.
- Nominal wages grew 1.7 percent in 2023, slightly below inflation.
- Private consumption: 2.1 percent y/y in 2023.
- Investment: equipment and software investment fell -1.9 percent y/y in 2023; construction fell -2.1 percent y/y in 2023.
- Headline inflation: 2.8 percent in 2022, 2.1 percent in 2023, and 1.0 percent in March 2024.
- Core inflation in March 2024: 1.0 percent; domestic inflation: 1.8 percent.
- Outlook:
  - Growth: 1.3 percent in 2024 (1.0 percent adjusted for sports events) and 1.4 percent in 2025 (1.7 percent adjusted for sports events).
  - Medium-term growth: around 1.5 percent, facing headwinds from adverse demographic trends, skills gaps, and lower trading partner growth.
  - Unemployment projected: 2.3 percent in 2024 and 2.4 percent in 2025.
- Policy recommendations:
  - Incentivize participation of women, older workers, and migrants to mitigate skills shortages and raise potential growth.
  - Expand childcare and move from family- to individual-based taxation to reduce tax disincentives for female full-time work.
  - Consider raising the retirement age, align pension incentives, and allow more flexibility combining work and pension income.

### Fiscal position, debt-brake framework, and policy advice
- General government surplus: 0.5 percent of GDP in 2023, down from 1.2 percent of GDP in 2022.
- Federal government: small deficit of -0.1 percent of GDP in 2023; cantons and social security funds drove the positive balance.
- Public debt: 38.3 percent of GDP in 2023.
- Projected fiscal balance: 0.5 percent of GDP in 2024 and 0.2 percent of GDP in 2025.
- Revenue (% GDP): 32.5 in 2023; 32.5 projected for 2024; 32.4 projected for 2025.
- Expenditure (% GDP): 32.0 in 2023; 32.0 projected for 2024; 32.1 projected for 2025.
- Amortization account: end-2023 needs CHF27.2 billion (3.4 percent of GDP); ordinary six-year deadline extended until 2035 with option to 2039.
- Extraordinary expenditures in 2024: CHF2.4 billion (0.3 percent of GDP) for aid to Ukrainian refugees (CHF1.2 billion) and capital contributions to the railways (CHF1.2 billion).
- Medium-term risks: spending pressures from defense, infrastructure, demographics; referendum on a 13th monthly pension payment will require at least CHF 4.2 billion a year (½ percent of GDP) from 2026.
- Staff view and recommendations:
  - Fiscal stance broadly appropriate given the debt-brake framework.
  - Close structural deficits for 2026–27 and develop a comprehensive medium-term plan to address aging, climate, and defense-related pressures.
  - Use budget “clean-up measures” and consider spending reprioritization and revenue increases.
- Tax and revenue notes:
  - Pillar Two (15 percent minimum corporate tax) implementation via a supplementary tax: revenue potential between CHF1 billion and 2.5 billion.
  - VAT rate increase: standard VAT rate 8.1 percent from January 2024; additional VAT revenue of CHF1.1 billion in 2024 rising to CHF1.4 billion by 2028.
  - Tariff abolishment: estimated revenue reduction around CHF600 million per year.
  - Removal of EV tax exemptions: gains CHF222 million in 2024 and CHF400 million by 2028.

### Monetary policy, SNB actions, and balance sheet developments
- SNB policy rate: increased from -0.75 percent in 2022 to 1.75 percent in June 2023; lowered by 25 bps in March 2024.
- SNB FX operations: sold CHF133 billion of foreign currency (net) in 2023, compared to CHF22 billion in 2022.
- Swiss franc: appreciated by 6.4 percent in nominal terms in 2023 and depreciated in the more recent period; REER appreciated by 3.4 percent in 2023; NEER appreciated by 6.8 percent in 2023.
- SNB reported loss of CHF3.2 billion in financial year 2023, down from CHF132 billion in 2022; no profit transfers to the government in 2024.
- SNB financial specifics:
  - 2023 SNB financial loss: CHF3.2 billion.
  - Negative results on CHF positions: CHF8.5 billion.
  - Profits on foreign position: CHF4 billion.
  - Provisions allocated for potential foreign currency losses: CHF10.5 billion (drawing from distribution reserve).
  - Provisions for currency reserves: CHF113 bn.
  - Distribution reserve: CHF -52.3 bn.
  - To distribute in 2025, SNB would need a profit of about CHF66, an ROA of about 8 percent.
  - SNB profit as of 2024Q1: CHF 58.8 billion.
  - Central bank assets close to 100 percent of GDP.
- Operational changes: remuneration threshold lowered and minimum reserves no longer remunerated as of December 2023; minimum reserve ratio increased from 2.5 to 4 percent in April 2024.
- Staff view: March 2024 rate cut appropriate to guard against moving to very low inflation; monetary policy should remain data-dependent and responsive to international developments; further cuts if inflation surprises on the downside, otherwise maintain stance if inflationary pressures increase.
- Recommendations: continue prudent risk management, increase provisions as planned, and if opportunity arises, gradually reduce the large balance sheet.

### Financial sector stability, Credit Suisse acquisition, and reform agenda
- State-facilitated acquisition of Credit Suisse (CS) by UBS in 2023 stabilized markets; acquisition formally completed in June 2023; full integration expected through 2026.
- Transaction specifics:
  - UBS paid CHF 3 billion to CS shareholders.
  - Additional Tier-1 instruments written down by CHF16.5 billion.
  - Federal guarantee to SNB for liquidity assistance to CS up to CHF100 billion.
  - Federal loss-protection guarantee to UBS up to CHF9 billion for losses beyond CHF5 billion on acquired CS assets.
  - SNB liquidity assistance of up to CHF168 billion.
  - UBS terminated the CHF9 billion default guarantee and repaid all but CHF38 billion of emergency liquidity assistance as of December 2023.
  - Authorities reported overall cost of state support was zero.
- Banking sector resilience:
  - Banks have strong buffers but pockets of vulnerabilities, particularly in real estate.
  - Mortgage loan growth moderated to 2.4 percent in 2023 from 3.5 percent in 2022; mortgage lending accounts for 85 percent of bank lending (note: elsewhere residential mortgage exposure cited as 75 percent of total loans).
  - Non-performing loans (NPLs): 0.8 percent of total gross loans.
  - Bank profitability increased due to higher net interest margins and trading income.
  - Bankruptcies increased by +2.9 percent in 2023.
  - Announced redundancies related to the acquisition: 3,000 in Switzerland (about 3 percent of the domestic banking sector workforce).
- Concentration and TBTF concerns:
  - Combined bank assets (UBS-CS): 180 percent of GDP.
  - UBS constitutes ¼ of domestic loans and deposits.
- Reform and supervisory measures:
  - Maintain ample capital buffers; encourage banks to conserve profits as interest rates decline.
  - Expand macroprudential toolkit (borrower-based measures: binding LTV, DTI, DSTI requirements).
  - Reactivate or activate CCyB if vulnerabilities increase; sectoral CCyB reactivated at 2.5 percent in 2022.
  - Strengthen FINMA’s autonomy, governance, and accountability; increase FINMA resources and on-site inspections.
  - Strengthen early intervention powers, recovery and resolution planning, and crisis-management framework; plan for two reform packages for H1 2025.
  - New FSAP will be launched in 2024; 2025 FSAP will provide updated recommendations.
- Crisis-management and safety-net changes:
  - New liquidity requirements for SIBs to be fully met by end-2024.
  - SNB extended ELA eligibility to all banks against mortgage collateral.
  - Authorities tabled law to make PLB permanent.
  - Adoption of Basel III rules in 2023; amended Capital Adequacy Ordinance to enter into force in January 2025.
- TBTF report main recommendations (summary):
  - Strengthen prevention regime (corporate governance, capital requirements, early intervention).
  - Strengthen liquidity regime and LoLR framework; expand preparatory measures and introduce PLB.
  - Expand crisis toolkit to improve resolution planning and resolvability of SIBs.

### Macroprudential, data, AML/CFT, and fintech
- Data gaps: gaps inhibit comprehensive views of direct and indirect exposures, cross-border markets, and interlinkages; recommended to close gaps.
- New dataset: SNB and FINMA to introduce supervisory loan-by-loan dataset on banks’ exposures to non-banks with >90 percent coverage; first data release expected in 2026.
- AML/CFT:
  - Shortcomings identified in ML prevention and crypto risks.
  - Draft bill for a federal registry of beneficial owners submitted to Parliament in 2024 (public consultation closed November 2023).
  - Planned AML/CFT amendments to extend due diligence obligations to legal and accounting activities and to cash payments in real estate and precious metals sectors.
- Fintech and digital currency:
  - SNB exploring a wholesale CBDC; pilot with SIX Digital Exchange and six commercial banks.
  - Evaluating settlement options for tokenized assets, links to SIC, and private tokenized money backed by central bank reserves.

### Housing market, real estate risks, and supply-side policy
- Residential real estate conditions:
  - Vacant dwellings: 1.2 percent of total dwelling stock as of 2023.
  - Real estate price adjustments vary across segments (between -4 and +3 percent across segments); owner-occupied properties show moderate price increases; residential-investment and commercial properties have seen declines.
  - Residential mortgage exposure: 75 percent of total loans; IPRP constitute a quarter of mortgage volume and show higher vulnerabilities.
  - CRE exposure: 15 percent of mortgage loans.
- Housing affordability and supply:
  - Population growth 2012–22: 10 percent; population growth in 2023: 1.6 percent (highest since the 1960s).
  - Authorities’ action plan: encourage housing production via densification and planning, streamline procedures, emphasize affordable housing construction.
- Macroprudential recommendations to address housing and real estate risks:
  - Expand borrower-based measures (LTV, DTI, DSTI).
  - Advance supply-side actions to relieve pressure on residential housing market.
  - Strengthen regulations on investment vehicles, FMIs, fintech, insurance, and sustainable finance.
  - Address housing affordability via advancing authorities’ action plan.

### Pensions, demographic pressures, and climate policy implications
- Pension financing:
  - Recent pension reforms advanced; VAT increase and retirement age for women important for Pillar I sustainability through 2030.
  - Referendum on a 13th monthly pension payment passed in March; requires at least CHF 4.2 billion a year (½ percent of GDP) from 2026.
  - Federal Council proposed financing options for CHF 4.2 billion gap:
    - Option i) increase wage contributions by 0.8 ppts;
    - Option ii) combine increase in wage contributions by 0.5 and VAT rate by 0.4 percentage points.
  - FC variants for lower federal contribution include use of OASI fund or smaller increases in wage contributions and VAT.
  - Recommendation: decide on financing measures and develop further pension reforms; reforms under Pillar II are subject to referendum in Fall 2024.
- Demographics and fiscal projections:
  - Spending on national defense expected to increase to 1 percent of GDP by 2035 (from 0.7 percent in 2019).
  - Demographic-related expenditures of general government expected to increase from 17.2 percent of GDP to 18.8 percent of GDP by 2040 (to 19.8 percent of GDP by 2060).
  - Depending on policy scenario, general government debt ratio could be 3 to 3.8 percentage points higher by 2040 (8.4 to 11 percentage points higher by 2060).
- Climate policy:
  - Revised CO2 Act (March 2024) establishes policy framework for 2025–30; some provisions less ambitious (share of CO2 levy revenue allocated to buildings program remains 0.33 rather than 0.5; nominal CO2 levy remains CHF120/t CO2e through 2030).
  - Weaker domestic emissions incentives may require acquiring more emissions-reduction credits internationally and affect building retrofit incentives.

### External sector, current account, reserves, and valuation
- Current account surplus: 7.6 percent of GDP in 2023 (down from 9.4 percent in 2022).
- External valuation and NIIP:
  - NIIP: 95 percent of GDP at end-2023.
  - Gross Assets: 631 percent of GDP.
  - Reserve Assets: 91 percent of GDP.
  - Gross Liab.: 537 percent of GDP.
  - Debt Liab.: 167 percent of GDP.
- CA adjustments and REER assessment:
  - After adjusting for cyclical and Switzerland-specific factors, staff CA gap estimated at -2.8 percent of GDP, suggesting an overvaluation of 5.2 percent of the franc (range 3.7–6.7 percent, midpoint 5.2 percent).
  - EBA REER model estimates show larger overvaluation in alternative models (12.7 and 17.5 percent).
- FX intervention and reserves:
  - SNB sold CHF133 billion (17 percent of GDP) of FX (net) through FXIs in 2023.
  - Official reserve assets (including gold): CHF724 billion (USD864 billion, 91 percent of GDP) at end-2023; down CHF128 billion from end-2022.
- Policy implications:
  - Fiscal policy should operate within debt-brake while creating fiscal space to address spending pressures.
  - Monetary policy: SNB remain data-dependent to avoid inflation settling at very low rates.
  - Continue commitment to free trade and cooperation, including abolition of industrial tariffs in 2024.

### Corporate sector performance and key numeric facts
- Corporate sector:
  - Survey data indicate robust profit margins.
  - Manufacturing margins under pressure due to lower capacity utilization and strong franc.
  - Bankruptcies increased by +2.9 percent in 2023; share of bankruptcies over total firms remain below 2 percent.
- Financial sector numeric highlights (verbatim):
  - “excess” savings (around 4 percent of GDP)
  - SNB 2023 loss: CHF3.2 billion
  - Negative CHF positions: CHF8.5 billion
  - Foreign position profits: CHF4 billion
  - Provisions allocated: CHF10.5 billion
  - Provisions for currency reserves: CHF113 bn
  - Distribution reserve: CHF -52.3 bn
  - To distribute in 2025: need a profit of about CHF66, an ROA of about 8 percent
  - SNB profit as of 2024Q1: CHF 58.8 billion
  - Central bank assets close to 100 percent of GDP
  - Combined bank assets (UBS-CS): 180 percent of GDP
  - UBS constitutes ¼ of domestic loans and deposits
  - Residential mortgage exposure: 75 percent of total loans
  - IPRP share of mortgage volume: a quarter of mortgage volume
  - CRE exposure: 15 percent of mortgage loans
  - Trading portfolios: 6 percent of total assets
  - Sectoral CCyB: 2.5 percent
  - Vacant dwellings: 1.2 percent (2023)
  - Population growth 2012–22: 10 percent
  - Population growth 2023: 1.6 percent
  - Swiss pension funds allocations: 8.4 percent (direct Swiss properties), 3 percent (mortgage loans), 10.5 percent (via real estate funds), 3.9 percent (real estate abroad)
  - Swiss insurance companies allocations: 9 percent (direct real estate), 7 percent (mortgage)

### Key selected economic indicators (selected rows, verbatim)
- Population (2023): 8.815 million
- Real GDP growth (%): 2021: 5.4; 2022: 2.7; 2023: 0.8; 2024: 1.3 (Proj.); 2025: 1.4 (Proj.)
- Unemployment (%): 2021: 3.0; 2022: 2.2; 2023: 2.0; 2024: 2.3 (Proj.); 2025: 2.4 (Proj.)
- Inflation (period average, %): 2021: 0.6; 2022: 2.8; 2023: 2.1; 2024: 1.5 (Proj.); 2025: 1.2 (Proj.)
- Fiscal balance (% GDP): 2021: -0.3; 2022: 1.2; 2023: 0.5; 2024: 0.5 (Proj.); 2025: 0.2 (Proj.)
- Public debt (% GDP): 2021: 41.0; 2022: 37.7; 2023: 38.3; 2024: 36.7 (Proj.); 2025: 35.6 (Proj.)
- Broad money (% change): 2021: 1.4; 2022: 0.1; 2023: -2.0; 2024: 2.9 (Proj.); 2025: 2.6 (Proj.)
- Credit to the private sector (% change): 2021: 3.8; 2022: 2.6; 2023: 1.8; 2024: 2.9 (Proj.); 2025: 2.6 (Proj.)
- Current account (% GDP): 2021: 6.9; 2022: 9.4; 2023: 7.6; 2024: 8.2 (Proj.); 2025: 7.6 (Proj.)
- Reserves (end-of-period, billions of US dollars): 2021: 1014; 2022: 852; 2023: 724
- External debt (% GDP): 2021: 293.3; 2022: 274.7; 2023: 241.1

*Source: IMF staff report for the 2024 Article IV consultation (Switzerland).*

### 2023. The labor market remained resilient, although the unemployment is slowly rising

### 2023. The labor market remained resilient, although the unemployment is slowly rising

### Recent economic developments and labor market
- Growth slowed to 0.8 percent in 2023, down from 2.7 percent in 2022.
- Employment growth reached 2.3 percent in 2023 (2.2 percent for males and 2.5 percent for females).
- Registered unemployment was 2.0 percent in 2023, increasing to 2.3 percent in March (headline unemployment series).
- Vacancy-to-unemployment ratio declined in 2023 but remains above historical averages; firms report recruitment difficulties due in part to skills shortages.
- Nominal wages grew 1.7 percent in 2023, slightly below inflation, mitigating second-round inflation risks.
- Private consumption growth was 2.1 percent y/y in 2023; equipment and software investment fell -1.9 percent y/y in 2023; construction fell -2.1 percent y/y in 2023.
- Headline inflation: 2.8 percent in 2022, 2.1 percent in 2023, and 1.0 percent in March 2024.
- Core inflation in March 2024: 1.0 percent; domestic inflation: 1.8 percent.

### Outlook and growth projections
- Growth is expected to recover to 1.3 percent in 2024 (1.0 percent adjusted for sports events) and 1.4 percent in 2025 (1.7 percent adjusted for sports events).
- Inflation is projected to average 1.5 percent in 2024, remaining within the SNB’s 0–2 percent price stability range.
- Medium-term growth is projected to hover around 1.5 percent but faces headwinds from adverse demographic trends, skills gaps, and lower trading partner growth.
- Current account is projected to remain broadly unchanged, reflecting gradual external demand recovery offset by an appreciated currency.
- Risks: short-term downside from intensification of regional conflicts, abrupt global slowdown, safe-haven flows; financial-sector risks related to integration of Credit Suisse (CS) and UBS; medium-term downside from accelerated geoeconomic fragmentation and setbacks in strengthening EU relations.

### Fiscal position and policy
- General government surplus declined to 0.5 percent of GDP in 2023, from 1.2 percent of GDP in 2022.
- Federal government ran a small deficit of -0.1 percent of GDP in 2023; cantons and social security funds drove the positive balance.
- Public debt: 38.3 percent of GDP in 2023.
- Projected fiscal balance: 0.5 percent of GDP in 2024 and 0.2 percent of GDP in 2025.
- Revenue (% GDP): 32.5 in 2023, 32.5 projected for 2024, 32.4 projected for 2025.
- Expenditure (% GDP): 32.0 in 2023, 32.0 projected for 2024, 32.1 projected for 2025.
- Staff view: fiscal stance broadly appropriate given the debt-brake framework; need to close structural deficits for 2026–27 and develop a comprehensive medium-term plan to address aging, climate, and defense-related pressures.
- Policy note: a comprehensive fiscal plan is needed to address long-term fiscal pressures and mounting spending pressures from defense, infrastructure, and demographics; budget “clean-up measures” (cuts in lower-priority spending) have been used.

### Monetary policy and SNB actions
- SNB policy rate: increased from -0.75 percent in 2022 to 1.75 percent in June 2023; lowered by 25 bps in March 2024.
- SNB sold CHF133 billion of foreign currency (net) in 2023, compared to CHF22 billion in 2022.
- Swiss franc: appreciated by 6.4 percent in nominal terms in 2023 and depreciated in the more recent period.
- SNB reported a loss of CHF3.2 billion in financial year 2023, down from CHF132 billion in 2022; no profit transfers to the government in 2024 as a result.
- Operational changes: remuneration threshold lowered and minimum reserves no longer remunerated as of December 2023; minimum reserve ratio increased from 2.5 to 4 percent in April 2024.
- Staff view: the March 2024 rate cut was appropriate to guard against moving to very low inflation; monetary policy should remain data-dependent and responsive to international developments; if inflation surprises on the downside, SNB should continue to cut rates; if inflationary pressures increase, SNB could keep its current stance.

### Financial sector stability and reforms
- State-facilitated acquisition of Credit Suisse by UBS in 2023 stabilized financial markets with limited spillovers.
- Banks have strong buffers but pockets of vulnerabilities persist, particularly in real estate.
- Mortgage loan growth moderated to 2.4 percent in 2023 from 3.5 percent in 2022; mortgage lending accounts for 85 percent of bank lending.
- Real estate price adjustments vary across segments (between -4 and +3 percent across segments); owner-occupied properties see moderate price increases while residential-investment and commercial properties have seen declines.
- SNB and authorities: federal guarantees to UBS terminated.
- Policy recommendations:
  - Maintain ample capital buffers.
  - Expand the macroprudential toolkit to address real estate risks.
  - Advance supply-side actions to relieve pressure on the residential housing market.
  - Close data gaps.
  - Strengthen financial-sector reforms informed by lessons from Credit Suisse crisis: arm the supervisor with more resources, early intervention powers, and expanded recovery and resolution planning (in line with 2019 FSAP recommendations).
  - Authorities proposed measures to strengthen regulation and intend to present two packages for implementation and parliamentary discussion in the first half of 2025.
- A new FSAP will be launched in 2024 to assess the sector and provide updated recommendations.

### Structural policies and long-term challenges
- Key structural challenges: demographic ageing, labor shortages, skills gaps, and climate policy implementation.
- Policy recommendations:
  - Continue labor market and pension reforms to incentivize higher participation of women, older workers, and migrants.
  - Address skills gaps through targeted policies.
  - Implement pension reforms to tackle future financing gaps, including impacts from the referendum on a 13th monthly pension payment (passed in March; will come into effect in 2026).
  - Advance climate policy; the revised CO2 Act clarifies the policy framework for 2025–30 but is less ambitious and may require acquiring more emissions-reduction credits from internationally.
  - Advance negotiations with the EU and enhance cooperation with other key partners to mitigate geo-economic fragmentation risks.

### Executive Board / Directors’ views (summary)
- Directors welcomed Switzerland’s strong fundamentals, resilience, and envisaged gradual recovery.
- Risks considered broadly balanced but with uncertainty around geoeconomic fragmentation and regional conflicts.
- Directors stressed continued prudent macroeconomic and financial sector policies and progress on demographic and climate challenges.
- Debt brake rule regarded as having anchored fiscal policy well; importance of closing structural deficits for 2026–27 and developing a comprehensive medium-term plan emphasized.
- Directors commended SNB actions that curbed inflation and agreed the March rate cut was appropriate; recommended data-dependent policy and gradual SNB balance sheet reduction while building buffers from retained earnings.
- Financial sector: directors welcomed resilience but urged vigilance on real estate risks, stronger reforms informed by Credit Suisse crisis lessons, enhancement of macroprudential toolkit, closing data gaps, and implementation of remaining 2019 FSAP recommendations. They noted the 2025 FSAP will provide updated recommendations.
- Directors emphasized incentivizing higher labor force participation and pension reforms; welcomed recent climate policy progress and resumption of negotiations with the EU on single market participation.

### Key selected economic indicators (selected rows)
- Population (2023): 8.815 million
- Real GDP growth (%): 2021: 5.4; 2022: 2.7; 2023: 0.8; 2024: 1.3 (Proj.); 2025: 1.4 (Proj.)
- Unemployment (%): 2021: 3.0; 2022: 2.2; 2023: 2.0; 2024: 2.3 (Proj.); 2025: 2.4 (Proj.)
- Inflation (period average, %): 2021: 0.6; 2022: 2.8; 2023: 2.1; 2024: 1.5 (Proj.); 2025: 1.2 (Proj.)
- Fiscal balance (% GDP): 2021: -0.3; 2022: 1.2; 2023: 0.5; 2024: 0.5 (Proj.); 2025: 0.2 (Proj.)
- Public debt (% GDP): 2021: 41.0; 2022: 37.7; 2023: 38.3; 2024: 36.7 (Proj.); 2025: 35.6 (Proj.)
- Broad money (% change): 2021: 1.4; 2022: 0.1; 2023: -2.0; 2024: 2.9 (Proj.); 2025: 2.6 (Proj.)
- Credit to the private sector (% change): 2021: 3.8; 2022: 2.6; 2023: 1.8; 2024: 2.9 (Proj.); 2025: 2.6 (Proj.)
- Current account (% GDP): 2021: 6.9; 2022: 9.4; 2023: 7.6; 2024: 8.2 (Proj.); 2025: 7.6 (Proj.)
- Reserves (end-of-period, billions of US dollars): 2021: 1014; 2022: 852; 2023: 724
- External debt (% GDP): 2021: 293.3; 2022: 274.7; 2023: 241.1

*Source: IMF staff report for the 2024 Article IV consultation (Switzerland).*

### 8.      Corporate sector performance was mixed. Survey data indicate robust profit margins,

### 8.      Corporate sector performance was mixed. Survey data indicate robust profit margins,

### Corporate sector performance
- Survey data indicate robust profit margins.
- Manufacturing margins have come under pressure amid lower capacity utilization due to weak demand and the strong franc.
- Despite higher financing costs, the share of firms reporting difficulties is in line with historical averages; most describe their liquidity as comfortable.
- Bankruptcies increased by +2.9 percent in 2023, partly reflecting post-pandemic normalization.
- The growth of newly registered companies has also increased, leaving the share of bankruptcies over the total number of firms broadly constant (below 2 percent).

### Financial sector resilience
- Banking sector profitability increased, driven by higher net interest margins and trading income.
- Insurers benefited from rising premium volumes and income.
- Non-banks (NBFIs) recorded net financial gains up to 2023Q3, compared to 2022 losses.
- Non-performing loans (NPLs) increased but remain low at 0.8 percent of total gross loans.
- Since the state-facilitated acquisition of Credit-Suisse (CS) by UBS, bank share prices have increased, with limited spillovers.
- Announced redundancies related to the acquisition are 3,000 in Switzerland, about 3 percent of the domestic banking sector workforce.
- The economic impact of the acquisition has so far been muted.

### Box 1 — Credit Suisse Crisis: measures and outcomes
- Authorities considered options including acquisition, restructuring, temporary public ownership, bankruptcy, and activation of the Swiss emergency plan.
- The authorities—the Federal Council, FINMA and SNB—facilitated a take-over of CS by UBS.
- UBS paid CHF 3 billion to CS shareholders.
- Additional Tier-1 instruments were written down by CHF16.5 billion.
- Measures included:
  - A federal guarantee to SNB for liquidity assistance to CS up to CHF100 billion.
  - A federal loss-protection guarantee to UBS of up to CHF9 billion in the event of a loss of more than CHF5 billion on assets of Credit Suisse that UBS had to take over in the transaction.
  - SNB liquidity assistance of up to CHF168 billion.
- The acquisition required emergency legislation, took place outside of the resolution regime and without shareholders’ approval.
- The acquisition was formally completed in June 2023; key legal-entity mergers are expected in 2024, subject to regulatory approvals.
- Full integration of all businesses is expected to continue through 2026.
- UBS terminated the CHF9 billion default guarantee and repaid all but CHF38 billion of emergency liquidity assistance as of December 2023.
- The overall cost of state support was zero; authorities earned interest and commitment fees for the use of liquidity support and state guarantees.

### External position and valuation
- The external current account (CA) surplus was 7.6 percent of GDP in 2023, down from 9.4 percent of GDP in 2022 due to a higher deficit in services.
- The franc appreciated by 3.4 percent in real terms in 2023.
- After adjusting for cyclical and Switzerland-specific factors, the CA gap is estimated to be -2.8 percent of GDP, suggesting an overvaluation of 5.2 percent of the franc.
- The assessment is subject to uncertainty.

### Outlook and risks
- Growth projections:
  - Growth is projected to recover moderately in 2024 to 1.3 percent.
  - Growth projected at 1.3 percent (1 percent adjusted for sports events) in 2024 and 1.4 percent (1.7 percent adjusted for sports events) in 2025, driven by investment.
  - Medium-term growth hovers around 1.5 percent.
- Labor market: will remain resilient, although unemployment is projected to increase from historic lows.
- Trade surplus: projected to remain broadly unchanged, with gradual recovery in external demand countered by the strong franc.
- Inflation:
  - Inflation should remain within the price stability range, at 1.5 percent on average in 2024.
  - Inflation expected to slightly pick up in the first half of the year but stay within the 0–2 percent range of price stability.
  - Contributing factors:
    - Rent adjustments tied to the mortgage reference interest rate increased from 1.25 to 1.75 percent in 2023, and could lead to rent increases of up to 6 percent.
    - A medium-sized household will pay 18 percent more in 2024 for electricity, according to the Federal Electricity Commission.
    - Starting from January 2024, the standard VAT rate is 8.1 percent, a 0.4 ppt increase.
- Risks:
  - Short-term downside risks: intensification of regional conflicts and an abrupt global slowdown, which could result in slower growth and safe haven flows.
  - Policy responses in such a scenario: fiscal policy should allow automatic stabilizers to work, while providing targeted support to the most vulnerable; foreign exchange interventions can be considered in cases of disorderly market conditions or to prevent inflation expectations deanchoring due to large and persistent exchange rate appreciation.
  - Upside: faster global disinflation could ease financial conditions and support growth.
  - Medium-term downside risks: accelerated geoeconomic fragmentation and setbacks in strengthening EU relations.
  - Additional downside risk: ongoing integration of CS and UBS and the large size of the combined bank.
- Policy recommendations to mitigate risks:
  - Continued commitment to free trade and cooperation, including abolition of industrial tariffs in 2024 and efforts to expand trade relations.

### Fiscal policy
- Fiscal stance:
  - The overall fiscal surplus is projected to remain at 0.5 percent of GDP in 2024.
  - At the confederation level, consolidation measures of CHF 2 billion identified in 2023 will help meet debt-brake rule requirements in 2024.
  - Extraordinary expenditures of CHF2.4 billion (0.3 percent of GDP) are envisaged in 2024 for aid to Ukrainian refugees (CHF1.2 billion) and capital contributions to the railways (CHF1.2 billion).
- Amortization account:
  - At end-2023, amortization or offsetting needs were CHF27.2 billion (3.4 percent of GDP), mostly from COVID-19 and from the war in Ukraine.
  - The authorities extended the ordinary six-year deadline for amortization until 2035, with an option for extension until 2039.
  - Federal authorities will finance asylum-related expenditures within the ordinary budget by no later than 2028.
- Medium-term fiscal challenges:
  - Spending pressures accumulating, especially from defense and social insurance.
  - Rationalization within the ordinary budget has closed deficits through 2025, but deficits remain for 2026–2027 (0.2–0.4 percent of GDP).
  - Recently-passed referendum on a 13th monthly pension payment might increase the federal government’s yearly contribution from 2026; a proposal would reduce the federal share of OASI cost from 20.2 percent to 18.7 percent.
  - Spending on national defense is expected to increase to 1 percent of GDP by 2035, up from 0.7 percent of GDP in 2019.
  - Demographic-related expenditures of general government expected to increase from 17.2 percent of GDP to 18.8 percent of GDP by 2040 (to 19.8 percent of GDP by 2060).
  - Depending on the policy scenario, the general government debt ratio could be 3 to 3.8 percentage points higher by 2040 (8.4 to 11 percentage points higher by 2060).
- Recommended approach:
  - A comprehensive medium-term plan is needed to address fiscal pressures, including spending reprioritization and revenue increases.
- Tax reforms and revenue impacts:
  - Implementation of the OECD-led global minimum corporate tax rate of 15 percent (Pillar Two) via a supplementary tax; revenue potential estimated between CHF1 billion and 2.5 billion.
  - On Pillar One, the Federal Council will decide on signing the Multilateral Convention, followed by an ordinary legislative procedure.
  - The VAT tax hike to support Pillar I pension reforms has come into effect, with additional revenue of CHF1.1 billion in 2024, rising to CHF1.4 billion by 2028.
  - Industrial tariffs and tax-exemptions on electric vehicles were removed starting January 2024:
    - Estimated revenue reduction due to tariff abolishment: around CHF600 million per year.
    - Gains from removal of tax-exemptions: CHF222 million in 2024 and CHF400 million by 2028.
  - Progress on individual income taxation reform; a “tax-justice initiative” reform proposal was submitted to Parliament in February 2024. Revenue impacts are uncertain.
  - Staff note: given accumulating spending needs, reforms should ideally not lead to overall revenue losses.

### Debt-brake rule (Box 2) — features and effects
- The debt-brake limits federal expenditures to cyclically-adjusted revenues; deficits are debited to a compensational account and must be offset via subsequent surpluses.
- An escape clause allows extraordinary expenditures debited to an amortization account to be compensated during the following six years.
- The rule contributed to a reduction in public debt from 56.9 percent of GDP in 2003 to 38.3 percent of GDP in 2023.
- By 2023, surplus of compensation account reached CHF20.1 billion (2.5 percent of GDP).
- The rule accommodated large COVID-19 spending: the Confederation made CHF30 billion available quickly.

### Monetary policy
- SNB actions and rationale:
  - The SNB’s March policy rate cut ahead of other major central banks was appropriate to counter risks of inflation moving to and settling at very low rates.
  - Financial conditions tightened significantly in 2023 due to policy rate increases and franc appreciation, including due to interventions.
  - Despite some easing in 2024 owing to declines in long-term rates and a mild franc depreciation, financial conditions remained tight ahead of the March policy meeting.
  - With downward inflation surprises and inflation within the 0–2 percent price stability range, the SNB cut its policy rate in March to prevent overtightening.
  - Currently, ex-ante short-term real rates are slightly positive, within the wide range of estimates of neutral rates.
  - Markets price in further rate cuts with terminal rates at around 1 percent.
  - Financial conditions have eased, reflecting a decline in longer-term yields, the policy-rate cut and franc depreciation so far in 2024.

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

### 24.      Monetary policy should remain responsive to incoming data. Temporary factors (rent

### 1cheea2024001 - 24.      Monetary policy should remain responsive to incoming data. Temporary factors (rent

### Monetary policy stance and risks
- Monetary policy should remain responsive to incoming data.
- Temporary factors (rent increases) are expected to put upward pressures on prices, but inflation is expected remain within the stability range.
- If renewed increases in energy prices, resilient labor markets, pandemic-related “excess” savings (around 4 percent of GDP), or easing of financial conditions lead to inflationary pressures, the authorities should keep the current policy rate as some other central banks lower rates.
- If inflation continues to surprise on the downside, given the costs of nearing the zero lower bound or even returning to negative territory, the SNB should continue to cut rates to insure against inflation moving to and settling at very low (or possibly negative) rates.

### SNB financial position, risk management, and balance sheet
- 2023 SNB financial loss: CHF3.2 billion.
  - Negative results on CHF positions: CHF8.5 billion (driven by higher interest payments to banks).
  - Profits on foreign position: CHF4 billion.
- Allocated as provisions for potential foreign currency losses: CHF10.5 billion (drawing from distribution reserve).
- Provisions for currency reserves stand at CHF113 bn, while the distribution reserve is CHF -52.3 bn, including the 2023 loss.
- To distribute in 2025, the SNB would need a profit of about CHF66, an ROA of about 8 percent.
- As of 2024Q1, the SNB reported a profit of CHF 58.8 billion, largely generated by the assets held in foreign currencies.
- Given the SNB’s track record of achieving its primary mandate, new losses are unlikely to pose operational or recapitalization risks.
- Recommendations:
  - Continue a prudent risk management approach in the investment strategy.
  - Increase provisions as planned.
  - If the opportunity arises, gradually reduce the large balance sheet (assets close to 100 percent of GDP).

### Digital currency and payments innovation
- The SNB is exploring a wholesale central bank digital currency (CBDC).
  - Conducting a pilot with SIX Digital Exchange and six commercial banks for a wholesale CBDC as the settlement instrument for digital securities.
  - Evaluating other settlement options for tokenized assets: a link with the Swiss RTGS system SIC and use of private, bankruptcy-protected tokenized money backed by central bank reserves.
- Objective: enhance preparedness for technological changes and understand implications of different settlement options.

### Financial sector resilience and exposures
- Overall soundness:
  - Bank capital and liquidity positions remain sound and above regulatory minima.
  - Non-life insurers and reinsurers improved solvency-test ratios.
  - Coverage of equity capital requirements of asset management companies is comfortable.
- System vulnerabilities and exposures:
  - Trading portfolios account for 6 percent of total assets.
  - Residential mortgages: 75 percent of total loans.
    - Investment-purpose residential properties (IPRP) constitute a quarter of mortgage volume and show higher vulnerabilities (stronger signs of overvaluation, higher price sensitivity to interest rates, higher inclination of default by commercial investors, and potential for fire sales).
    - Proportion of adjustable-rate mortgages has risen; some mortgage loans are “Exception-to-Policy”.
    - Household “excess” savings estimated around 4 percent of GDP (noted earlier under monetary policy risks).
  - Commercial real estate (CRE):
    - Banks’ exposure to domestic CRE: 15 percent of mortgage loans (varies across banks).
    - CRE loss rates are higher than other segments; signs of growing unsecured borrowings by CRE companies.
    - NBFI exposures to CRE are relatively limited overall but high for some non-life and health insurers.
  - NBFI exposures to real estate are small compared with banking sector overall; leverage and liquidity risks for NBFIs remain low.
- Stress testing and buffers:
  - Sectoral countercyclical capital buffer (CCyB) reactivated at 2.5 percent in 2022.
  - Stress tests indicate domestically-focused banks would incur substantial losses in severe interest-rate shock and real estate-crisis scenarios; some banks could breach capital buffers though most would remain able to absorb losses.
- Data gaps:
  - Gaps inhibit comprehensive views of direct and indirect exposures, cross-border markets, and interlinkages across financial institutions, including fintech. Closing these gaps is recommended.

### Macroprudential and supervisory recommendations
- Encourage banks to conserve part of profits to strengthen capital buffers as interest rates decline and profitability could fall.
- Expand the macroprudential toolkit via borrower-based measures:
  - Binding Loan-To-Value (LTV) requirements.
  - Debt-to-Income (DTI) requirements.
  - Debt-Service-To-Income (DSTI) requirements.
- If vulnerabilities increase:
  - Consider activating the broad-based CCyB (sectoral CCyB already at the maximum level).
  - Consider a positive neutral CCyB to allow flexibility in responding to periods of financial stress.
- Strengthen forward-looking assessment of private bank resilience.
- Enhance regulations on investment vehicles, financial infrastructure, fintech, insurance, and sustainable finance to strengthen the financial center.
- Address housing affordability via advancing the authorities’ action plan.

### UBS, TBTF, crisis management, and reform agenda
- State-facilitated acquisition stabilized markets but poses challenges:
  - Combined bank assets: 180 percent of GDP.
  - UBS now constitutes ¼ of domestic loans and deposits.
  - UBS required to increase capital latest by 2030 under current TBTF framework.
- Supervisory and crisis-management measures introduced or proposed:
  - New liquidity requirements for SIBs to be fully met by end-2024.
  - FINMA increased resources for UBS supervision and recovery/resolution planning.
  - SNB extended eligibility of emergency liquidity assistance (ELA) to all banks against collateral in the form of mortgages.
  - Authorities tabled a law to make the emergency public liquidity backstop (PLB) permanent.
  - Adoption of Basel III rules in 2023; amended Capital Adequacy Ordinance to enter into force in January 2025.
- Further reforms needed:
  - Strengthen crisis-management framework, ensure implementability of recovery plans, conduct resolvability assessments, and update UBS’s resolution plan.
  - Monitor competition and concentration risks closely.
  - The Federal Council plans two reform packages for first half of 2025: ordinance-level changes and legislative amendments.

### TBTF report main recommendations (summary)
- Strengthen prevention regime:
  - Corporate governance and supervision (e.g., senior managers’ regime, variable remuneration measures).
  - Capital requirements (stricter implementation, increases for foreign participations, forward-looking elements in institution-specific capital surcharge).
  - Early intervention and recovery (strengthen FINMA’s options and duties, expand stabilization measures for SIBs, define clear trigger criteria).
- Strengthen liquidity regime:
  - Increase liquidity requirements for SIBs.
  - Review and refine LoLR legal framework.
  - Expand preparatory measures by banks and introduce a PLB.
- Expand crisis toolkit:
  - Improve resolution planning and resolvability of SIBs (reduce legal and implementation risks, expand resolution options, targeted capital requirements).
  - Strengthen crisis organization and cooperation among authorities.

### AML/CFT and beneficial ownership reforms
- FINMA identified shortcomings in ML prevention and defined combating ML—particularly concealment of asset origins through complex legal structures—and crypto as key risks.
- Recommendations and actions:
  - Strengthen AML/CFT risk-based supervision of banks, including analysis of cross-border flows from jurisdictions of concern.
  - Enhance understanding of potential impacts of ML shocks on banking stability.
  - Drafted bill for a federal registry of beneficial owners of companies and other legal entities (for submission to parliament in 2024).
  - Planned AML/CFT amendments to extend due diligence obligations to legal and accounting activities and to cash payments in the real estate and precious metals sectors; include obligations to prevent breaching international sanctions.
  - Public consultation for beneficial ownership bill closed in November 2023; commentary largely favorable with few modifications envisaged.
  - Submission of draft to Parliament envisaged for end-May 2024.
- Authorities will continue extension of due diligence measures to high-risk activities (lawyers, accountants, fiduciaries) despite resistance from some affected sectors.

### Housing market and structural policy notes
- Residential real estate tightness and housing affordability:
  - Vacant dwellings: 1.2 percent of total dwelling stock as of 2023.
  - Population growth 2012–22: 10 percent.
  - Population growth in 2023: 1.6 percent (highest since the 1960s).
  - Authorities’ action plan: encourage housing production via densification and planning, streamline procedures, emphasize affordable housing construction.
- Labor market and skills:
  - Labor markets perform well but face increasing skill shortages and mismatches amid demographic headwinds.
  - Skill shortages are acute in technology, finance, healthcare, and engineering.

### Key numeric facts (verbatim)
- “excess” savings (around 4 percent of GDP)
- SNB 2023 loss: CHF3.2 billion
- Negative CHF positions: CHF8.5 billion
- Foreign position profits: CHF4 billion
- Provisions allocated: CHF10.5 billion
- Provisions for currency reserves: CHF113 bn
- Distribution reserve: CHF -52.3 bn
- To distribute in 2025: need a profit of about CHF66, an ROA of about 8 percent
- SNB profit as of 2024Q1: CHF 58.8 billion
- Central bank assets close to 100 percent of GDP
- Combined bank assets (UBS-CS): 180 percent of GDP
- UBS constitutes ¼ of domestic loans and deposits
- Residential mortgage exposure: 75 percent of total loans
- IPRP share of mortgage volume: a quarter of mortgage volume
- CRE exposure: 15 percent of mortgage loans
- Trading portfolios: 6 percent of total assets
- Sectoral CCyB: 2.5 percent
- Vacant dwellings: 1.2 percent (2023)
- Population growth 2012–22: 10 percent
- Population growth 2023: 1.6 percent
- Swiss pension funds allocations: 8.4 percent (direct Swiss properties), 3 percent (mortgage loans), 10.5 percent (via real estate funds), 3.9 percent (real estate abroad)
- Swiss insurance companies allocations: 9 percent (direct real estate), 7 percent (mortgage)

*International Monetary Fund — Switzerland country chapter content unit 1cheea2024001*

### 37.      Incentivizing participation of women, older workers,  and immigrants would increase

### 37.      Incentivizing participation of women, older workers, and immigrants would increase the labor force, mitigate skills shortages, and raise potential growth

### Women: findings and recommendations
- Finding: Participation of women is high but reflects a high incidence of part-time workers.
- Analysis: Part-time workers have limited opportunities for on-the-job training, which contributes to skill mismatches and weaker accumulation of women’s human capital.
- Constraints: High childcare cost and tax disincentives discourage women from full-time work.
- Policy recommendations:
  - Expand childcare and provide targeted support to reduce barriers to full-time employment.
  - Move from family- to individual-based taxation to reduce tax disincentives and improve participation (OECD, 2024).

### Older workers: findings and recommendations
- Finding: Increasing participation of older workers would allow for retention of experience and expertise, improve labor dynamics, and strengthen pension funding.
- Policy options:
  - Increase the retirement age.
  - Align pension incentives (example: reduce progressivity in second-pillar contribution rates).
  - Allow more flexibility in combining work and pension income (OECD, 2024).

### Immigrants: findings and recommendations
- Finding: The share of employed persons with migration background has been increasing, but the unemployment rate of migrant workers is persistently higher.
- Policy recommendations:
  - Continue policies to attract, retain, and integrate migrants into the labor force.
  - Emphasize vocational and educational training to address labor shortages (OECD, 2024).

### Pension financing and recent reforms
- Finding: Pension reforms are advancing, but additional actions are needed to close new financing gaps.
- Recent measures and impacts:
  - Increase in the VAT rate and retirement age for women were important steps toward Pillar I pension sustainability through 2030.
  - The recently-passed referendum on a 13th monthly pension payment will require additional funding of at least CHF 4.2 billion a year (½ percent of GDP) from 2026.
- Federal Council (FC) proposed financing options for the CHF 4.2 billion gap:
  - Option i) increase wage contributions by 0.8 ppts;
  - Option ii) combine an increase in wage contributions by 0.5 and of the VAT rate by 0.4 percentage points.
- FC variants to finance the gap due to lower federal contribution:
  - Variant i) some use of the OASI fund;
  - Variant ii) generate further income either through an increase in wage contributions by 0.2 ppts or a combined increase in wage contributions by 0.1 ppts and the VAT rate by 0.2 ppts.
- Recommendation: To safeguard sustainability and avoid depletion of the OASI fund, authorities should decide on measures to provide financing of the 13th monthly pension payment and develop further pension reforms as planned.
- Note: Reforms under Pillar II, including lowering of the conversion rate and contribution salary threshold, have been approved by parliament and are subject to a referendum in Fall 2024.

### Climate policy implications for labor and fiscal planning
- Finding: A revised CO2 Act adopted in March 2024 establishes the policy framework for emissions reduction for 2025–2030.
- Analysis: Some provisions are less ambitious than initially proposed (for example, the share of CO2 levy revenue allocated to the buildings program remains 0.33 rather than 0.5; the nominal level of the CO2 levy remains CHF120/t CO2e through 2030), which may erode real incentives and require acquiring more emissions-reduction credits internationally than anticipated.
- Implication: Weaker domestic emissions incentives could affect resource allocation for building retrofits and the scale of international credit purchases.

### Broader staff appraisal relevant to labor participation
- Finding: The labor market has performed well overall, with a high level of labor force participation and low unemployment, but recruiting challenges persist and aging will exacerbate skill shortages in the medium term.
- Policy recommendations reiterated:
  - Further incentivize labor-force participation of women, older workers, and migrants to address widening skill gaps.
  - Reduce childcare costs and ease tax disincentives for dual-earner families to increase female participation.
  - Consider increasing the retirement age and incentives for longer careers to support labor participation and improve pension system sustainability.
  - Continue emphasis on vocational education to help close emerging skill gaps.

*Source: IMF staff report excerpt on Switzerland (1cheea2024001).*

### 59.      It is recommended that the next consultation takes place on the regular 12-month

### 1cheea2024001 - 59.      It is recommended that the next consultation takes place on the regular 12-month

### Major macroeconomic developments and near-term outlook
- Real GDP (Staff projections, percent change): 2018: 2.9; 2019: 1.2; 2020: -2.3; 2021: 5.4; 2022: 2.7; 2023: 0.8; 2024: 1.3; 2025: 1.4; 2026: 1.8; 2027: 1.2; 2028: 1.8; 2029: 1.2.
- Total domestic demand (percent change): 2018: 1.2; 2019: 2.0; 2020: -0.2; 2021: -0.1; 2022: 1.9; 2023: 1.1; 2024: 0.8; 2025: 1.3; 2026: 1.2; 2027: 1.2; 2028: 1.2; 2029: 1.2.
- Nominal GDP (billions of Swiss francs): 2018: 709.7; 2019: 717.3; 2020: 695.8; 2021: 742.4; 2022: 781.7; 2023: 795.3; 2024: 818.4; 2025: 839.5; 2026: 864.7; 2027: 885.6; 2028: 912.4; 2029: 934.1.
- Key near-term staff view: growth weakened recently, retail sales contracted, but economic activity indicators picked up in recent months while confidence remained weak.

### Labor market and slack
- Unemployment rate (percent): 2018: 2.5; 2019: 2.3; 2020: 3.2; 2021: 3.0; 2022: 2.2; 2023: 2.0; 2024: 2.3; 2025: 2.4; 2026: 2.5; 2027: 2.5; 2028: 2.5; 2029: 2.5.
- Employment growth and capacity: employment growth remains robust though unemployment is slowly rising from a low level; output gap (percent of potential): 2018: 0.7; 2019: 0.4; 2020: -1.6; 2021: -0.4; 2022: 0.5; 2023: 0.0; 2024: -0.3; 2025: -0.1; 2026: 0.0; 2027: 0.0; 2028: 0.0; 2029: 0.0.

### Inflation and prices
- Consumer price index (period average, percent change): 2018: 0.9; 2019: 0.4; 2020: -0.7; 2021: 0.6; 2022: 2.8; 2023: 2.1; 2024: 1.5; 2025: 1.2; 2026: 1.2; 2027: 1.2; 2028: 1.2; 2029: 1.2.
- CPI (end of period, percent change): 2018: 0.7; 2019: 0.2; 2020: -0.8; 2021: 1.6; 2022: 2.9; 2023: 1.7; 2024: 1.4; 2025: 1.2; 2026: 1.2; 2027: 1.2; 2028: 1.2; 2029: 1.2.
- Medium-term: inflation returned to the stability range and remains below the Euro Area average; medium-term inflation expectations remain anchored.

### Monetary policy, SNB actions, and interest rates
- SNB policy: The SNB cut the policy rate in March and short-term rates moved in lockstep with the policy rate.
- Bank lending rates and deposit rates: passthrough of the policy rate to lending and deposit rates was quick and substantial.
- Real policy rate note: real policy rate measured as nominal rate minus inflation.
- Money and liquidity: the monetary base contracted with liquidity absorption operations; cash circulation declining but slowly recovering.
- SNB balance sheet (Table 3, selected items, millions of Swiss francs): Total assets: 2018: 817,069; 2019: 860,956; 2020: 999,028; 2021: 1,056,776; 2022: 881,377; 2023: 794,644. Monetary base 1/ (currency in circulation and sight deposits of domestic banks): 2018: 549,374; 2019: 564,161; 2020: 674,297; 2021: 725,618; 2022: 706,823; 2023: 563,456.
- Foreign currency reserves (SNB, millions of CHF): 2018: 763,728; 2019: 794,015; 2020: 910,001; 2021: 966,202; 2022: 800,566; 2023: 677,396.

### External sector and balance of payments
- Current account (billions of CHF): 2018: 40; 2019: 30; 2020: 35; 2021: 17; 2022: 46; 2023: 76; 2024: 69 (staff projections continue through 2029).
- Current account (percent of GDP): 2018: 5.6; 2019: 4.1; 2020: 0.5; 2021: 6.9; 2022: 9.4; 2023: 7.6; 2024: 8.2; 2025: 7.6; 2026: 8.0; 2027: 7.6; 2028: 8.0; 2029: 7.6.
- Goods balance (billions of CHF): 2018: 71; 2019: 71; 2020: 59; 2021: 106; 2022: 115; 2023: 117.
- Exports (billions of CHF): 2018: 338; 2019: 341; 2020: 331; 2021: 401; 2022: 454; 2023: 443.
- Imports (billions of CHF): 2018: 267; 2019: 270; 2020: 272; 2021: 295; 2022: 339; 2023: 326.
- NIIP (Net IIP, percent of GDP, memorandum): 2018: 112.9; 2019: 92.8; 2020: 115.7; 2021: 103.2; 2022: 92.4; 2023: 94.7; projections thereafter provided in staff tables.

### Financial sector and bank soundness
- Regulatory Tier I capital as percent of risk-weighted assets (selected years): 2012: 15.7; 2013: 17.8; 2014: 16.1; 2015: 16.6; 2016: 15.7; 2017: 18.2; 2018: 18.3; 2019: 19.0; 2020: 19.3; 2021: 19.1; 2022: 19.4; 2023: 19.3.
- Regulatory Tier 1 capital as percent of assets (percent): 2012: 5.7; 2013: 6.3; 2014: 7.0; 2015: 7.5; 2016: 7.3; 2017: 8.3; 2018: 8.5; 2019: 8.8; 2020: 7.7; 2021: 7.4; 2022: 7.9; 2023: 7.8.
- Non-performing loans as percent of gross loans: 2012: 0.8; 2013: 0.8; 2014: 0.7; 2015: 0.7; 2016: 0.7; 2017: 0.6; 2018: 0.7; 2019: 0.6; 2020: 0.8; 2021: 0.7; 2022: 0.7; 2023: 0.8.
- Liquidity Coverage Ratio (introduced Q1 2015, percent): 2015: 140.3; 2016: 152.7; 2017: 150.9; 2018: 158.3; 2019: 160.6; 2020: 179.2; 2021: 177.6; 2022: 165.3; 2023: 193.4.

### Housing, household balance sheets, and credit
- Residential property transaction prices (Index, 2010Q1 = 100): price growth of residential real estate has moderated (chart-based).
- Price-to-income ratio: the price-to-income ratio is historically high (Index, long-term average = 100).
- Mortgages (percent of GDP): mortgage-to-GDP ratio increased slightly in 2023; mortgage growth slowed.
- Total household debt (2022, percent of gross household disposable income): household debt remains elevated (chart-based exact country comparisons shown).
- Household financial position: large and liquid household assets offset elevated debt (HH&NPISH Financial Assets and Liabilities, 2022, percent of GDP).

### Public finances and debt dynamics
- General Government (billions of Swiss francs): Revenue (2023): 259; Expenditure (2023): 255; Net lending/net borrowing (2023): 4.
- General Government (percent of GDP): Revenue (2023): 33.1; Expenditure (2023): 31.9; Net lending/net borrowing (2023): 1.2.
- General Government gross debt (percent of GDP, forecasted): 2018: 39.8; 2019: 39.7; 2020: 43.2; 2021: 41.0; 2022: 37.7; 2023: 38.3; 2024: 36.7; 2025: 35.6; 2026: 34.3; 2027: 33.3; 2028: 32.1; 2029: 31.1.
- Confederation (Federal Government) net lending/net borrowing (billions): 2018: 5; 2019: 6; 2020: -17; 2021: -7; 2022: -1; 2023: -1; medium-term projections included in staff tables.

### Key sectoral and cyclical observations (from figures and tables)
- Growth composition 2023: private consumption was the main contributor to growth; manufacturing and construction experienced contraction in 2023.
- External sector 2023: current account surplus declined but remained sizable; exports supported by chemicals and watches.
- Exchange rate: the Swiss franc appreciated in nominal and real terms over recent years; continued appreciation has facilitated disinflation.
- Financial markets: stock prices recovered in 2023, particularly for banks; long-term yields declined in late 2023; yield curve inverted by end-2024 series.
- Credit: domestic credit growth slowed and contracted for non-mortgage lending in 2023.

*Source: IMF staff compilation based on Haver Analytics; Swiss National Bank; SECO; Federal Finance Administration; Information Notice System; State Secretariat for Economic Affairs; Federal Customs Administration; and IMF staff estimates as presented in the document.*

### Annex I. External Sector Assessment

### Annex I. External Sector Assessment

### Overall Assessment
- On a preliminary basis, Switzerland’s external position in 2023 was weaker than the level implied by medium-term fundamentals and desirable policies.
- External buffers remain strong given surplus on net foreign investment position and sizeable foreign reserves.
- The assessment is subject to uncertainty due to complex measurement issues and data lags.
- Due to changes in methodology, it is possible that data will be revised more extensively than in past years.
- More time will be needed to assess the durability of the shift in the current account in 2023. A complete analysis will be provided in the 2024 External Sector Report.

### Potential Policy Responses
- Fiscal policy: Operate within the authorities' debt-brake rule while balancing the need to avoid creating headwinds to growth and creating fiscal space to address accumulating spending pressures.
  - Authorities need to amortize past extraordinary expenditures (Covid-19, support for refugees from Ukraine) and the sizable accumulated balance of the amortization account—via surpluses or extraordinary receipts—until 2035, with an option for extension until 2039.
  - A comprehensive medium-term plan is needed to address mounting structural spending needs on aging, climate, and defense.
- Monetary policy: Under current inflation and liquidity conditions, the SNB should remain data-dependent and avoid the risk of inflation settling at very low rates.
- Macroprudential policy: Continue to focus on safeguarding financial stability, taking into consideration the current cyclical position of the economy.
- Trade and cooperation: Continue commitment to free trade and cooperation (including abolition of industrial tariffs in 2024 and efforts to expand trade relations) to build resilience.

### Foreign Asset and Liability Position and Trajectory
Background and dynamics
- Switzerland is a major financial center with a large, positive NIIP of 95 percent of GDP and large gross foreign asset and liability positions of 631.4 and 536.7 percent of GDP, respectively, at end-2023.
- The NIIP reflects a history of large CA surpluses and valuation changes, and has fluctuated around 100 percent of GDP over the past five years.
- Compared with 2022, the NIIP increased in 2023 by 2.4 percentage points of GDP, mainly driven by positive net transactions which compensated negative valuation effects due to exchange rate movements.
- Decline in reserves were partly offset by movements in other investments.
- Projections of the NIIP in 2024 and beyond are complicated by the large gross positions and compositional differences among assets and liabilities.

Assessment
- Switzerland’s large gross liability position and the volatility of financial flows and investment returns present some risk, but this is mitigated by the large gross asset position and the CHF denomination of about two-thirds of external liabilities.

Key statistics (2023, % GDP)
- NIIP: 95
- Gross Assets: 631
- Reserve Assets: 91
- Gross Liab.: 537
- Debt Liab.: 167

### Current Account
Background
- Switzerland’s CA surpluses averaged 6.9 percent of GDP during 2012–2022.
- The CA surplus in 2023 is estimated to be 7.6 percent of GDP, down from 9.4 percent in 2022.
- The decline was primarily influenced by reductions in merchanting (from 10.6 to 9.5 percent of GDP) and services (from -1.1 to -2.6 percent of GDP).
- Introduction of a new current account survey altered how merchanting-related expenses are reported: it reduced the reported decline in net merchanting income but negatively affected the service balance by increasing the import of transportation services.
- Balance in cross-border goods trade remained largely stable in 2023, despite a significant drop in net exports of pharmaceuticals—possibly due to normalization following high exports during the pandemic and a temporary effect from value chain restructuring in one major pharmaceutical company; there is uncertainty whether this is structural.
- The CA surplus is expected to slightly increase to 8.2 percent of GDP in 2024 due to a recovery in external demand and moderate toward 8 percent in the medium term supported by the performance of key sectors (pharmaceutical, merchanting).

Assessment and adjustments
- The EBA CA norm of 6.4 percent of GDP is close to the previous year’s norm.
- Based on a cyclically-adjusted CA surplus of 7.7 percent and the norm, the overall EBA-estimated CA gap equaled 1.3 percent of GDP in 2023.
- Domestic policy gaps account for -1.7 percentage points (pp) and include change in reserves (-1.8 pp) which more than offsets fiscal underspending (+0.5 pp); policy gaps in the rest of the world contribute +0.7 pp.
- Switzerland-specific adjustments in the income account—valuation losses on fixed-income securities arising from inflation (-3.3 pp) and retained earnings on portfolio equity investment (-0.8 pp)—lead to a gap of -2.8 percent of GDP (±0.8 percentage points).

Key statistics (2023, % GDP)
- CA: 7.6
- Cycl. Adj. CA: 7.7
- EBA Norm: 6.4
- EBA Gap: 1.3
- Other Adj.: -4.1
- Staff Gap: -2.8

### Real Exchange Rate
Background
- Relative to 2022, the average NEER appreciated by 6.8 percent, while the CPI-based REER appreciated by 3.4 percent in 2023.
- From a long-term perspective, the NEER has appreciated by 31 percent since 2011, while the CPI-based REER has depreciated by 2 percent.
- As of end-March 2024, REER appreciated by 0.8 percent compared to the 2023 average.
- The UBS-CS merger did not have a significant impact on the franc exchange rate.

Assessment
- The staff CA gap implies REER overvaluation of 5.2 percent in 2023 (applying an elasticity of 0.54).
- The EBA REER index and level models suggest that the average REER in 2023 was overvalued by 12.7 and 17.5 percent, respectively.
- Model fits do not fully capture trends specific to Switzerland, notably a secular improvement in productivity, especially in knowledge-based sectors.
- Consistent with the staff CA gap, staff assess the REER gap in 2023 to be in the range of 3.7 percent and 6.7 percent with a midpoint of 5.2 percent (overvalued).

### Capital and Financial Accounts: Flows and Policy Measures
Background and flows
- Net financial outflows totaled 6.8 percent of GDP in 2023, including private outflows of 21 percent of GDP (related to the collapse of Credit Suisse) and a decrease in SNB reserve assets of 15 percent of GDP (due to interventions).
- During 2010–2022, net private inflows averaged 1.1 percent of GDP, while the average annual increase in SNB reserves was 9.4 percent of GDP.

Assessment
- Financial flows are large and volatile, reflecting Switzerland’s status as a financial center and safe haven.
- From a long-term perspective, sizable net private financial outflows prior to the global financial crisis declined and, on average, turned into net capital inflows between 2010 and 2020, adding to appreciation pressures.
- In 2023, driven by Credit Suisse related events and interest rate differentials, net private outflows increased to 25 percent, while the SNB reduced reserve assets on a net basis.

### FX Intervention and Reserves Level
Background
- Official reserve assets (including gold) amounted to CHF724 billion (USD864 billion, 91 percent of GDP) at end-2023, down CHF128 billion (USD59 billion) from end-2022.
- The SNB sold CHF133 billion (17 percent of GDP) of FX (net) through FXIs in 2023; in the recent past interventions have curbed excessive appreciation due to safe-haven inflows.

Assessment
- Reserves are large relative to GDP, but more moderate in comparison with short-term foreign liabilities.
- Considering the reserve currency status of the franc, the adequacy of FX reserves is not a pressing concern for Switzerland.
- The financial losses incurred by the SNB in 2022 and 2023, and the volatility of its income, indicate risks associated with its large balance sheet.

*Source: Annex I. External Sector Assessment.*

### Annex III . Exposure to Geoeconomic Fragmentation

### Annex III . Exposure to Geoeconomic Fragmentation

### Overview
- Switzerland’s share of gross trade to nominal GDP is described as "high compared to major trade partners" and has increased since the pandemic.
- The economy relies heavily on exports and foreign demand, with important imports and major trade connections with neighboring European countries, the United States, and China.
- Key export-intensive industries include pharmaceuticals and machinery.

### Involvement in Global Value Chains (GVCs) and Foreign Production Exposure (FPE)
- Switzerland is deeply involved in Global Value Chains and thus exposed to risks from geoeconomic fragmentation.
- The Foreign Production Exposure (FPE) metric (Baldwin et al. (2022)) is used to assess reliance on foreign inputs; the metric represents "the required amount of total gross output from any source-country to produce an additional $1 in any sector of the destination-country."
- Switzerland’s reliance on the EU remains significant but has decreased over time in favor of the US and especially China.
- Trends by sector:
  - The shift away from EU inputs toward US and China is common across key sectors such as chemicals and high-technology.
  - Switzerland’s FPE to Chinese inputs has seen a "significant surge over the past two decades across industries," with China becoming more important to the high-tech sector than the US.

### Implications and Risks
- Exposure through GVCs implies vulnerability to geoeconomic fragmentation, which can affect Switzerland across multiple sectors.
- The rising importance of Chinese inputs, particularly in high-technology, alters the country’s input-source composition and creates new dependencies beyond traditional EU linkages.
- No numerical values for the FPE shares are provided in the annex text excerpt; analysis relies on directional statements (e.g., "decreased," "surge," "more important").

*Source: IMF staff (Annex III . Exposure to Geoeconomic Fragmentation).*

### 1. Strengthen FINMA’s autonomy, governance,

### 1. Strengthen FINMA’s autonomy, governance, and accountability, and preserve the primacy of its prudential mandate

### FINMA autonomy, governance, and accountability
- Recommendation: Strengthen FINMA’s autonomy, governance, and accountability; preserve primacy of prudential mandate. (FDF/FINMA; ¶32–34)
- Implementation status: Partly taken into account in the 2020 Ordinance to the Financial Market Supervision Act, which is being fully implemented and applied.
- Next steps: Steps needed to strengthen FINMA autonomy, governance, and accountability are under review.

### Supervisory resourcing, audits, and on-site inspections
- Recommendation: Ensure FINMA—rather than banks—contracts and pays directly for supervisory audits using ‘audit-level’ practices in critical areas. (FDF/FINMA; ¶38)
  - Implementation: FINMA published the ex-post evaluation of the revision of the “Auditing” Circular in May 2023. The authorities’ TBTF review proposes to examine the use of audit firms.
- Recommendation: Focus supervisory audits and increase FINMA’s risk-based on-site inspections. (FINMA; ¶38)
  - Implementation: FINMA revised its supervisory approach to guide external auditors to follow a more risk-focused approach under FINMA guidance and work in closer consultation with FINMA.
  - Evidence: Results over three years were analyzed in an ex-post analysis in 2022; a comprehensive assessment was published in 2023.
  - Resource reallocation: Resource savings from the revised supervisory approach have been re-invested to:
    - increase effectiveness of on-site inspections of specific risk areas (particular focus on interest rate risk, cyber and IT risks, and climate risk);
    - strengthen supervision of large banks by establishing dedicated on-site teams; and
    - strengthen authorization and licensing processes.
  - Internal policy: FINMA’s internal policy on on-site inspections has been revised to reflect organizational and process changes.

### Risk management and governance assessments
- Recommendation: Strengthen assessments of key risk management and control practices. (FINMA; ¶39)
  - Implementation: FINMA Risk Barometer measures are integrated into supervisory planning and feed into Assessment Letters.
  - New tools/processes: A FINMA governance barometer was introduced; a supervisory concept for corporate governance was established; a Corporate Governance Questionnaire influences supervisory intensity.
  - Internal risk management: FINMA formalized its internal risk assessment process for large banks and developed a risk inventory where supervision and support functions identify risks and track supervisory measures. Inventory and supervisory actions are discussed among heads of banks, head risk management, and supervisory team heads.

### Macroprudential framework
- Recommendation: Expand the macroprudential toolkit with mandated supply- and demand-side tools, and strengthen accountability and expectations to act in decision-making. (SNB/FINMA/FDF; ¶35–36)
  - Implementation status: New mandated tools have not been introduced in the macroprudential toolkit (ST).
  - Note: Adjustments are being considered in the context of Basel III implementation.

### Data gathering, fintech monitoring, and analytics
- Recommendation: Increase resources for high-quality data gathering and analysis of financial system risks, especially for the fast-moving fintech sector, and to advance recovery and resolution planning. (SNB/FINMA/OAK BV; ¶15, ¶29, ¶36 ¶41, ¶51, ¶54, ¶58, ¶63)
  - Implementation status: Progress has been made in some areas (fintech, asset management, recovery and resolution planning, FMIs), but gaps remain. (MT)
  - New dataset: The SNB and FINMA decided to introduce a supervisory loan-by-loan dataset on banks’ exposures to non-banks, with more than 90 percent coverage (only the smallest banks in Switzerland are exempted).
  - Purpose and timetable: The dataset will replace existing credit surveys and fill existing gaps in banks’ credit risk exposure monitoring. The first data release is expected in 2026.
- Fintech and crypto-assets monitoring (FDF/FINMA; ¶58–59):
  - Implementation: FINMA has increased resources dedicated to analyzing fintech projects and providing regulatory feedback; investigations on suspected unauthorized fintech activities remain a priority.
  - Reporting: In 2023 FINMA established reporting for banks regarding crypto assets they hold on balance sheet and crypto assets held in custody.
  - Policy work: The Federal Council Report on digital finance of 2022 identified needs for action; follow-ups include revision of the Swiss Fintech-license.
  - Going forward: FINMA will particularly focus on improving the data quality of the reporting.

### Financial Market Infrastructures (FMIs), recovery, and resolution
- Recommendation: Strengthen recovery and resolution planning for FMIs. (FINMA/SNB/SIX; ¶49)
  - Implementation: FINMA assesses recovery plans for SIX x-clear and SIX SIS yearly. FINMA approved both plans with a few remaining noncritical expectations in December 2022; both FMIs addressed expectations in 2023, resulting in approval of both plans in December 2023.
  - Resolution strategy: For SIX x-clear, the preferred resolution strategy and preferred resolution tool set have been defined and discussed with the CMG of SIX x-clear.
  - Legal framework: Necessary legal basis for some preferred resolution tools has been addressed by FINMA as part of the evaluation of the Swiss Financial Market Infrastructure Act (FMIA). Entry into force of FMIA is not expected before 2027/2028; identified implementation challenges are being assessed and addressed.
- Recommendation: Improve independence of FMIs governance arrangements. (SNB/SIX; ¶48)
  - Implementation: As part of redesign of consolidated supervision, significant adjustments were negotiated and implemented to FMI governance, autonomy in risk management, and independence from Group support in crisis situations. (ST)

### Asset management concentration risk and enforcement powers
- Recommendation: Better monitor and manage concentration risk of regulated funds, and empower FINMA to impose administrative fines. (FDF/FINMA; ¶52–53)
  - Implementation: Legislation with additional requirements for risk monitoring has been approved by parliament. There are currently no plans to increase monitoring of concentration risks of regulated funds.
  - Enforcement powers: The opportunity to empower FINMA to impose administrative fines is being examined. (ST)

### Financial safety net, deposit insurance, and resolvability
- Recommendation: Enhance, expand, and expedite recovery and resolution planning, including resolvability. (FDF/FINMA; ¶63–66)
  - Implementation: A “public liquidity backstop” that covers SIBs was initiated in 2022 and adopted under an emergency ordinance for 6 months in March 2023; the Federal Council adopted a dispatch in September 2023 and it is under legislative review (discussions postponed until after the publication of the report of the PIC).
  - Insurance oversight: In June 2023, the Federal Council approved amendments to the Insurance Oversight Ordinance (IOO) and brought both the revised Ordinance and the revised Insurance Oversight Act (IOA) into force with effect from January 1, 2024. (ST)
- Recommendation: Thoroughly reform the DIS with a public DIA included in crisis management, ex-ante DIS funding, and authority to use deposit insurance funds for resolution funding, subject to safeguards. (FDF; ¶67–68)
  - Implementation status: The Federal Council brought amendments to the Banking Act and Banking Ordinance into force with effect from January 1, 2023. The reform improves the DIS while not relying on a public DIA, an ex-ante DIS funding, or the use of deposit insurance funds for resolution funding. Various changes in deposit protection came into force on January 1, 2023. FINMA approved the self-regulation of the Swiss Deposit Insurance Scheme esisuisse. (MT)

### Timing code legend
- C = Continuous; I = Immediate (within one year); ST = Short Term (within 1–2 years); MT = Medium Term (within 3–5 years).

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### Selected macroeconomic and financial context and authorities’ views (from accompanying statements)
- Real GDP: According to the new “flash” estimate, Switzerland’s real GDP, adjusted for seasonal/calendar effects and sporting events, increased by 0.3 percent in the first quarter of 2024.
- Growth projection: Growth should accelerate moderately and reach 1.7 percent in 2025.
- Inflation and monetary policy:
  - Inflation has been back below 2 percent and is projected to remain in this range over the next few years.
  - The SNB lowered the policy rate in March 2024 and will continue to closely monitor inflation and adjust policy if necessary; the SNB remains willing to be active in the foreign exchange market as necessary.
- Labor market:
  - Seasonally adjusted registered unemployment was 2.3 percent in April.
  - Unemployment is expected to rise somewhat, averaging 2.5 percent in 2025.
- Financial sector resilience and reform priorities:
  - Swiss banking sector profitability and capitalization both increased in 2023; loss potential under stress scenarios remains substantial.
  - Authorities view current macroprudential measures as adequate but may expand the toolkit if vulnerabilities increase.
  - Following the Credit Suisse takeover by UBS in mid-March 2023, the federal government’s comprehensive report (published April 10, 2024) proposes measures to strengthen prevention, liquidity, and the crisis toolkit for SIBs.
  - International focus areas include capital requirements (transparency regarding parent bank capitalization and AT1 instruments’ loss-absorbing function), liquidity requirements (strengthening the buffer function of the Liquidity Covered Ratio), operationalizing cross-border bail-ins, and public sector funding mechanisms.
- Anti–money laundering and integrity:
  - The federal government submitted draft legislation to establish a new federal registry for beneficial ownership and extend due diligence provisions to legal and accounting professions; measures to strengthen sanctions compliance were also included.
  - Progress recognized by FATF’s October 2023 follow-up report; Switzerland remains a major donor to IMF AML/CFT initiatives.

*Prepared from information provided by the Swiss authorities and IMF staff reports.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1cheea2024001.pdf_