## Current Account, External Assessment and the Equilibrium Real Exchange Rate

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---

### Recent economic developments
- Growth and output gap
  - GDP growth reached 1.6 percent in 2013.
  - Real GDP at end-2013 was nearly 15 percent above its 2009 trough.
  - Output gap estimated to average about -¾ percent of potential GDP in 2013.
- Labor market
  - Employment growth around 1 percent in 2013, driven mostly by the services sector.
  - Unemployment remained flat at around 8 percent; pre-crisis level was around 6½ percent.
  - Increase in labor force reflected past reforms and growing immigrant population.
  - Unemployment increase disproportionately affected the young, the low-skilled, and the foreign-born.
  - Reduced responsiveness of unemployment to growth (Okun’s law) suggests much of the unemployment increase is structural.
- Inflation and wages
  - Headline CPI inflation averaged 0 percent in 2013 and declined slightly to -0.2 percent in the first half of 2014.
  - CPIF averaged 0.9 percent in 2013 and 0.4 percent in 2014:H1.
  - Core inflation (CPI at fixed mortgage rate excluding energy) averaged 1.1 percent in 2013 and 0.6 percent in 2014:H1.
  - Nominal wage growth around 2 percent in 2013; productivity improvements in services roughly compensated for wage growth.
  - Inflation expectations have drifted downward but remain relatively well-anchored at the policy horizon.
- External position
  - Current account surplus reached 6.4 percent of GDP in 2013 (up from 6 percent in 2012).
  - Large and positive external balance largely reflects structural factors: very large financial sector, pension and household savings patterns, population aging dynamics, and social protection reforms since the mid-1990s.
  - Staff estimates the krona broadly in equilibrium.
- Housing and household balance sheets
  - House price increases in 2014:H1: about 7½ percent annual growth for single-family homes and nearly 13 percent for tenant-owned apartments.
  - Household indebtedness almost 175 percent of disposable income in 2013, and over 190 percent if debt from tenant-owned housing associations is included.
  - About 40 percent of households increased or failed to reduce their debt stock in 2013.
  - Debt ratios particularly high for indebted lower-income households who are especially vulnerable to income, interest rate, and house price shocks.
- Policy stance to support recovery
  - Financial sector reforms: Basel III measures implemented ahead of schedule, including systemic risk buffers and plans for a counter-cyclical buffer, strengthened liquidity coverage ratios (LCRs), and higher mortgage risk weights.
  - Monetary policy: Riksbank reduced the repo rate by 25 basis points in December 2013 and a further 50 basis points in July 2014, setting it at 0.25 percent.
  - Fiscal policy: Net lending projected to increase to -1.9 percent of GDP in 2014, up from -1.3 percent in 2013 (primarily on account of lower revenues); implies a procyclical structural expansion of about ½ percent of potential GDP.

### Outlook and risks
- Baseline outlook
  - Real GDP growth projected to strengthen to about 2.6 percent in 2014 and about 2.8 percent in 2015.
  - Exports expected to pick up along with euro area growth and global trade; private consumption and investment should provide most dynamics while fiscal policy consolidates.
  - With the output gap fully closing, inflation expected to gradually rise to around 1½ percent in 2015.
- Key downside risks
  - Financial instability due to rising household debt:
    - Share of new mortgages with a variable rate increased from over one half in 2012 to more than two thirds in 2013.
    - Many households have large net asset positions, but a significant share of assets is illiquid.
    - Adverse shocks to interest rates, house prices, or income could quickly reduce consumption, employment, and growth and impact the banking system, especially during global funding stress.
  - Banking sector vulnerability to regional and global financial tensions; financial instability in Sweden could quickly spread to other Nordic and Baltic countries.
  - Low inflation and moderating global trade:
    - Extended period of very low inflation could lower long-run inflation expectations below target and drag on growth.
    - Conversely, rising oil prices or a depreciation of the krona could lift inflation above the baseline.
    - Geopolitical tensions could reduce external demand.

### Authorities’ view
- Authorities broadly agreed with staff on the outlook and risks:
  - Recovery driven by private domestic demand.
  - Gradual increase of inflation to the Riksbank’s target of 2 percent.
  - Risks from lower external demand and financial instability related to high household debt.
  - Authorities noted upside risks from stronger-than-anticipated global growth.

### Policy agenda (summary)
- Main challenge: reduce financial risks while pursuing structural reforms to lower unemployment.
- Priority policy actions
  - Urgent progress on the financial stability agenda with measures targeted at household credit demand and further strengthening banking resilience.
  - Macroprudential policy should be first line of defense to allow the Riksbank to pursue its inflation target with less concern about financial risks.
  - Structural reforms to reduce unemployment, focusing on vulnerable groups.
  - Fiscal consolidation is timely: with robust growth ahead, a steady consolidation path will help preserve fiscal buffers.

### Financial policies: addressing stability risks
- Ongoing and planned measures
  - Banks: plans to further improve capital buffers, including raising minimum mortgage risk weights to 25 percent at the end of 2014 and introducing Basel III measures such as systemic risk and countercyclical capital buffers.
  - Despite measures, household credit picked up; Riksbank projects credit to continue rising in 2014 and 2015 under current policies.
- Macroprudential tools focused on mortgage demand
  - Demand-side measures more likely to curb credit growth than further supply-side tightening, given banks’ favorable funding conditions and low mortgage rates.
  - Agreement with the Financial Supervisory Authority (FSA): banks committed to encourage new customers to agree to voluntary amortization plans.
  - Suggestion that gradual introduction of mandatory amortization requirements may be needed if credit does not slow.
  - Example: Singapore enforced mandatory amortization within 35 years for new mortgages.
- DSTI limits and LTV caps
  - Introducing a gradual DSTI limit combined with a lower binding LTV cap would help contain mortgage demand.
  - Current LTV cap is 85 percent.
  - In 2013, about 10 percent of households took on supplementary unsecured loans in part to help finance house purchases.
  - DSTI would tie households’ debt to income independent of house values and act as an automatic stabilizer.
- Mortgage interest tax deductibility
  - Mortgage interest tax deductibility provides an incentive to accumulate and maintain high debt levels.
  - A gradual reduction in mortgage interest deductibility would reduce this distortion (Finland cited as an example).
  - Current treatment: mortgage interest costs up to 100,000 krona (in excess of capital income) can be deducted at a 30 percent income tax rate, with amounts over that deducted at a 21 percent rate.
- Housing supply constraints
  - Long-term solution requires alleviating housing supply constraints, especially in metropolitan areas where urbanization and immigration increase demand.
  - Measures: expand affordable housing stock, reforms to zoning and permitting, rent-setting reforms, and public infrastructure investments coordinated with municipalities.
- Additional measures to strengthen banking resilience
  - Capital
    - Average core Tier I risk-weighted capital ratio rose from 11.8 percent to 16.8 percent between end-2010 and end-2013.
    - Average leverage ratio (core Tier 1 capital as share of total assets) increased only slightly from 3.6 percent to 3.9 percent.
    - A higher leverage ratio requirement (example: a 5 percent minimum leverage ratio proposed by the U.S. Federal Reserve) would ensure a more substantial increase in shock-absorbers.
    - Introducing the countercyclical capital buffer at or close to 2½ percent would also help.
  - Liquidity
    - Over half of Swedish bank funding comes from wholesale sources, mostly short-maturity covered bonds and certificates.
    - Riksbank’s measure of structural liquidity shows the resulting maturity mismatch has improved only marginally and remains low compared to other European banks.
    - Rapid progress toward fulfilling the Basel III Net Stable Funding Ratio (NSFR) requirement at 100 percent would help.
    - Introducing a minimum LCR requirement in Swedish krona could add to banks’ ability to withstand a short-term krona liquidity squeeze.

### Cross-border cooperation and resolution
- Regional coordination
  - Coordinated Nordic approach to raising mortgage lending standards in Norway, with Swedish and Danish authorities ensuring compliance of local bank branches, marks progress in macroprudential cooperation.
  - Implementation of the EU Bank Recovery and Resolution Directive (BRRD) should allow completion of the work of the Nordea Crisis Management Group (CMG) and facilitate a binding ex-ante burden sharing agreement.
  - Retaining the option of Sweden joining the Banking Union would keep open the possibility of improving regulatory and macroprudential cooperation across the Nordic-Baltic region.
- Authorities’ perspective
  - Authorities broadly concurred with staff’s assessment of financial vulnerabilities and noted measures under way.
  - Riksbank and Ministry of Finance emphasized need to improve the amortization culture.
  - FSA argued effects of already implemented measures should be evaluated before further policy action.

### Monetary policy: balancing price and financial stability
- Inflation dynamics and drivers
  - Inflation persistently below target due to external and domestic factors, including krona appreciation and declines in global oil and food prices in 2013.
  - Aggregate ULC growth fell from 2.7 percent in 2012 to 1.4 percent in 2013.
- Trade-offs quantified
  - A 50 basis point decrease in the policy rate increases the ratio of debt to disposable income by about 2 percentage points and the share of variable rate mortgages in the total mortgage stock by about 5 percentage points (over a two-year period, per a simple VAR exercise).
  - An exogenous 60 bp negative shock in the Stibor rate is equivalent to a 50bp decrease in the repo rate in modeled impulse responses.
- Policy stance and implications
  - Policy rate cuts in December 2013 and July 2014 reaffirmed the Riksbank’s commitment to the inflation objective.
  - Substantial rise in financial stability risks might require interest rates to rise sooner than otherwise to contain vulnerabilities.
  - Effective macroprudential policies should be first line of defense; otherwise higher interest rates than warranted by macroeconomic conditions impose broad economic costs.

### Macroprudential recommendations
- Urgent need for a comprehensive set of macroprudential measures to contain rising household credit:
  - Continue strengthening banks (higher mortgage risk weights, many Basel III measures ahead of schedule).
  - Implement demand-targeted measures if mortgage credit and house price growth do not slow:
    - Gradual introduction of statutory amortization rates if voluntary measures remain ineffective.
    - Lower LTV caps.
    - Introduction of DSTI limits to improve household resilience to shocks.
  - Gradually phase-out tax deductibility of mortgage interest rates to reduce incentives to accumulate debt.

### Structural reforms to reduce unemployment and improve housing supply
- Labor market measures
  - Increase wage flexibility at the firm level.
  - Expand vocational training and training-based ALMPs to help vulnerable groups transition into employment.
  - Continue reforms such as Earned-Income Tax Credit, disability insurance reform, and enhanced ALMPs.
- Housing market reforms
  - Expand supply of affordable housing via zoning and permitting reforms, adjustments to rent-setting mechanisms (e.g., exempting new construction from rental regulations for longer), and public infrastructure investments.
  - Tax reforms to improve allocation of existing housing stock: reduce capital gains taxation that deters moving and complement with an increase in the property tax on private residences (property taxation was reduced in 2008 to a municipal property fee capped at 0.75 percent).

### Fiscal consolidation: protecting buffers
- Government consolidation plan and targets
  - “Krona-for-krona” strategy implies reforms must be counterfinanced.
  - Government suggested structural consolidation path with annual adjustments of about ½ percent of potential GDP starting in 2015.
  - Staff’s numbers: this path would help achieve a headline fiscal surplus of above 1 percent of GDP by 2018 and reduce the public debt-to-GDP ratio to around 30 percent of GDP, from nearly 42 percent currently.
  - Swedish fiscal framework requires a 1 percent surplus “over the cycle” to build sizable fiscal buffers.
- Rationale and risks
  - Maintaining borrowing capacity is prudent given potentially large contingent government liabilities in a small open economy with an aging population and a large financial sector.
  - 2013 Staff Report estimated contingent liabilities from financial sector risks alone to be in the range of 17 to 90 percent of GDP, depending on severity and resolution approach.
- Synergies with financial stability
  - Fiscal consolidation and gradual reforms of mortgage interest deductibility and property tax can help contain mortgage credit growth.
- Authorities’ view
  - Broad agreement with staff’s fiscal assessment; importance of adhering to consolidation plan to retain credibility.
  - Ministry of Finance noted it saw higher spare capacity than staff estimates.

### Staff appraisal: summary findings and priorities
- Macroeconomic assessment
  - Sweden’s economy is doing well with growth gaining speed, buoyant household consumption, and supportive policies.
  - Employment rising, but labor force expanded more; increased unemployment is largely structural and concentrated among the young, low-skilled, and foreign-born.
  - Inflation is low due to global commodity price trends and a strong krona; lower imported energy prices and moderate nominal wage growth with productivity gains have reduced cost pressures.
  - Sweden’s external position is moderately stronger than levels consistent with medium-term fundamentals; structural factors (demographics, large banking sector) explain much of the high current account surplus.
- Financial stability risks
  - Banking system is large and wholesale-dependent.
  - Household debt has grown to 190 percent of disposable income on some measures while house prices are increasing rapidly.
  - Very low interest rates and structural factors (housing supply constraints, tax incentives keeping amortization rates low) contribute to elevated risks.
  - Lower-income households are particularly indebted and vulnerable to income, interest rate, and house price shocks.
- Policy priorities
  - Containing mortgage demand is urgent via macroprudential tools (statutory amortization if needed, lower LTVs, DSTI limits) and gradual tax reforms (phase-out of mortgage interest deductibility).
  - Address housing supply rigidities through zoning, permitting, rent-setting reforms, and infrastructure investment; improve allocation of existing stock via tax reform (reduce capital gains taxation and raise very low property tax rates).
  - Monetary policy must balance price and financial stability risks; absent effective macroprudential measures, very low interest rates could fuel borrowing and necessitate earlier rate increases to curb financial vulnerabilities.
  - Implement a comprehensive set of macroprudential measures to contain household credit demand to allow monetary policy to focus on the inflation target.

### Box summaries and scenario analysis
- Box 1 — External assessment (key findings)
  - Since its trough in early 2009, the krona has appreciated nearly 20 percent against the euro and in real effective terms.
  - Using data up to June 2014, the IMF’s EBA methodology suggests the krona remains substantially undervalued relative to the value consistent with medium-term fundamentals and desirable policies.
  - Sweden’s current account exceeded the level implied by fundamentals and policies in 2013 by about 8½ percent.
  - Sweden’s current account surplus reached 6.4 percent of GDP in 2013.
  - 2013 external positions: gross external assets 298.5 percent of GDP; gross external liabilities 304.0 percent of GDP; net IIP -5.6 percent of GDP (improved from -12.7 percent in 2012).
  - If FDI were valued at market prices instead of book value, the Swedish net IIP would be nearly 25 percentage points higher in 2013.
  - Staff assessment: adjusted current account norm around 2–6 percent of GDP; current account gap in 2013 in the range of -½ to +3½ percent of GDP; REER gap assessed to be in the range of -10 to +2.
- Box 2 — Inflation simulations (Philips curve model)
  - Projection: Swedish inflation is projected to reach the 2-percent target towards the end of 2016.
  - Baseline assumptions: output gap closes by early 2015; euro area recovery drives up euro area core inflation; oil price continues to decline.
  - Baseline result: HICP inflation will exceed 1½ percent in mid-2016 and converge to 2-percent sometime between end-2016 and mid-2017.
  - Alternative scenarios:
    - External Downside: euro area inflation delayed by two years; oil prices fall by 20 percent by end-2018; krona strengthens by 1 percentage point a year.
    - External Upside: euro area inflation reaches 2 percent by end-2016; NEER depreciates moderately.
    - Domestic Downside: output gap closes around end-2016 (two years later).
    - Domestic Upside: output gap closes by end-2014.
  - Scenario outcomes: downside scenarios delay pick-up in inflation until mid-2018; upside scenarios bring 2 percent inflation 2–4 quarters earlier, in early 2016.
- Box 3 — Risk Assessment Matrix (selected entries)
  - Risk 1: Surges in global financial market volatility — Overall Level of Concern: High; Relative Likelihood: Medium; Policy response: reduce vulnerabilities, preserve fiscal buffers, provide liquidity support including in foreign currency.
  - Risk 2: Protracted period of slow European growth — Overall Level of Concern: High; Relative Likelihood: Medium; Policy response: provide monetary support, let automatic fiscal stabilizers operate, consider slowing structural fiscal adjustment.
  - Risk 3: Significant house price decline — Overall Level of Concern: Medium; Relative Likelihood: High; Vulnerabilities: high household debt, elevated property prices, regional bank linkages; Policy response: preventively, reduce vulnerabilities via macroprudential measures; in event, lower policy rate and provide liquidity support to banks.

### Appendix I — Debt Sustainability Analysis (selected baseline indicators)
- Time reference: As of July 11, 2014. Unit: percent of GDP unless indicated.
- Nominal gross public debt (selected years):
  - 2012: 44.1
  - 2013: 38.3
  - 2014: 40.5
  - 2015: 41.8
  - 2016: 40.7
  - 2017: 38.5
  - 2018: 35.9
  - 2019: 32.6
  - 2019 (final listed): 29.1
- Public gross financing needs:
  - 2012: 8.4; 2013: 9.4; 2014: 10.0; 2015: 12.5; 2016: 13.2; 2017: 11.7; 2018: 10.8; 2019: 9.2; 2019 (final listed): 8.2
- Real GDP growth (percent):
  - 2012: 2.4; 2013: 0.9; 2014: 1.6; 2015: 2.6; 2016: 2.8; 2017: 2.7; 2018: 2.6; 2019: 2.5; 2019 (final listed): 2.4
- Inflation (GDP deflator, percent):
  - 2012: 1.7; 2013: 1.0; 2014: 0.9; 2015: 0.7; 2016: 1.4; 2017: 1.9; 2018: 2.1; 2019: 2.1; 2019 (final listed): 2.0
- Nominal GDP growth (percent):
  - 2012: 4.0; 2013: 2.0; 2014: 2.6; 2015: 3.3; 2016: 4.3; 2017: 4.7; 2018: 4.8; 2019: 4.7; 2019 (final listed): 4.5
- Effective interest rate (percent):
  - 2012: 3.7; 2013: 2.5; 2014: 2.3; 2015: 2.4; 2016: 2.4; 2017: 2.4; 2018: 2.4; 2019: 2.4; 2019 (final listed): 2.6
- Sovereign spreads and ratings:
  - Spread (bp) 3/: -29
  - CDS (bp): 19
  - Ratings (Foreign / Local): Moody's: Aaa / Aaa; S&Ps: AAA / AAA; Fitch: AAA / AAA
- Contribution to changes in public debt (selected)
  - Change in gross public sector debt (percent of GDP):
    - 2012: -1.5; 2013: -0.3; 2014: 2.1; 2015: 1.3; 2016: -1.1; 2017: -2.2; 2018: -2.6; 2019: -3.3; 2019 (final listed): -3.5; Cumulative (2012–2019): -11.4
  - Identified debt-creating flows (percent of GDP), cumulative (2012–2019): -6.3
  - Primary deficit (percent of GDP), cumulative (2012–2019): -1.1
  - Primary (noninterest) revenue (percent of GDP), cumulative (2012–2019): 50.5
  - Primary (noninterest) expenditure (percent of GDP), cumulative (2012–2019): 99.4
- Automatic debt dynamics (percent of GDP), cumulative (2012–2019): -5.2
- Interest rate/growth differential (percent of GDP), cumulative (2012–2019): -4.3
- Ten-year government bond yield (year average): 2012: 2.6; 2013: 1.6; 2014: 2.1.
- Repo rate (end of period): 2011: 1.8; 2012: 1.0; 2013: 0.8.
- Selected macro projections (2011–2019) (excerpt)
  - Real GDP (percent change): 2011: 2.9; 2012: 0.9; 2013: 1.6; 2014: 2.6; 2015: 2.8; 2016: 2.7; 2017: 2.6; 2018: 2.5; 2019: 2.4.
  - CPI inflation (percent): 2011: 3.0; 2012: 0.9; 2013: 0.0; 2014: 0.1; 2015: 1.4; 2016: 1.9; 2017: 2.1; 2018: 2.1; 2019: 2.0.
  - Unemployment rate (percent): 2011: 7.8; 2012: 8.0; 2013: 8.0; 2014: 8.1; 2015: 7.7; 2016: 7.5; 2017: 7.4; 2018: 7.3; 2019: 7.1.
  - Output Gap (percent of potential): 2011: 0.5; 2012: -0.5; 2013: -0.8; 2014: -0.5; 2015: 0.3; 2016: 0.7; 2017: 1.0; 2018: 0.9; 2019: 0.8.
  - General government gross debt (percent of GDP): 2011: 38.6; 2012: 38.3; 2013: 40.5; 2014: 41.8; 2015: 40.7; 2016: 38.5; 2017: 35.9; 2018: 32.6; 2019: 29.1.
  - Current account (percent of GDP): 2011: 6.1; 2012: 6.0; 2013: 6.4; 2014: 6.0; 2015: 6.1; 2016: 6.1; 2017: 5.9; 2018: 5.8; 2019: 5.6.
- Exchange rate regime and other indicators
  - Exchange rate regime: Free floating exchange rate.
  - SEK per U.S. dollar (as of July 24, 2014): 6.8.
  - GDP per capita (2013, USD): 58,014.
  - Population (2013, million): 9.6.

### Key DSA-related risks and scenario notes
- Contingent Liability Shock scenario
  - One-time increase in non-interest expenditures equivalent to 10 percent of banking sector assets simulated.
  - Real GDP growth path in shock year(s): 2014: 2.6; 2015: -3.6; 2016: -3.7; 2017: 2.6; 2018: 2.5; 2019: 2.4.
  - Primary Balance in shock: 2015: -32.0 (sharp deterioration), with subsequent recoveries.
  - Effective interest rate in shock jumps (e.g., 2016: 6.7).
- Staff finding: Financial instability linked to household debt and bank reliance on wholesale funding is the key downside risk; contingent liability scenarios model fiscal costs of large banking-sector-related fiscal calls.

*IMF staff report chapter "Current Account, External Assessment and the Equilibrium Real Exchange Rate" (excerpts as provided).*

### 1. Current Account, External Assessment and the Equilibrium Real Exchange Rate_______________ 17

### 1. Current Account, External Assessment and the Equilibrium Real Exchange Rate

### Recent economic developments
- Growth and output gap
  - GDP growth reached 1.6 percent in 2013.
  - Real GDP at end-2013 was nearly 15 percent above its 2009 trough.
  - Output gap estimated to average about -¾ percent of potential GDP in 2013.
- Labor market
  - Employment growth around 1 percent in 2013, driven mostly by the services sector.
  - Unemployment remained flat at around 8 percent; pre-crisis level was around 6½ percent.
  - Increase in labor force reflected past reforms and growing immigrant population.
  - Unemployment increase disproportionately affected the young, the low-skilled, and the foreign-born.
  - Reduced responsiveness of unemployment to growth (Okun’s law) suggests much of the unemployment increase is structural.
- Inflation
  - Headline CPI inflation averaged 0 percent in 2013 and declined slightly to -0.2 percent in the first half of 2014.
  - CPIF (CPI at a fixed mortgage rate) averaged 0.9 percent in 2013 and 0.4 percent in 2014:H1.
  - Core inflation (CPI at fixed mortgage rate excluding energy) averaged 1.1 percent in 2013 and 0.6 percent in 2014:H1.
  - Nominal wage growth around 2 percent in 2013; productivity improvements in services roughly compensated for wage growth.
  - Inflation expectations have drifted downward but remain relatively well-anchored at the policy horizon.
- External position
  - Current account surplus reached 6.4 percent of GDP in 2013, up from 6 percent in 2012.
  - Large and positive external balance largely reflects structural factors: very large financial sector, pension and household savings patterns, population aging dynamics, and social protection reforms since the mid-1990s.
  - Sweden’s strong external position reflects mostly structural factors; staff estimates the krona broadly in equilibrium.
- Housing and household balance sheets
  - House price increases in 2014:H1: about 7½ percent annual growth for single-family homes and nearly 13 percent for tenant-owned apartments.
  - Household indebtedness almost 175 percent of disposable income in 2013, and over 190 percent if debt from tenant-owned housing associations is included.
  - About 40 percent of households increased or failed to reduce their debt stock in 2013.
  - Debt ratios particularly high for indebted lower-income households who are especially vulnerable to income, interest rate, and house price shocks.
- Policy stance to support recovery
  - Financial sector reforms: Basel III measures implemented ahead of schedule, including systemic risk buffers and plans for a counter-cyclical buffer, strengthened liquidity coverage ratios (LCRs), and higher mortgage risk weights.
  - Monetary policy: Riksbank reduced the repo rate by 25 basis points in December 2013 and a further 50 basis points in July 2014, setting it at 0.25 percent.
  - Fiscal policy: Net lending projected to increase to -1.9 percent of GDP in 2014, up from -1.3 percent in 2013 (primarily on account of lower revenues); implies a procyclical structural expansion of about ½ percent of potential GDP.

### Outlook and risks
- Baseline outlook
  - Real GDP growth projected to strengthen to about 2.6 percent in 2014 and about 2.8 percent in 2015.
  - Exports expected to pick up along with euro area growth and global trade; private consumption and investment should provide most dynamics while fiscal policy consolidates.
  - With the output gap fully closing, inflation expected to gradually rise to around 1½ percent in 2015.
- Key downside risks
  - Financial instability due to rising household debt:
    - Share of new mortgages with a variable rate increased from over one half in 2012 to more than two thirds in 2013.
    - Many households have large net asset positions, but a significant share of assets is illiquid.
    - Adverse shocks to interest rates, house prices, or income could quickly reduce consumption, employment, and growth and impact the banking system, especially during global funding stress.
  - Banking sector vulnerability to regional and global financial tensions; financial instability in Sweden could quickly spread to other Nordic and Baltic countries.
  - Low inflation and moderating global trade:
    - Extended period of very low inflation could lower long-run inflation expectations below target and drag on growth.
    - Conversely, rising oil prices or a depreciation of the krona could lift inflation above the baseline.
    - Geopolitical tensions could reduce external demand.

### Authorities’ view
- Authorities broadly agreed with staff on the outlook and risks:
  - Recovery driven by private domestic demand.
  - Gradual increase of inflation to the Riksbank’s target of 2 percent.
  - Risks from lower external demand and financial instability related to high household debt.
  - Authorities noted upside risks from stronger-than-anticipated global growth.

### Policy agenda (summary)
- Main challenge: reduce financial risks while pursuing structural reforms to lower unemployment.
  - Urgent progress on the financial stability agenda with measures targeted at household credit demand and further strengthening banking resilience.
  - Macroprudential policy should be first line of defense to allow the Riksbank to pursue its inflation target with less concern about financial risks.
  - Structural reforms to reduce unemployment, focusing on vulnerable groups.
  - Fiscal consolidation is timely: with robust growth ahead, a steady consolidation path will help preserve fiscal buffers.

### Financial policies: addressing stability risks
- Ongoing and planned measures
  - Banks: plans to further improve capital buffers, including raising minimum mortgage risk weights to 25 percent at the end of 2014 and introducing Basel III measures such as systemic risk and countercyclical capital buffers.
  - Despite measures, household credit picked up; Riksbank projects credit to continue rising in 2014 and 2015 under current policies.
- Macroprudential tools focused on mortgage demand
  - Demand-side measures more likely to curb credit growth than further supply-side tightening, given banks’ favorable funding conditions and low mortgage rates.
  - Agreement with the Financial Supervisory Authority (FSA): banks committed to encourage new customers to agree to voluntary amortization plans.
  - Suggestion that gradual introduction of mandatory amortization requirements may be needed if credit does not slow.
  - Example noted: Singapore enforced mandatory amortization within 35 years for new mortgages.
- Debt service-to-income (DSTI) limits and loan-to-value (LTV) caps
  - Introducing a gradual DSTI limit combined with a lower binding LTV cap would help contain mortgage demand.
  - Current LTV cap is 85 percent.
  - In 2013, about 10 percent of households took on supplementary unsecured loans in part to help finance house purchases.
  - DSTI would tie households’ debt to income independent of house values and act as an automatic stabilizer.
- Mortgage interest tax deductibility
  - Mortgage interest tax deductibility provides an incentive to accumulate and maintain high debt levels.
  - A gradual reduction in mortgage interest deductibility would reduce this distortion (Finland cited as an example of such an approach).
  - Current treatment: mortgage interest costs up to 100,000 krona (in excess of capital income) can be deducted at a 30 percent income tax rate, with amounts over that deducted at a 21 percent rate.
- Housing supply constraints
  - Long-term solution requires alleviating housing supply constraints, especially in metropolitan areas where urbanization and immigration increase demand.
  - Measures: expand affordable housing stock, reforms to zoning and permitting, rent-setting reforms, and public infrastructure investments coordinated with municipalities to make private housing investment more attractive.
- Additional measures to strengthen banking resilience
  - Capital
    - Average core Tier I risk-weighted capital ratio rose from 11.8 percent to 16.8 percent between end-2010 and end-2013.
    - Most of the improvement reflected changes in average risk weights driven in part by new risk models.
    - Average leverage ratio (core Tier 1 capital as share of total assets) increased only slightly from 3.6 percent to 3.9 percent.
    - A higher leverage ratio requirement (example: a 5 percent minimum leverage ratio proposed by the U.S. Federal Reserve) would ensure a more substantial increase in shock-absorbers.
    - Introducing the countercyclical capital buffer at or close to 2½ percent would also help.
  - Liquidity
    - Over half of Swedish bank funding comes from wholesale sources, mostly short-maturity covered bonds and certificates.
    - Riksbank’s measure of structural liquidity shows the resulting maturity mismatch has improved only marginally and remains low compared to other European banks.
    - Rapid progress toward fulfilling the Basel III Net Stable Funding Ratio (NSFR) requirement at 100 percent would help.
    - Introducing a minimum LCR requirement in Swedish krona could add to banks’ ability to withstand a short-term krona liquidity squeeze.

*Source: IMF staff report chapter "Current Account, External Assessment and the Equilibrium Real Exchange Rate" (excerpts as provided).*

### 18.      The size and regional orientation of Sweden’s banks makes cross border cooperation

### 18.      The size and regional orientation of Sweden’s banks makes cross border cooperation essential

### Cross-border cooperation and resolution
- Coordinated Nordic approach to raising mortgage lending standards in Norway, with Swedish and Danish authorities ensuring compliance of local bank branches, marks progress in macroprudential cooperation in the highly integrated regional banking market.
- Implementation of the EU Bank Recovery and Resolution Directive (BRRD) should:
  - Allow completion of the work of the Nordea Crisis Management Group (CMG).
  - Facilitate a binding ex-ante burden sharing agreement.
- Retaining the option of Sweden joining the Banking Union would keep open the possibility of improving regulatory and macroprudential cooperation and coordination across the Nordic-Baltic region.

### Authorities’ views on financial vulnerabilities
- Authorities broadly concurred with staff’s assessment of financial vulnerabilities and noted measures under way.
- Households:
  - Household indebtedness seen as high from historical and international perspectives.
  - Authorities emphasized ongoing push for higher capital and liquidity standards (often ahead of the Basel III timetable).
  - Riksbank and Ministry of Finance emphasized need to improve the amortization culture.
  - FSA argued effects of already implemented measures (e.g., increased risk weights and voluntary amortization plans) should be evaluated before further policy action.

### Monetary policy: balancing price and financial stability
- Inflation dynamics and drivers:
  - Inflation has been persistently below target due to external and domestic factors, including krona appreciation lowering import prices and declines in global oil and food prices in 2013.
  - Aggregate ULC growth fell from 2.7 percent in 2012 to 1.4 percent in 2013, reducing cost-push pressures on inflation.
- Staff analysis and uncertainty:
  - A Philips curve model suggests inflation will converge back to the two-percent target, but speed depends on domestic growth and external developments (oil price and exchange rate dynamics).
- Trade-offs between interest rates and financial stability:
  - A 50 basis point decrease in the policy rate increases the ratio of debt to disposable income by about 2 percentage points and the share of variable rate mortgages in the total mortgage stock by about 5 percentage points (over a two-year period, per a simple VAR exercise).
  - An exogenous 60 bp negative shock in the Stibor rate is equivalent to a 50bp decrease in the repo rate in modeled impulse responses.
- Policy stance and implications:
  - Policy rate cuts in December 2013 and July 2014 reaffirmed the Riksbank’s commitment to the inflation objective.
  - Substantial rise in financial stability risks (e.g., acceleration in house price increases and mortgage credit growth) might require interest rates to rise sooner than otherwise to contain vulnerabilities.
  - Effective macroprudential policies should be first line of defense; otherwise higher interest rates than warranted by macroeconomic conditions impose broad economic costs.

### Macroprudential recommendations
- Urgent need for a comprehensive set of macroprudential policy measures to contain rising household credit:
  - Continue strengthening banks (higher mortgage risk weights, many Basel III measures ahead of schedule).
  - Implement macroprudential measures directly targeting credit demand if mortgage credit and house price growth do not slow:
    - Gradual introduction of statutory amortization rates if voluntary measures remain ineffective.
    - Lower LTV caps.
    - Introduction of DSTI limits to improve household resilience to shocks.
  - Gradually phase-out tax deductibility of mortgage interest rates to reduce incentives to accumulate debt.

### Structural reforms to reduce unemployment and improve housing supply
- Labor market:
  - Recent reforms (Earned-Income Tax Credit, disability insurance reform, enhanced ALMPs) and strong GDP growth expanded employment, but unemployment remains high among vulnerable groups (youths, foreign-born, older workers, low-skilled).
  - Swedish wage formation has produced a compressed wage distribution; increasing wage flexibility at the firm level and expanding vocational training and training-based ALMPs can help vulnerable groups transition into employment.
- Housing market constraints and reforms:
  - High urbanization and immigration increased housing demand and residential property prices.
  - Policies to expand supply of affordable housing include:
    - Tackling zoning and permitting problems.
    - Adjusting rent setting mechanism; exempting new construction from rental regulations for longer than currently the case.
    - Public infrastructure investments.
  - Tax reforms to improve allocation of existing housing stock:
    - Reduce capital gains taxation that deters moving.
    - Complement with an increase in the property tax on private residences (property taxation was reduced in 2008 to a municipal property fee capped at 0.75 percent; noted comparisons: up to 4 percent in the U.S. and up to 3 percent in Denmark).

### Fiscal consolidation: protecting buffers
- Government consolidation plan and targets:
  - “Krona-for-krona” strategy implies reforms must be counterfinanced.
  - Government suggested structural consolidation path with annual adjustments of about ½ percent of potential GDP starting in 2015.
  - Staff’s numbers: this path would help achieve a headline fiscal surplus of above 1 percent of GDP by 2018 and reduce the public debt-to-GDP ratio to around 30 percent of GDP, from nearly 42 percent currently.
  - Swedish fiscal framework requires a 1 percent surplus “over the cycle” to build sizable fiscal buffers.
- Rationale for maintaining fiscal buffers:
  - Despite moderate public debt, maintaining borrowing capacity is prudent given potentially large contingent government liabilities in a small open economy with an aging population and a large financial sector.
  - 2013 Staff Report estimated contingent liabilities from financial sector risks alone to be in the range of 17 to 90 percent of GDP, depending on severity and resolution approach.
- Synergies with financial stability:
  - Fiscal consolidation and gradual reforms of mortgage interest deductibility and property tax can help contain mortgage credit growth.
- Authorities’ view:
  - Broad agreement with staff’s fiscal assessment; importance of adhering to consolidation plan to retain credibility.
  - Authorities saw need to further strengthen fiscal buffers and saw no substantial need to modify the fiscal framework in the near term; Ministry of Finance noted it saw higher spare capacity than staff estimates.

### Staff appraisal: summary findings and priorities
- Macroeconomic assessment:
  - Sweden’s economy is doing well with growth gaining speed, buoyant household consumption, and supportive policies.
  - Employment rising, but labor force expanded more; increased unemployment is largely structural and concentrated among the young, low-skilled, and foreign-born.
  - Inflation is low due to global commodity price trends and a strong krona; lower imported energy prices and moderate nominal wage growth with productivity gains have reduced cost pressures.
  - Sweden’s external position is moderately stronger than levels consistent with medium-term fundamentals; structural factors (demographics, large banking sector) explain much of the high current account surplus.
- Financial stability risks:
  - Banking system is large and wholesale-dependent.
  - Household debt has grown to 190 percent of disposable income on some measures while house prices are increasing rapidly.
  - Very low interest rates and structural factors (housing supply constraints, tax incentives keeping amortization rates low) contribute to elevated risks.
  - Lower-income households are particularly indebted and vulnerable to income, interest rate, and house price shocks.
- Policy priorities:
  - Containing mortgage demand is urgent via macroprudential tools (statutory amortization if needed, lower LTVs, DSTI limits) and gradual tax reforms (phase-out of mortgage interest deductibility).
  - Address housing supply rigidities through zoning, permitting, rent-setting reforms, and infrastructure investment; improve allocation of existing stock via tax reform (reduce capital gains taxation and raise very low property tax rates).
  - Monetary policy must balance price and financial stability risks; absent effective macroprudential measures, very low interest rates could fuel borrowing and necessitate earlier rate increases to curb financial vulnerabilities.
  - Implement a comprehensive set of macroprudential measures to contain household credit demand to allow monetary policy to focus on the inflation target.

* _cr14261 - 18.      The size and regional orientation of Sweden’s banks makes cross border cooperation*

### 38.      Structural unemployment requires structural reforms. High unemployment is

### 38.      Structural unemployment requires structural reforms. High unemployment is

### Structural unemployment and labor-market measures
- High unemployment is concentrated among vulnerable groups where the gap between entry-level sectoral wages and productivity can be large.
- Social partners have an important role to play:
  - Explore ways to increase wage flexibility at the firm level.
  - Together with the government, develop vocational training programs aligned with employers’ needs.
- Objective: Help the vulnerable add to their human capital to enable access to better-paying, higher-productivity jobs.

### Fiscal stance and recommendation
- It is time for fiscal consolidation.
- Given the strong growth outlook, 2015 is the right time to embark on a consolidation path towards the one-percent net lending surplus target over the cycle.
- Rationale:
  - Preserve the prudent borrowing capacity adequate for a small open economy preparing for an aging population.
  - Address potentially significant contingent liabilities from a large financial sector.

### Consultation cycle recommendation
- Recommendation: Sweden remains on the standard 12-month Article IV consultation cycle.

### Box 1 — Current Account, External Assessment and the Equilibrium Real Exchange Rate: Key findings
- Since its trough in early 2009, the krona has appreciated nearly 20 percent against the euro and in real effective terms.
- Using data up to June 2014, the IMF’s External Balance Assessment (EBA) methodology suggests:
  - The krona remains substantially undervalued relative to the value consistent with medium-term fundamentals and desirable policies.
  - Sweden’s current account exceeded the level implied by fundamentals and policies in 2013 by about 8½ percent.
- Sweden’s current account surplus reached 6.4 percent of GDP in 2013.
- In 2013:
  - Gross external assets reached 298.5 percent of GDP.
  - Gross external liabilities reached 304.0 percent of GDP.
  - Swedish net international investment position (IIP) was -5.6 percent of GDP (improved from -12.7 percent in 2012).
- Valuation effects are important:
  - If FDI was valued at market prices instead of the standard book value, the Swedish net IIP would be nearly 25 percentage points higher in 2013.
- Factors relevant to the external position:
  - The krona is freely floating and there are no significant policy gaps that would impact the current account.
  - Demographic factors and high private savings, reinforced by pension and social protection reforms since the mid 1990s (notably a phased shift to a defined contributions pension scheme and a progressive shrinkage in transfers), contribute to high capital exports and current account surpluses.
  - Structural factors not fully captured by EBA: Sweden operates as a regional financial center (total assets about four times GDP) and plays a significant role in merchanting trade.
- Staff assessment:
  - Adjusted current account norm: around 2–6 percent of GDP.
  - Current account gap in 2013: in the range of -½ to +3½ percent of GDP.
  - REER gap assessed to be in the range of -10 to +2.

### Box 2 — Inflation Simulations Based on a Philips Curve Model: Setup and projections
- Projection: Swedish inflation is projected to reach the 2-percent target towards the end of 2016.
- Model specification (small open economy Philips curve):
  - HICP inflation in Sweden (π) explained by lagged inflation, output gap (y, Hodrick-Prescott filter with λ = 1,600), euro area core inflation (π_EA), oil prices (toil), and nominal effective exchange rate (NEER).
  - Model estimated by two-stage least-squares (2SLS) using quarterly data during 1994Q1–2013Q4. Alternative methods yield similar results.
- Baseline scenario assumptions:
  - Output gap closes by early 2015.
  - Euro area recovery drives up euro area core inflation.
  - Oil price continues to decline.
  - Simulation suggests HICP inflation will exceed 1½ percent in mid-2016 and converge to 2-percent sometime between end-2016 and mid-2017.
- Alternative scenarios considered:
  - Scenario 1: External Downside Scenario
    - Euro area inflation reaches currently predicted levels only with a two-year delay.
    - Imported oil prices fall by 20 percent by end of 2018.
    - The krona strengthens by 1 percentage point a year over the simulation horizon.
  - Scenario 2: External Upside Scenario
    - Euro area inflation reaches 2 percent by end of 2016, two years earlier than in the baseline projection.
    - NEER depreciates moderately as safe haven flows dissipate.
  - Scenario 3: Domestic Downside Scenario
    - The Swedish output gap closes by around end-2016, two years later than in the baseline scenario.
  - Scenario 4: Domestic Upside Scenario
    - The Swedish output gap closes by end of 2014.
    - The Swedish economy runs a slightly larger (positive) output gap than in the baseline during 2016-2018.
- Scenario outcomes:
  - Under downside scenarios, the expected pick-up in inflation would be delayed until mid-2018, converging to 2 percent with a 6-8 quarter delay relative to the baseline.
  - Under upside scenarios, inflation would reach 2 percent already 2-4 quarters earlier, in early 2016.
- Notes:
  - Euro area core inflation used to avoid endogeneity since oil is separately included.
  - Riksbank’s July 2014 forecast: CPIF inflation reaches 2 percent in 2016; CPI inflation projected to rise to around 3 percent reflecting forecast repo rate hikes.

### Box 3 — Sweden: Risk Assessment Matrix (selected entries)
- Overall structure: Potential deviations from baseline listed with Source of Risks, Overall Level of Concern, Relative Likelihood, Impact if Realized, and Policy response.
- Risk 1: Surges in global financial market volatility
  - Overall Level of Concern: High
  - Triggers: geopolitical tensions or revised market expectations on UMP exit.
  - Vulnerability: Swedish banks reliant on wholesale funding and exposed to international financial markets.
  - Relative Likelihood: Medium
  - Impact if Realized: Bank losses and funding stress could curtail lending, reducing investment, consumption, and growth; adverse impact could be partially mitigated by safe-haven flows.
  - Policy response: Preventively, reduce vulnerabilities of the financial sector and preserve fiscal buffers. In the event, provide liquidity support, including in foreign currency using Sweden’s large borrowed reserves and possible swap arrangements.
- Risk 2: Protracted period of slow European growth
  - Overall Level of Concern: High
  - Triggers: e.g., geopolitical tensions.
  - Vulnerability: Sweden’s exports are tightly linked to European markets.
  - Relative Likelihood: Medium
  - Impact if Realized: Exports and income decline, domestic demand slow, reducing growth.
  - Policy response: Provide monetary support, let automatic fiscal stabilizers operate, consider slowing structural fiscal adjustment.
- Risk 3: Significant house price decline in Sweden (or an interconnected neighboring Nordic country)
  - Overall Level of Concern: Medium
  - Vulnerabilities:
    - Household debt is high due to easy access to credit, low interest rates, and housing tax incentives.
    - Property prices remain elevated.
    - Swedish banks active throughout the Nordic region.
  - Relative Likelihood: High
  - Impact if Realized: Lower growth via reduced consumption and employment; rising NPLs and bank funding costs could curtail lending and investment.
  - Policy response: Preventively, reduce vulnerabilities in the housing market through macroprudential measures. In the event, lower the policy rate and provide liquidity support to banks.

*International Monetary Fund — SWEDEN (excerpts from the IMF staff report)*

### 4. Significant and

### 4. Significant and lasting decline in inflation expectations leading to lower growth. Low

### Scenario description
- Following a strong negative shock to inflation (e.g., linked to much weaker euro area growth or dropping global energy prices), inflation and inflation expectations drop persistently to very low or negative levels.
- Wage growth could fall to very low or negative levels along with inflation.

### Macroeconomic effects (medium)
- This could drag down growth if households and firms deferred expenditure in anticipation of lower prices in the future.
- Falling nominal income could trigger debt sustainability issues for households.

### Policy response
- Lower the policy rate and keep low for longer; reconsider fiscal consolidation.

### Risk context and probabilities (staff assessment)
- The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path.
- "Low" is meant to indicate a probability below 10 percent, "medium" a probability between 10 and 30 percent, and "high" a probability between 30 and 50 percent.

### Relevant indicators and projections (selected)
- CPI inflation (percent change):
  - 2011: 3.0
  - 2012: 0.9
  - 2013: 0.0
  - 2014: 0.1
  - 2015: 1.4
  - 2016: 1.9
  - 2017: 2.1
  - 2018: 2.1
  - 2019: 2.0
- Real GDP (percent change):
  - 2011: 2.9
  - 2012: 0.9
  - 2013: 1.6
  - 2014: 2.6
  - 2015: 2.8
  - 2016: 2.7
  - 2017: 2.6
  - 2018: 2.5
  - 2019: 2.4
- Unemployment rate (percent):
  - 2011: 7.8
  - 2012: 8.0
  - 2013: 8.0
  - 2014: 8.1
  - 2015: 7.7
  - 2016: 7.5
  - 2017: 7.4
  - 2018: 7.3
  - 2019: 7.1
- Output Gap (percent of potential):
  - 2011: 0.5
  - 2012: -0.5
  - 2013: -0.8
  - 2014: -0.5
  - 2015: 0.3
  - 2016: 0.7
  - 2017: 1.0
  - 2018: 0.9
  - 2019: 0.8
- Current account (percent of GDP):
  - 2011: 6.1
  - 2012: 6.0
  - 2013: 6.4
  - 2014: 6.0
  - 2015: 6.1
  - 2016: 6.1
  - 2017: 5.9
  - 2018: 5.8
  - 2019: 5.6

*IMF staff analysis as presented in the Risk Assessment Matrix and Sweden country chapter.*

### Appendix I. Debt Sustainability Analysis

### Appendix I. Debt Sustainability Analysis

### Baseline Scenario (Public Sector DSA — Sweden)
- Time reference: As of July 11, 2014.
- Unit: percentage of GDP unless otherwise indicated.
- Nominal gross public debt:
  - 2012: 44.1
  - 2013: 38.3
  - 2014: 40.5
  - 2015: 41.8
  - 2016: 40.7
  - 2017: 38.5
  - 2018: 35.9
  - 2019: 32.6
  - 2019 (final listed): 29.1
- Public gross financing needs:
  - 2012: 8.4
  - 2013: 9.4
  - 2014: 10.0
  - 2015: 12.5
  - 2016: 13.2
  - 2017: 11.7
  - 2018: 10.8
  - 2019: 9.2
  - 2019 (final listed): 8.2
- Real GDP growth (percent):
  - 2012: 2.4
  - 2013: 0.9
  - 2014: 1.6
  - 2015: 2.6
  - 2016: 2.8
  - 2017: 2.7
  - 2018: 2.6
  - 2019: 2.5
  - 2019 (final listed): 2.4
- Inflation (GDP deflator, percent):
  - 2012: 1.7
  - 2013: 1.0
  - 2014: 0.9
  - 2015: 0.7
  - 2016: 1.4
  - 2017: 1.9
  - 2018: 2.1
  - 2019: 2.1
  - 2019 (final listed): 2.0
- Nominal GDP growth (percent):
  - 2012: 4.0
  - 2013: 2.0
  - 2014: 2.6
  - 2015: 3.3
  - 2016: 4.3
  - 2017: 4.7
  - 2018: 4.8
  - 2019: 4.7
  - 2019 (final listed): 4.5
- Effective interest rate (percent):
  - 2012: 3.7
  - 2013: 2.5
  - 2014: 2.3
  - 2015: 2.4
  - 2016: 2.4
  - 2017: 2.4
  - 2018: 2.4
  - 2019: 2.4
  - 2019 (final listed): 2.6
- Sovereign spreads:
  - Spread (bp) 3/: -29
  - CDS (bp): 19
- Ratings (Foreign / Local):
  - Moody's: Aaa / Aaa
  - S&Ps: AAA / AAA
  - Fitch: AAA / AAA

### Contribution to Changes in Public Debt (cumulative and yearly)
- Change in gross public sector debt (percent of GDP):
  - 2012: -1.5
  - 2013: -0.3
  - 2014: 2.1
  - 2015: 1.3
  - 2016: -1.1
  - 2017: -2.2
  - 2018: -2.6
  - 2019: -3.3
  - 2019 (final listed): -3.5
  - Cumulative (2012–2019): -11.4
- Identified debt-creating flows (percent of GDP):
  - 2012: -2.0
  - 2013: 0.6
  - 2014: 11.2
  - 2015: 31.6
  - 2016: -0.4
  - 2017: -1.1
  - 2018: -1.7
  - 2019: -2.2
  - 2019 (final listed): -2.5
  - Cumulative (2012–2019): -6.3
- Primary deficit (percent of GDP):
  - 2012: -1.6
  - 2013: 0.7
  - 2014: 1.4
  - 2015: 1.8
  - 2016: 0.5
  - 2017: -0.1
  - 2018: -0.6
  - 2019: -1.2
  - 2019 (final listed): -1.6
  - Cumulative (2012–2019): -1.1
- Primary (noninterest) revenue and grants (percent of GDP):
  - 2012: 53.0
  - 2013: 50.5
  - 2014: 50.8
  - 2015: 49.4
  - 2016: 50.0
  - 2017: 50.3
  - 2018: 50.3
  - 2019: 50.3
  - 2019 (final listed): 50.3
  - Cumulative (2012–2019): 50.5
- Primary (noninterest) expenditure (percent of GDP):
  - 2012: 51.5
  - 2013: 51.2
  - 2014: 52.2
  - 2015: 51.2
  - 2016: 50.5
  - 2017: 50.2
  - 2018: 49.7
  - 2019: 49.1
  - 2019 (final listed): 48.7
  - Cumulative (2012–2019): 99.4

### Automatic Debt Dynamics and Components
- Automatic debt dynamics (percent of GDP):
  - 2012: -0.4
  - 2013: -0.1
  - 2014: -0.2
  - 2015: -0.2
  - 2016: -0.9
  - 2017: -1.0
  - 2018: -1.1
  - 2019: -1.0
  - 2019 (final listed): -0.9
  - Cumulative (2012–2019): -5.2
- Interest rate/growth differential (percent of GDP):
  - 2012: -0.2
  - 2013: 0.2
  - 2014: -0.1
  - 2015: -0.4
  - 2016: -0.8
  - 2017: -0.9
  - 2018: -0.9
  - 2019: -0.8
  - 2019 (final listed): -0.6
  - Cumulative (2012–2019): -4.3
- Of which: real interest rate (percent):
  - 2012: 0.9
  - 2013: 0.5
  - 2014: 0.5
  - 2015: 0.7
  - 2016: 0.4
  - 2017: 0.2
  - 2018: 0.1
  - 2019: 0.1
  - 2019 (final listed): 0.2
  - Cumulative (2012–2019): 1.5
- Of which: real GDP growth contribution (percent):
  - 2012: -1.1
  - 2013: -0.4
  - 2014: -0.6
  - 2015: -1.0
  - 2016: -1.1
  - 2017: -1.1
  - 2018: -1.0
  - 2019: -0.9
  - 2019 (final listed): -0.8
  - Cumulative (2012–2019): -5.8
- Exchange rate depreciation contribution (percent of GDP):
  - 2012: -0.2
  - 2013: -0.3
  - 2014: -0.1
  - 2015–2019: 0.0 (no values reported beyond 2014)
- Other identified debt-creating flows:
  - All years 2012–2019: 0.0
- Privatization receipts (negative): 0.0 for all years 2012–2019.
- Contingent liabilities: 0.0 for all years 2012–2019.
- Other debt-creating flows (specify): 0.0 for all years 2012–2019.
- Residual, including asset changes (percent of GDP):
  - 2012: 0.4
  - 2013: -0.9
  - 2014: 0.9
  - 2015: -0.2
  - 2016: -0.8
  - 2017: -1.2
  - 2018: -1.2
  - 2019: -1.3
  - 2019 (final listed): -1.3
  - Cumulative (2012–2019): -6.0

### Debt, Economic, and Market Indicators (Selected)
- Public sector defined as general government.
- Staff calculations source.
- Ten-year government bond yield (year average, table later): 2012: 2.6; 2013: 1.6; 2014: 2.1.
- Repo rate (end of period): 2011: 1.8; 2012: 1.0; 2013: 0.8.
- Selected macro projections (2011–2019):
  - Real GDP (percent change): 2011: 2.9; 2012: 0.9; 2013: 1.6; 2014: 2.6; 2015: 2.8; 2016: 2.7; 2017: 2.6; 2018: 2.5; 2019: 2.4.
  - CPI inflation (percent): 2011: 3.0; 2012: 0.9; 2013: 0.0; 2014: 0.1; 2015: 1.4; 2016: 1.9; 2017: 2.1; 2018: 2.1; 2019: 2.0.
  - Unemployment rate (percent): 2011: 7.8; 2012: 8.0; 2013: 8.0; 2014: 8.1; 2015: 7.7; 2016: 7.5; 2017: 7.4; 2018: 7.3; 2019: 7.1.
  - Output Gap (percent of potential): 2011: 0.5; 2012: -0.5; 2013: -0.8; 2014: -0.5; 2015: 0.3; 2016: 0.7; 2017: 1.0; 2018: 0.9; 2019: 0.8.
  - General government gross debt, official statistics (percent of GDP): 2011: 38.6; 2012: 38.3; 2013: 40.5; 2014: 41.8; 2015: 40.7; 2016: 38.5; 2017: 35.9; 2018: 32.6; 2019: 29.1.
  - Current account (percent of GDP): 2011: 6.1; 2012: 6.0; 2013: 6.4; 2014: 6.0; 2015: 6.1; 2016: 6.1; 2017: 5.9; 2018: 5.8; 2019: 5.6.
- Exchange rate regime: Free floating exchange rate.
- SEK per U.S. dollar (as of July 24, 2014): 6.8.
- GDP per capita (2013, USD): 58,014.
- Population (2013, million): 9.6.

### Composition of Public Debt and Alternative Scenarios
- Underlying assumptions (in percent) for scenarios (selected):
  - Baseline: Real GDP growth 2014–2019 = 2.6, 2.8, 2.7, 2.6, 2.5, 2.4; Inflation 0.7, 1.4, 1.9, 2.1, 2.1, 2.0; Primary Balance -1.8, -0.5, 0.1, 0.6, 1.2, 1.6; Effective interest rate 2.4, 2.4, 2.4, 2.4, 2.4, 2.6.
  - Historical Scenario: Real GDP growth 2014–2019 = 2.6, 2.1, 2.1, 2.1, 2.1, 2.1; Inflation same as Baseline; Primary Balance -1.8, 1.2, 1.2, 1.2, 1.2, 1.2; Effective interest rate 2.4, 2.4, 2.9, 3.0, 3.2, 3.4.
  - Constant Primary Balance Scenario: Primary Balance kept constant at the 2013 Baseline projection level (-1.8) for 2014–2019; other macro assumptions largely as Baseline.
  - Contingent Liability Shock scenario:
    - One-time increase in non-interest expenditures equivalent to 10 percent of banking sector assets.
    - Real GDP growth path in shock year(s): 2014: 2.6; 2015: -3.6; 2016: -3.7; 2017: 2.6; 2018: 2.5; 2019: 2.4.
    - Inflation path in shock: 2014: 0.7; 2015: -0.2; 2016: 0.3; 2017–2019: 2.1, 2.1, 2.0.
    - Primary Balance: 2014: -1.8; 2015: -32.0; 2016: 0.1; 2017: 0.6; 2018: 1.2; 2019: 1.6.
    - Effective interest rate in shock: 2014: 2.4; 2015: 2.7; 2016: 6.7; 2017: 3.7; 2018: 3.7; 2019: 3.8.
- Scenario construction notes:
  - Baseline constructed from historical debt maturity, currency denomination, and other characteristics of outstanding government debt; projections based on financing needs and related variables from Swedish National Debt Office and Ministry of Finance.
  - Historical scenario sets real GDP growth, real interest rate, and primary balance to historical averages.
  - Constant Primary Balance scenario keeps primary balance at 2013 Baseline projection level.
  - Contingent Liability Shock reduces real GDP growth by 2 standard deviations for 2 consecutive years; revenue-to-GDP unchanged relative to baseline; deterioration in primary balance increases interest rate; decline in growth reduces inflation.

### Debt Composition and Maturity (selected graphical descriptions)
- Gross nominal public debt (percent of GDP) projected by year 2012–2019 (figures tabulated above).
- Public gross financing needs (percent of GDP) projected by year 2012–2019 (figures tabulated above).
- By maturity (historical and projected): breakdown by medium and long-term versus short-term (no numeric table in text; charts referenced).
- By currency (historical and projected): local currency-denominated versus foreign currency-denominated (no numeric table in text; charts referenced).

### Key Staff Findings and Risks (from DSA context and related report excerpts)
- Financial instability is identified as the key downside risk, especially given:
  - Household debt reaching 190 percent of disposable income on some measures.
  - More than two thirds of new mortgages have variable rates.
  - A significant share of household net-assets is illiquid.
- Potential shock transmission:
  - Adverse shocks to interest rates, house prices, or income could lower consumption, raise unemployment, reduce growth, and impact banking system—particularly during global funding stress.
  - Sweden’s large and regionally connected banks are vulnerable to financial tensions in other Nordic countries and the Baltics.
- Policy context reflected in scenarios:
  - Contingent Liability Shock models fiscal cost of a large banking-sector related fiscal call (10 percent of banking sector assets) with severe macro and interest-rate feedbacks.

*Source: Fund staff calculations and IMF staff report materials included in the provided content.*

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