## _cr16353

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---

### Growth and labor market
- Real GDP growth:
  - 2015: 4.1
  - 2016: 3.4
  - 2017 (projection): 2.4
- Employment and unemployment:
  - Employment increased by 1.5 percent so far in 2016.
  - Unemployment pushed down to about 7 percent (trend unemployment down to 7 percent in August).
  - Employment gains of 1.5 percent y/y helped bring trend unemployment down to 7 percent in August from around 8 percent in 2011–14.
- Domestic demand:
  - Domestic demand was a key growth driver with a 4.7 percent y/y rise in 2016 H1.
  - Private investment and new dwelling construction were important contributors.

### Inflation and monetary policy
- Core inflation and expectations:
  - Core inflation has risen significantly to an average of 1.2 percent in 2016.
  - Inflation expectations have moved closer to Riksbank’s target.
- Monetary policy stance:
  - After a further easing in early 2016, the central bank has kept the repo rate at -0.5 percent and it has continued bond purchases.
  - Directors recommended that monetary policy remain stimulatory for some time and that unwinding of stimulus should await confirmation of a durable rise in inflation.
- Monetary guidance (staff appraisal and authorities):
  - Maintain expansionary stance until durable inflation rise is confirmed.
  - Further rate cuts appropriate if inflation prospects and expectations weaken, accompanied by vigilance on household debt and readiness to tighten macroprudential stance.
  - Bond purchases could be extended while monitoring debt markets.

### Housing market and household debt
- Recent developments:
  - House price rises slowed to about 5 percent annualized in the last ten months from around 15 percent for most of 2015.
  - Housing prices stand at some 40 percent above their 20-year average relative to income.
  - Stockholm apartment prices broadly flat since September 2015 after a 54 percent jump in the three preceding years.
  - Household credit growth: 7.5 percent y/y in August.
  - Household debt reached 179 percent of disposable income, rising by 11 percentage points in the past three years.
- Distribution and composition:
  - Share with DTI ratios above 600 percent rose by 7 percentage points from 2011 to reach 17 percent by 2015.
  - Share with DTI ratios above 450 percent rose 16 percentage points to 37 percent by 2015.
  - Average LTVs on new mortgages declined to 68.3 percent in 2015, from around 70 percent in 2012–14.
- Residential investment and outlook:
  - Residential investment recently reached 5 percent of GDP compared with a 25-year average of 3 percent.
  - Very high growth in residential investment expected to slow due to resource constraints; domestic demand and GDP growth expected to cool from 2017.
  - Output gap turns positive from 2016; core HICP inflation takes three years to approach the target.
- Recommendations to contain vulnerabilities:
  - Reforms to maintain an adequate land supply for construction.
  - Phase out tax deductibility of interest payments.
  - Phase out rent controls while protecting the vulnerable (exempt all new construction from controls; use housing allowance to protect vulnerable households).
  - Reinforce macroprudential policies through timely adoption of a debt-to-income (DTI) limit.
  - Expand budgetary support for affordable rental housing—currently at 0.1 percent of GDP.
  - Temporarily remove the threshold for deferring capital gains tax on a primary residence to promote efficient use of existing dwellings.
- Specific macroprudential measures and calibration:
  - Minimum amortization requirements on new mortgages effective June (annual repayments of at least 1 percent for LTV over 50 percent; at least 2 percent for LTV above 70 percent).
  - FI study suggests a DTI cap of 600 percent of disposable income, with exemption of 15 percent of mortgages, would slow the rise in household debt while having modest negative effect on growth.
  - Recommendation: FI should initiate adoption of a DTI limit soon; final calibration could be deferred until authorization and experience with amortization requirement is observed.
  - Alternative: raise risk weights for portion of mortgages exceeding a DTI threshold or adopt a capital surcharge on such loans.

### Fiscal position, migration-related spending, and policy stance
- Fiscal outcomes and projections:
  - Fiscal deficit expected to be small in 2016.
  - Budget for 2017 provides for initiatives totaling 0.5 percent of GDP in education, active labor market policies, and child and elder care, while targeting a small fiscal deficit.
  - Migration-related government spending has almost doubled to about 1.4 percent of GDP owing to the surge in refugee inflows in 2015 (other figures: migration-related spending cited as 1.5 percent of GDP in 2016 and projected 1.6 percent in 2017 in different tables).
- Directors’ fiscal guidance:
  - Given Sweden’s strong fiscal position, fiscal policy should accommodate temporary migration-related costs; the modestly expansionary fiscal stance planned for 2017 is appropriate.
  - Utilize fiscal room in coming years to further support migrant integration and affordable rental housing.
- Fiscal framework revisions:
  - With effect from 2019, the surplus target is to be reduced from 1 percent of GDP to 0.33 percent of GDP.
  - A debt anchor at 35 percent of GDP introduced as a benchmark; government required to explain deviations of more than 5 percent of GDP from this anchor.
  - Staff’s debt sustainability indicates public debt on a downward path toward the new anchor.
- Key fiscal numbers (selected):
  - Net lending: 2015: 0.2; 2016: -0.2; 2017: -0.3; 2018: 0.0; 2019: 0.8
  - Adjusted structural balance: 2015: -0.2; 2016: 0.0; 2017: -0.3; 2018: -0.2; 2019: 0.5
  - Migration-related spending (memo): 2015: 0.8; 2016: 1.5; 2017: 1.6; 2018: 1.1; 2019: 0.9
  - Gross public debt: 2015: 42.9; 2016: 41.5; 2017: 40.3; 2018: 39.0; 2019: 37.7
- Fiscal policy implication:
  - Modestly expansionary near-term stance appropriate to accommodate temporary migration-related spending while moving to the new surplus target in the medium term.
  - Use fiscal room to support migrant integration (education, housing) and be prepared to cushion the economy in adverse shocks.

### Migration and integration findings and recommendations
- Migration flows and capacity:
  - Almost 163,000 people (1¾ percent of the population) sought asylum in Sweden in 2015; inflows dropped to just over 15,000 in the first half of 2016.
  - Swedish Migration Agency forecast for 2016: between 30,000 and 50,000 asylum seekers.
  - Large stock of asylum seekers with pending applications is straining reception capacity and impeding integration into the labor market.
- Reception and establishment pressures:
  - At start of 2016, about 182,000 people were registered in the SMA’s reception system.
  - Processing time for asylum applications increased from under 5 months in 2014 to between 15 months and 2 years currently.
  - About 55 percent of asylum seekers choose to stay in SMA-provided accommodation.
  - After a residence permit is granted, refugees currently have to wait about 5 months before being assigned to a municipality—often due to lack of affordable housing.
- Integration policy recommendations:
  - Provide additional affordable housing and educational capacity in municipalities.
  - Streamline employment subsidy programs and improve job matching; PES should step up outreach to employers and streamline programs to reduce administrative burden.
  - Allow temporary and targeted exceptions to high entry-level wages to enable on-the-job skill building (recommended by most Directors).
  - Systematically assess relative effectiveness of ALMP measures and expand hiring of lower skilled workers via greater wage flexibility at the firm level or temporary targeted exceptions.
  - Increase early language/civic training, adult education, and skills assessment during asylum period; offer early skills assessment by PES.
  - Create fast-track schemes for occupations with shortages (chefs, teachers, nurses, physicians) and facilitate entrepreneurship.

### Financial sector resilience, FSAP findings, and macroprudential framework
- FSAP main findings:
  - Bank solvency resilient under a severe scenario.
  - Severe stress scenario parameters: 6 percentage point rise in unemployment; 30 percent fall in real housing prices.
  - No bank breaks regulatory threshold; one bank falls below supervisory threshold in stress (not accounting for buffer release).
  - System-wide leverage ratio falls by 0.3 percentage points in stressed scenario (from 4.1 percent in 2015).
  - Nonbank sector: only two insurers drop slightly below solvency ratio of 100 percent; total additional capital needed to restore solvency less than 1 percent of GDP.
- Vulnerabilities and liquidity:
  - Banks are very reliant on wholesale funding; Swedish banks (excluding subsidiaries) had about 50 percent of GDP in short-term external debt at end 2015.
  - LCRs in U.S. dollars and in euro are well above 100, but extended FX liquidity pressures possible; recommendation to monitor an extended (three-month) LCR in U.S. dollars and euros.
  - FX reserves at USD 52.9 bn in August 2016, equivalent to about 20 percent of short-term external debt of monetary and financial institutions and about 11 percent of GDP.
- Supervisory and institutional recommendations:
  - Fix legal framework to enable timely adoption of macroprudential measures; provide FI with formal mandate and broader regulatory powers.
  - Expand FI’s ability and resources; FI analysis finds resource gap of approximately 45 percent relative to other supervisors.
  - Adopt a leverage ratio as a backstop to risk-based capital requirements; consider raising risk weights or imposing capital surcharge on high-DTI loans.
  - Improve data (introduce comprehensive anonymized household balance sheet surveys) and strengthen stress testing for banks, insurers, and funds.
  - Enhance regional cooperation (Nordic-Baltic Macroprudential Forum), memoranda of understanding with full access to supervisory information, and agreements on liquidity support and resolution.
- Recent initiatives and legislative progress:
  - Political agreement (October 26, 2016) to expand FI’s ability to take macroprudential measures; legislative proposal to be sent for public consultation aiming to be effective from 2018.
  - Amortization requirement introduced in June; counter-cyclical capital buffer raised to 2 percent effective March 2017.
  - Authorities agree on strengthening regional coordination and crisis preparedness; first FSC crisis-simulation exercise held.

### Debt sustainability and external position (selected projections and indicators)
- Baseline public debt projections (selected):
  - Nominal gross public debt: 2014: 39.7; 2015: 44.6; 2016: 42.9; 2017: 41.6; 2018: 40.5; 2019: 39.4; 2020: 38.8; 2021: 37.5
  - Public gross financing needs: 2014: 11.1; 2015: 13.1; 2016: 9.6; 2017: 8.8; 2018: 10.7; 2019: 11.2; 2020: 10.5; 2021: 9.3; 2021: 7.8 (duplicate year entries as listed)
  - Effective interest rate: 2014: 3.2; 2015: 1.8; 2016: 1.2; 2017: 0.3; 2018: 0.7; 2019: 0.7; 2020: 0.9; 2021: 1.1; 2021: 1.2
- Baseline macro projections (selected):
  - Real GDP growth: 2016: 3.4; 2017: 2.4; 2018: 2.2; 2019: 2.1; 2020: 2.0; 2021: 2.0
  - Inflation (GDP deflator): 2016: 2.0; 2017: 1.4; 2018: 1.7; 2019: 1.7; 2020: 2.2; 2021: 2.1
  - Primary Balance: 2016: -0.5; 2017: -0.6; 2018: -0.4; 2019: -0.1; 2020: 0.3; 2021: 0.4
- External position and reserves:
  - Current account (percent of GDP): 2013: 5.3; 2014: 4.6; 2015: 5.2; 2016: 4.9; 2017: 5.1; 2018: 5.0; 2019: 4.7
  - Net IIP rose to 4.1 percent of GDP in 2015 (up 4.5 percentage points in 2015).
  - FX reserves: USD 52.9 bn in August 2016 (about 11 percent of GDP).

### Executive Board assessment and staff priorities
- Directors’ priorities for sustaining solid growth:
  - Return inflation to target to rebuild policy space.
  - Contain rise in housing market and household debt vulnerabilities.
  - Ensure resilience of the financial sector.
  - Accelerate integration of refugees into the workforce.
- Policy balance:
  - Monetary policy should remain stimulatory until a durable rise in inflation is confirmed.
  - Fiscal policy should accommodate temporary migration-related costs while safeguarding medium-term fiscal targets.
- Staff appraisal key priorities:
  - Rebuild space for monetary policy by returning inflation to target.
  - Contain housing market and household debt vulnerabilities.
  - Ensure Sweden’s large financial sector remains resilient.
  - Accelerate integration of refugees into the workforce.
- Procedural recommendation:
  - Hold the next Article IV consultation with Sweden on the standard 12–month cycle.

### Key selected indicators (annual percent change or levels as reported)
- Real economy (percent change):
  - Real GDP: 2013: 1.2; 2014: 2.6; 2015: 4.1; 2016: 3.4; 2017: 2.4; 2018: 2.2; 2019: 2.1
  - Domestic demand: 2013: 1.6; 2014: 2.9; 2015: 4.0; 2016: 4.3; 2017: 2.7; 2018: 2.4; 2019: 2.2
  - HICP inflation (e.o.p): 2013: 0.4; 2014: 0.3; 2015: 0.7; 2016: 1.2; 2017: 1.6; 2018: 2.0; 2019: 2.2
  - Unemployment rate (in percent): 2013: 8.0; 2014: 7.9; 2015: 7.4; 2016: 6.9; 2017: 6.7; 2018: 6.7; 2019: 6.7
- Public finance (in percent of GDP):
  - Total revenues: 2013: 50.9; 2014: 50.1; 2015: 49.1; 2016: 48.9; 2017: 48.9; 2018: 48.9; 2019: 48.7
  - Total expenditures: 2013: 52.2; 2014: 51.7; 2015: 48.9; 2016: 49.1; 2017: 49.1; 2018: 49.1; 2019: 48.7
  - Net lending: 2013: -1.3; 2014: -1.6; 2015: 0.2; 2016: -0.2; 2017: -0.3; 2018: -0.2; 2019: 0.0
  - General government gross debt (official statistics): 2013: 39.8; 2014: 44.6; 2015: 42.9; 2016: 41.6; 2017: 40.5; 2018: 39.4; 2019: 38.8
- Interest rates and yields:
  - Repo rate: 2013: 0.8; 2014: 0.0; 2015: -0.4; 2016: -0.5
  - Ten-year government bond yield: 2013: 2.1; 2014: 1.7; 2015: 0.7; 2016: 0.2
  - Mortgage lending rate: 2013: 2.5; 2014: 1.9; 2015: 1.6; 2016: 1.6
- External and other indicators:
  - GDP per capita (2015, USD): 50,591
  - Population (2016, million): 9.9

*Source: SWEDEN STAFF REPORT FOR THE 2016 ARTICLE IV CONSULTATION (INTERNATIONAL MONETARY FUND).*

### 3.4 percent in 2016 on the heels of an expansion of just over 4 percent in 2015. Employment

### _cr16353 - 3.4 percent in 2016 on the heels of an expansion of just over 4 percent in 2015. Employment

### Growth and labor market
- Real GDP growth:
  - 2015: 4.1
  - 2016: 3.4
  - 2017 (projection): 2.4
- Employment and unemployment:
  - Employment increased by 1.5 percent so far in 2016.
  - Unemployment pushed down to about 7 percent (trend unemployment down to 7 percent in August).
  - Employment gains of 1.5 percent y/y helped bring trend unemployment down to 7 percent in August from around 8 percent in 2011–14.
- Domestic demand:
  - Domestic demand was a key growth driver with a 4.7 percent y/y rise in 2016 H1.
  - Private investment and new dwelling construction were important contributors.

### Inflation and monetary policy
- Core inflation (HICP basis) and expectations:
  - Core inflation has risen significantly to an average of 1.2 percent in 2016.
  - Inflation expectations have moved closer to Riksbank’s target.
- Monetary policy stance:
  - After a further easing in early 2016, the central bank has kept the repo rate at -0.5 percent and it has continued bond purchases.
  - Directors recommended that monetary policy remain stimulatory for some time and that unwinding of stimulus should await confirmation of a durable rise in inflation.

### Housing market and household debt
- House prices and indebtedness:
  - House price rises slowed to about 5 percent annualized in the last ten months from around 15 percent for most of 2015.
  - Housing prices stand at some 40 percent above their 20-year average relative to income.
  - Expensive housing has resulted in a growing share of new borrowers taking on high debts relative to their income.
- Recommendations to contain vulnerabilities:
  - Reforms to maintain an adequate land supply for construction.
  - Phasing out tax deductibility of interest payments.
  - Phasing out rent controls while protecting the vulnerable.
  - Reinforce macroprudential policies through timely adoption of a debt-to-income limit.

### Fiscal position and migration-related spending
- Fiscal outcomes and projections:
  - The fiscal deficit is expected to be small in 2016.
  - The budget for 2017 provides for initiatives totaling 0.5 percent of GDP in education, active labor market policies, and child and elder care, yet still targets a small fiscal deficit.
  - Migration-related government spending has almost doubled to about 1.4 percent of GDP owing to the surge in refugee inflows in 2015.
- Directors’ fiscal guidance:
  - Given Sweden’s strong fiscal position, fiscal policy should accommodate temporary migration-related costs, making the modestly expansionary fiscal stance planned for 2017 appropriate.
  - Utilize fiscal room in coming years to further support migrant integration.

### Migration and integration
- Migration flows and capacity:
  - Almost 163,000 people (1¾ percent of the population) sought asylum in Sweden in 2015; inflows dropped to just over 15,000 in the first half of 2016.
  - The Swedish Migration Agency revised its forecast for 2016 to between 30,000 and 50,000 asylum seekers.
  - The large stock of asylum seekers with pending applications is straining reception capacity and impeding integration into the labor market.
- Policy recommendations to improve integration:
  - Additional affordable housing and educational capacity in municipalities.
  - Streamline employment subsidy programs and improve job matching.
  - Allow temporary and targeted exceptions to high entry-level wages to enable on-the-job skill building (recommended by most Directors).

### Financial sector resilience and macroprudential framework
- FSAP findings:
  - Swedish banks are largely resilient to solvency shocks, although they are very reliant on wholesale funding.
- Supervisory and macroprudential recommendations:
  - Expand the financial supervision authority’s (FI) ability and resources to take timely macroprudential measures and achieve an appropriate frequency of supervisory inspection.
  - Adopt a leverage ratio as a backstop and strengthen foreign exchange liquidity requirements on banks in view of high reliance on wholesale funding.
  - Fix the legal framework for macroprudential policy to enable timely measures.

### Executive Board assessment — priorities and policy balance
- Directors’ priorities for sustaining solid growth:
  - Return inflation to target to rebuild policy space.
  - Contain rise in housing market and household debt vulnerabilities.
  - Ensure resilience of the financial sector.
  - Accelerate integration of refugees into the workforce.
- Monetary-fiscal balance:
  - Monetary policy should remain stimulatory until durable rise in inflation is confirmed.
  - Fiscal policy should accommodate temporary migration-related costs while safeguarding medium-term fiscal targets.

### Key selected indicators (annual percent change or levels as reported)
- Real economy (percent change):
  - Real GDP: 2013: 1.2; 2014: 2.6; 2015: 4.1; 2016: 3.4; 2017: 2.4; 2018: 2.2; 2019: 2.1
  - Domestic demand: 2013: 1.6; 2014: 2.9; 2015: 4.0; 2016: 4.3; 2017: 2.7; 2018: 2.4; 2019: 2.2
  - HICP inflation (e.o.p): 2013: 0.4; 2014: 0.3; 2015: 0.7; 2016: 1.2; 2017: 1.6; 2018: 2.0; 2019: 2.2
  - Unemployment rate (in percent): 2013: 8.0; 2014: 7.9; 2015: 7.4; 2016: 6.9; 2017: 6.7; 2018: 6.7; 2019: 6.7
- Public finance (in percent of GDP):
  - Total revenues: 2013: 50.9; 2014: 50.1; 2015: 49.1; 2016: 48.9; 2017: 48.9; 2018: 48.9; 2019: 48.7
  - Total expenditures: 2013: 52.2; 2014: 51.7; 2015: 48.9; 2016: 49.1; 2017: 49.1; 2018: 49.1; 2019: 48.7
  - Net lending: 2013: -1.3; 2014: -1.6; 2015: 0.2; 2016: -0.2; 2017: -0.3; 2018: -0.2; 2019: 0.0
  - General government gross debt (official statistics): 2013: 39.8; 2014: 44.6; 2015: 42.9; 2016: 41.6; 2017: 40.5; 2018: 39.4; 2019: 38.8
- Interest rates and yields:
  - Repo rate: 2013: 0.8; 2014: 0.0; 2015: -0.4; 2016: -0.5
  - Ten-year government bond yield: 2013: 2.1; 2014: 1.7; 2015: 0.7; 2016: 0.2
  - Mortgage lending rate: 2013: 2.5; 2014: 1.9; 2015: 1.6; 2016: 1.6
- External and other indicators:
  - Current account (percent of GDP): 2013: 5.3; 2014: 4.6; 2015: 5.2; 2016: 4.9; 2017: 5.1; 2018: 5.0; 2019: 4.7
  - GDP per capita (2015, USD): 50,591
  - Population (2016, million): 9.9

_Source: SWEDEN STAFF REPORT FOR THE 2016 ARTICLE IV CONSULTATION (INTERNATIONAL MONETARY FUND)._

### 4.      House price increases have slowed significantly but household debt is steadily rising.

### 4.      House price increases have slowed significantly but household debt is steadily rising.

### Recent developments in housing prices and household credit
- Housing price inflation declined to about 5 percent annualized in the last 10 months, from around 15 percent for most of 2015.
- Stockholm apartment prices have been broadly flat since September 2015, after jumping by 54 percent in the three preceding years.
- Slowing in price growth may reflect:
  - the high level housing prices reached in the Fall of 2015;
  - renewed public discussion of reducing tax deductibility of mortgage interest payments; and
  - some anticipation of the impact of minimum amortization requirements on new mortgages that became effective in mid-2016.
- Household credit growth was little changed in the past year, running at 7.5 percent y/y in August.
- Household debt reached 179 percent of disposable income, rising steadily by 11 percentage points in the past three years, as new housing purchasers take on higher debts.

### Distribution and composition of household debt
- The shares of new mortgage borrowers with high DTI ratios:
  - Share with DTI ratios above 600 percent rose by 7 percentage points from 2011 to reach 17 percent by 2015.
  - Share with DTI ratios above 450 percent rose 16 percentage points to 37 percent by 2015.
- The distribution of household debt-to-disposable income (DTI) ratios shifted out relatively modestly in recent years, but the shares of highly-indebted new borrowers have increased substantially, suggesting the share of highly indebted households could rise more rapidly going forward.
- Although household debt has risen relative to income, it has fallen relative to household assets.

### Macrofinancial outlook and risks
- Residential investment recently reached 5 percent of GDP compared with a 25-year average of 3 percent.
- Growth and inflation outlook:
  - Strong domestic demand growth in 2015–16 was aided by expansionary monetary policy and rising spending on migrants.
  - Most of the monetary easing took place in 2015; public consumption growth is expected to be significantly lower in 2017.
  - Very high growth in residential investment is expected to slow in the face of resource constraints, so domestic demand and GDP growth is expected to cool from 2017.
  - The output gap turns positive from 2016, feeding into a renewed inflation pick up from 2017, yet core HICP inflation takes three years to approach the target.
- Household debt is expected to keep rising in the medium term as banks are well placed to meet rising household credit demand:
  - Banks enjoy solid profitability despite negative interest rates and have buffers over capital requirements.
  - The financial sector does not appear to be a key driver of the residential property cycle, with household credit growth lagging housing price acceleration and remaining well below the pace of those gains.
- Macroeconomic vulnerabilities could build even if banking system stability is maintained:
  - Banks are largely resilient to potential solvency shocks but are very reliant on wholesale funding.
  - A rise in the share of highly-indebted households would increase macroeconomic vulnerabilities, amplifying consumption responses to interest rate movements.

### External and housing-related downside risks
- External risks:
  - Sweden is highly exposed to external shocks through banks’ high share of wholesale funding and strong trade linkages with Europe including the UK.
  - Weak growth in major advanced and emerging economies would primarily impact Sweden via lower exports.
  - Economic fallout from political fragmentation in Europe, including uncertainty associated with post-Brexit arrangements, could weigh on investment.
  - The adverse impact on Sweden’s growth and inflation would be greater if policy responses in these major economies resulted in a significant appreciation of the krona.
- Housing risks:
  - The market seems to be cooling off from the high price levels reached last fall.
  - A gradual increase in housing supply is expected to moderate prospective rises in housing prices rather than result in a significant decline.
  - Swedish house prices are historically high, at some 40 percent over their 20-year average relative to income, implying potential for a significant fall with a likely recession-like impact on consumption and unemployment.

### Policy implications and recommendations
- Monetary policy:
  - The expansionary monetary stance needs to be maintained to avoid prolonged low inflation and to allow monetary policy space to cushion shocks; some room remains to ease monetary policy if needed.
  - An unwinding of monetary expansion should await clear confirmation that tightening resource utilization is translating into a durable rise in inflation, and any unwinding should be at a measured pace accepting a broadly symmetric risk of inflation being above or below the target.
  - In case inflation prospects and expectations weaken, further rate cuts would be appropriate but should be accompanied by heightened vigilance regarding household debt vulnerabilities and preparedness to tighten the macroprudential stance. Bond purchases could be extended while monitoring debt markets.
- Macroprudential policy and legal framework:
  - Further macroprudential steps are needed to contain vulnerabilities associated with a likely continued rise in household indebtedness.
  - Fixing the legal framework to enable more timely adoption of macroprudential measures as risks evolve is urgent.
- Fiscal and labor market policy:
  - Fiscal policy should emphasize addressing migrant integration and housing challenges while moving to the new surplus target in the medium term, and be prepared to play a larger-than-usual role in cushioning the economy in case of adverse shocks.
  - Expanded education should be complemented by temporary and targeted flexibility in entry-level wages to help migrants and others gain employment and over time contribute to Sweden’s social model.

*International Monetary Fund staff summary of the Swedish context as presented in the source content.*

### 19.      Authorities’ Views. The Riksbank broadly agreed with staff views on the monetary and

### 19.      Authorities’ Views. The Riksbank broadly agreed with staff views on the monetary and exchange rate policy.

### Authorities’ views on monetary and exchange rate policy
- The Riksbank broadly agreed with staff views on the monetary and exchange rate policy.
- The authorities will continue monitoring developments in the financial markets and institutions closely for potential adverse effects from UMP.
- The authorities endorsed the recommendation to clarify the Riksbank’s financial stability mandate.

### B. Housing and Household Debt Policies — Findings and measures
- Minimum amortization requirements on new mortgages became effective in June.
- FI’s Swedish Mortgage Market report indicates amortization of mortgages with an LTV of 70–85 percent rose from 0.8 percent of principal in 2011 to 1.3 percent by 2015.
- New mortgage borrowers requirements:
  - Annual repayments of at least 1 percent of the debt principal for mortgages with LTV over 50 percent.
  - Annual repayments of at least 2 percent for mortgages with LTV above 70 percent.
- The direct macroeconomic impact is contained as only new borrowers are affected.
- Note on amortization adequacy: As amortization net of refinancing is key to containing household debt vulnerabilities, the adequacy of these minimum amortization rates should be reviewed annually.
- Macroprudential stance tightened by raising the counter-cyclical capital buffer to 2 percent effective March 2017, even as the credit-to-GDP gap has declined substantially in recent years.
- Mortgage amortization details (from footnote):
  - Nearly all mortgages with LTV above 70 percent were being amortized, average repayments were only 1.3 percent of debt, below the new 2 percent requirement.
  - For mortgages with LTV of 50–70 percent, only 51.2 percent were being amortized, by an average of 0.9 percent of the debt.

### Risks and need for broader efforts
- Income and population drivers of housing demand are expected to remain strong and interest rates may remain exceptionally low for some years.
- Recent rise in construction is less than 1 percent of the total dwelling stock annually.
- Current framework (LTV ceiling 85 percent, minimum risk weights 25 percent on mortgages, and minimum amortization requirements) may not contain upward pressure on high-DTI borrowing.
- Sustained rebalancing of housing demand and supply is key to protecting household financial resilience over the longer term.
- New macroprudential tools have a significant role in containing vulnerabilities over the medium term.

### Policy recommendations to rebalance housing demand and supply
- Sustaining the increase in housing supply:
  - Maintain an adequate supply of land ready for development.
  - Require more transparent, standardized, and timely municipal land sale and planning procedures.
  - Expand budgetary support for affordable rental housing—currently at 0.1 percent of GDP.
- Tax reform to reduce demand and incentives for debt financing:
  - Raise the very low ceilings on property tax to broaden the tax base in a progressive manner.
  - Phase out the tax deductibility of interest payments (appropriate in a low interest rate environment).
  - Temporarily remove the threshold for deferring capital gains tax on a primary residence to promote more efficient use of existing dwellings.
- Phasing out rent controls:
  - Rent controls create long queues, cause “lock-in” effects, and incentivize building tenant-owned rather than rental housing.
  - Phase-out controls while protecting vulnerable households through the housing allowance and exempting all new construction from controls.

### Role of DTI (Debt-to-Income) limits and macroprudential toolkit
- Banks report taking household DTI into account with some internal thresholds resulting in more loan rejections.
- Signs of tightening lending standards:
  - Average LTVs on new mortgages declined to 68.3 percent in 2015, from around 70 percent in 2012–14.
- International examples: UK and Ireland adopted mortgage LTI thresholds; New Zealand considering a DTI.
- FI study suggests a DTI cap of 600 percent of disposable income, with exemption of 15 percent of mortgages, would slow the rise in household debt while having modest negative effect on growth.
- A DTI limit would:
  - Lean against growth in the share of households with high DTI ratios while allowing some flexibility for individual circumstances.
  - Contain increases in the interest sensitivity of consumption and protect households’ resilience to income losses in a recession.
  - Automatically reduce LTVs on high DTI loans when housing prices rise faster than incomes.
  - Make lending responses to house price increases less elastic than relying solely on an LTV ceiling.
- Recommendation: FI should initiate adoption of a DTI limit soon; final calibration could be deferred until the tool is authorized and experience with amortization requirement is observed.

### Alternative approach: risk weights and supervision
- FI could raise the risk weight for the portion of mortgages exceeding a certain DTI threshold well above the current floor of 25 percent, or adopt a capital surcharge on such loans.
- Such measures should be supported by regular supervisory monitoring and engagement on the scale of such lending by each bank.
- If signals and supervision are insufficient, a regulatory limit on DTI would be needed.

### Authorities’ views on housing and DTI
- Authorities are alert to housing supply challenges; recent improvements in construction permitting would streamline processes for buildings of a similar design.
- Political view:
  - Gaining consensus on raising the property tax is unlikely.
  - Political support for the present rent setting system is strong due to concerns about high rents and reduced security of tenure.
  - Government considers political consensus with opposition parties necessary to discuss reducing mortgage interest deductibility.
- Government and FI prefer to first assess the impact of the amortization requirement before taking further measures.
- FI will continue studying options regarding household DTI limits.
- Riksbank notes urgent need for implementation of such tools and that regulation would have a more certain impact on containing risks.

### C. Prudential Policy and Financial Safety Nets — Legal and institutional reforms
- The legal framework for macroprudential policies should be fixed to enable timely action; priority heightened by prospects for household debt to keep rising.
- Recent introduction of amortization requirements came after long delays, revealing shortcomings in FI’s process to adopt new macroprudential tools.
- Recommendation: Amend the law to remove uncertainties around FI’s macroprudential powers and provide FI with a toolbox to address systemic risks in a timely and effective manner.
- The coming review of the Financial Stability Council (FSC) should:
  - Structure operations to support FI’s macroprudential mandate.
  - Expand joint work on risk analysis and design and impact assessment of potential measures.
  - FSC should have the power to make recommendations; prefer FI to have responsibility to comply or explain.

### Supervisory resources and leverage ratio
- FI needs to step up supervisory intensity.
  - FI supervises some of the largest and systemically important banks in the Nordic region.
  - FI analysis finds a resource gap of approximately 45 percent relative to other supervisors assigned to the banking sector.
  - FI resources should be expanded to achieve appropriate frequency of inspections.
  - Minimize delays in introducing regulations while legislation and ordinances are amended.
- Leverage ratio:
  - Can provide a useful backstop to risk-based capital requirements.
  - Stress tests indicate solvency resilient under a severe scenario, but modeling tail risks is challenging.
  - FI proposed a new supervisory approach to risk weights on corporate exposures; timely adoption of a leverage ratio as a backstop would further safeguard against model and measurement errors.
  - FI notes that if a leverage ratio is constructed as a minimum requirement, it would remove most of the current capital buffers.

### FX liquidity and reserves
- Evaluate further tightening of FX liquidity requirements.
- Swedish banks (excluding subsidiary banks in the region) had about 50 percent of GDP in short-term external debt at end 2015.
- Banks improved FX liquidity after the global financial crisis; LCRs in U.S. dollars and in euro are well above 100.
- In case market funding is interrupted, banks could need sizable FX liquidity support because some liquid assets are in securities not widely traded in a crisis.
- It would not be appropriate to reduce Sweden’s existing reserves of 11 percent of GDP, given replenishment time and desirability of a buffer.
- Adequacy of reserves could be assured by monitoring an extended (three-month) LCR in U.S. dollars and euros and ensuring an adequate portion of banks’ high quality liquid assets can be sold on the market in a crisis.

### Regional coordination
- Sweden hosts four of the largest publicly-listed banks in the Nordic region, with assets amounting to about 120 percent of Nordic region GDP.
- Nordea is a top-3 bank in Denmark, Finland, and Sweden.
- Swedish banks account for large shares of total bank assets in Estonia, Latvia, and Lithuania.
- Recommendation: Enhance regional cooperation on financial stability, building on the Nordic-Baltic Macroprudential Forum established in 2011.
- Memoranda of Understanding under discussion between regional supervisors should entail full access to supervisory information including participating in on-site inspections.
- Cooperative agreements are needed regarding potential liquidity support and to ensure financial stability in all countries is protected in event of resolution.

### Authorities’ views on prudential and safety-net reforms
- Finance Ministry analyzing options to clarify FI’s mandate for macroprudential policies.
- Under Sweden’s constitution, FSC cannot make recommendations to FI entailing a comply or explain obligation.
- Budget for 2017 provides additional resources to FI; these would be reviewed again at the next budget.
- Riksbank supports timely adoption of a leverage ratio as a backstop; FI prefers making risk weights more robust to address model risk concerns.
- FI notes leverage ratio constructed as a minimum requirement would remove most current capital buffers.
- FI noted Swedish LCR implementation exceeds international norms and is already focused on foreign currency requirements.
- Riksbank supported consideration of further tightening of FX liquidity regulation.
- Authorities agree on need to continue strengthening regional coordination in supervision, liquidity, and resolution.

### D. Fiscal Policy — Recent developments and stance
- Budget for 2017 targets continuation of a small deficit.
- Migration-related spending almost doubled to about 1.5 percent of GDP in 2016 despite lower than assumed refugee inflows.
- Budget expected to record only a small deficit owing to strong revenue performance and lower than expected spending including on healthcare.
- Looking to 2017, migration-related spending expected to rise modestly as introduction program costs rise when refugees obtain residence permits and settle in municipalities.
- New initiatives of about 0.5 percent of GDP include education and active labor market measures together with expanded elderly and child care; these are only partly covered by a new bank tax, higher taxes on chemicals and energy, and state income tax.
- Expected net lending to -0.3 percent of GDP in 2017 due to reversion to a more normal revenue performance and other factors.

### Fiscal policy recommendations and calibration
- A modestly expansionary fiscal stance is appropriate in the near-term to accommodate temporarily high migration-related spending.
- In 2015 the Fund recommended swings in migration-related expenses be accommodated in the near term and funded over time as part of achieving medium-term fiscal targets.
- Over 2015–17, the decline in the structural balance is estimated to broadly match the 0.8 percent of GDP increase in migration-related spending.
- Structural balance adjusted for exceptional migration-related spending is about -¼ percent of GDP in 2017, little changed from 2015.
- The fiscal easing supports growth and employment modestly, complementing monetary policy efforts.

### Fiscal framework revisions and key fiscal numbers
- With effect from 2019, the surplus target is to be reduced from 1 percent of GDP to 0.33 percent of GDP in view of the reduction in Sweden’s debt to 43 percent of GDP in 2015.
- A debt anchor at 35 percent of GDP is introduced as a benchmark consistent with the surplus target; government required to explain deviations of more than 5 percent of GDP from this anchor.
- Staff’s debt sustainability indicates public debt is on a downward path toward the new anchor.

- Key Indicators for General Government (No Policy Change After 2017) (Percent of GDP unless otherwise noted):
  - Net lending 2/:
    - 2015: 0.2
    - 2016: -0.2
    - 2017: -0.3
    - 2018: 0.0
    - 2019: 0.8
  - Adjustment for one off factors 3/:
    - 2015: 0.5
    - 2016: -0.1
    - 2017: 0.2
    - 2018: 0.0
    - 2019: 0.0
  - Net lending ex. one-offs:
    - 2015: -0.3
    - 2016: -0.1
    - 2017: -0.5
    - 2018: 0.0
    - 2019: 0.8
  - Cyclical contribution:
    - 2015: 0.3
    - 2016: -0.4
    - 2017: -0.4
    - 2018: -0.3
    - 2019: -0.2
  - Structural balance (Percent of potential GDP):
    - 2015: 0.0
    - 2016: -0.5
    - 2017: -0.9
    - 2018: -0.3
    - 2019: 0.6
  - Migration-related adjustment 4/:
    - 2015: -0.2
    - 2016: 0.5
    - 2017: 0.6
    - 2018: 0.1
    - 2019: -0.1
  - Adjusted structural balance:
    - 2015: -0.2
    - 2016: 0.0
    - 2017: -0.3
    - 2018: -0.2
    - 2019: 0.5
  - Memo items:
    - Change in structural balance:
      - 2015: 0.5
      - 2016: -0.5
      - 2017: -0.4
      - 2018: 0.6
      - 2019: 0.9
    - Output gap (percent of potential GDP):
      - 2015: -0.7
      - 2016: 0.9
      - 2017: 1.0
      - 2018: 0.7
      - 2019: 0.4
    - Migration-related spending:
      - 2015: 0.8
      - 2016: 1.5
      - 2017: 1.6
      - 2018: 1.1
      - 2019: 0.9
    - Gross public debt:
      - 2015: 42.9
      - 2016: 41.5
      - 2017: 40.3
      - 2018: 39.0
      - 2019: 37.7

- Note: After 2017, revenues grow in line with tax bases and nominal spending rises according to current rules. Adjustment for one off factors includes EU fee discount and extraordinary elements of corporate income and capital gains taxes. Migration-related spending in excess of an assumed medium-term outlook is 1 percent of GDP.

### Fiscal policy implications
- The new surplus target and debt anchor are valuable given Sweden’s strong fiscal position for cushioning potential shocks, such as potential liquidity needs of the large financial sector.
- In practice, targets should be achieved over periods sufficient to avoid a procyclical fiscal stance.

*Source: IMF staff summary of Authorities’ views and policy recommendations contained in the provided content unit.*

### 37.      Fiscal policy has room to cushion the economy if needed and there is also room to

### _cr16353 - 37.      Fiscal policy has room to cushion the economy if needed and there is also room to

### Fiscal outlook and fiscal space
- On a no policy change basis, the structural balance is expected to reach 0.6 percent of GDP by 2019, somewhat above the new medium-term target.
- Public debt is expected to be only a little above the 35 percent target.
- Sweden’s strong fiscal position allows:
  - Full operation of automatic stabilizers.
  - Proactive stimulus in adverse scenarios, particularly valuable when monetary policy space has decreased.
- The medium-term fiscal projections show some room to support migrant integration and affordable rental housing while observing new fiscal targets.
- Sweden’s revised fiscal framework includes:
  - A surplus target of 0.33 percent of GDP.
  - A new debt anchor of 35 percent of GDP.
- Last year’s surge in asylum seekers has doubled migrant-related spending by 2017 compared with 2015.

### Authorities’ views on fiscal policy
- The government’s approach is to accommodate the temporary element of migration-related costs.
- The Fiscal Policy Council considered that the 2017 budget should be less expansionary given Sweden’s position in the business cycle.
- Authorities noted broad political consensus on the proposed revised fiscal targets and flexibility to observe them while avoiding overly rapid adjustment.

### Labor market performance and structural challenges
- Strong job creation has been largely concentrated in higher skilled occupations.
- The unemployment rate among those with lower education has risen to 20 percent.
- Unemployment among workers born outside the EU is similar to that for the less educated cohort.
- Employers increasingly demand labor with at least upper-secondary education, while lower skilled workers dominate the pool of job seekers.
- High collectively-agreed wage floors (75–80 percent of average wages) and high similarity of wages across sectors limit scope to create entry-level jobs suited to lower-skilled workers.

### Active labor market and integration policies — findings and recommendations
- Recent initiatives:
  - Making trainee jobs and vocational introduction employment programs available for newly arrived migrants.
  - Increasing resources for basic education and vocational training.
- Policy recommendations:
  - Systematically assess the relative effectiveness of ALMP measures given disparities between spending on training and employment incentives.
  - Expand hiring of lower skilled workers via greater wage flexibility at the firm level or temporary and targeted exceptions to entry-level wages (examples cited from nearby countries).
  - Social partners should play a key role in designing workplace arrangements to build skills on-the-job.
  - Use carefully designed social supports and tax credits (e.g., lower payroll taxes targeted at low wage earners) to protect living standards while preserving work incentives.
  - Employment subsidy programs (e.g., “Step In” and “New Start” jobs for new arrivals) have proven effective; to increase their use:
    - PES should step up outreach to employers.
    - Streamline numerous programs to reduce administrative burden on employers.
    - Improve job matching to enhance employment gains.

### Refugee reception, introduction, and immediate integration needs
- Reception capacity is under great pressure given the exceptional number of new arrivals; hurdles undermine effectiveness of the introduction program.
- Authorities have announced measures to:
  - Reduce burdens on reception.
  - Speed up introduction (e.g., early language/civic training, adult education and skills assessment during asylum period).
  - Open more pathways into the labor market.
- Urgent further efforts needed:
  - Provide affordable housing to avoid settlement delays (see Section B).
  - Ensure sufficient municipal capacity for individually-tailored language training and basic education.
  - Improve coordination among many agencies involved in integration.

### Boxed findings on refugee reception and establishment (key numbers and issues)
- Reception system strain:
  - At start of 2016, about 182,000 people were registered in the SMA’s reception system.
  - Processing time for asylum applications increased from under 5 months in 2014 to between 15 months and 2 years currently.
  - About 55 percent of asylum seekers choose to stay in SMA-provided accommodation.
  - After a residence permit is granted, refugees currently have to wait about 5 months before being assigned to a municipality—often due to lack of affordable housing.
- Establishment program hurdles:
  - Low participation in introduction activities and labor market training; language training is often interrupted.
  - Delays in education assessment and skill validation prevent refugees with sufficient qualifications from quickly entering the workforce.
  - Unclear division of responsibilities and insufficient coordination among PES, municipalities, and other agencies undermine introduction quality.

### Impact of migration on potential output and unemployment (Box 2 — assumptions and quantitative results)
- Assumptions:
  - Out of the 163,000 asylum applicants last year, 57 percent are of working age.
  - Historical country-specific acceptance rates indicate about 75 percent would be granted residence permits.
  - It is assumed half of the residence permits are granted in 2017 and half in 2018.
  - Potential addition to aggregate employment during 2017–21 is calculated using historical employment rates among refugees during their first five years in Sweden.
  - An alternative faster-integration scenario uses employment rates experienced by refugees in Germany.
- Quantitative impacts (Fund staff estimates):
  - Impact on potential output growth:
    - 0.05 percentage points in 2017.
    - 0.1 percentage points in 2018.
    - Cumulative 0.3 percentage points over five years.
    - Faster integration scenario: cumulative 0.4 percentage points over five years.
  - Impact on unemployment rate:
    - Higher by 0.2 percentage points in 2017.
    - Higher by 0.4 percentage points in 2018.
    - Stabilizes thereafter.
  - Limited near- and medium-term impact reflects low employment rates among refugees during the first few years after arrival.

### Monetary policy, housing, macroprudential, and financial stability guidance
- Monetary policy:
  - Monetary easing has kept Swedish yields roughly in line with German Bunds and the krona broadly stable.
  - Core inflation has been around 1.2 percent for the past year and is expected to rise relatively gradually to the target in coming years.
  - Any unwinding of monetary stimulus should await clear confirmation of a durable rise in inflation; if inflation or expectations weaken, greater stimulus would be appropriate.
- Housing and household debt:
  - Moderating upward trend in housing prices requires:
    - Reforms to maintain adequate supply of suitable land to sustain construction.
    - Phasing out tax deductibility of mortgage interest.
    - Phasing out rent controls while protecting the vulnerable.
  - Reinforce macroprudential policies through timely adoption of a limit on DTI ratios to:
    - Contain growth in the share of highly-indebted households.
    - Ensure further rise in housing prices leads to lower LTVs on high-DTI loans.
    - Dampen feedbacks between credit and housing prices.
- Macroprudential legal framework and supervisory capacity:
  - Legal amendments are needed to provide FI with capacity to adopt new tools in a timely manner.
  - The FSC should expand joint work on risk analysis, tool design, and impact assessment.
  - FI’s resources should be expanded to achieve appropriate frequency of supervisory inspection.
  - Consider a leverage ratio as a backstop to risk-based capital requirements.
  - Strengthen coordination across the Nordic-Baltic financial system for supervision, liquidity support, and resolution, building on the Nordic-Baltic Macroprudential Forum.

### Staff appraisal summary (key priorities)
- Priorities:
  - Rebuild space for monetary policy by returning inflation to target.
  - Contain the rise in housing market and household debt vulnerabilities.
  - Ensure Sweden’s large financial sector remains resilient.
  - Accelerate integration of refugees into the workforce.
- Social partners’ role:
  - Facilitate arrangements enabling skills to be built on-the-job.
  - Combine temporary and targeted exceptions to high entry-level wages with expanded tax credits and strengthened benefit conditionality to protect living standards and improve work incentives.
  - Streamline employment subsidy programs and improve employer-employee matching to boost subsequent employment outcomes.
- Procedural recommendation:
  - Hold the next Article IV consultation with Sweden on the standard 12–month cycle.

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16353.pdf*

### Box 3. Main Findings of Sweden’s FSAP

### Box 3. Main Findings of Sweden’s FSAP

### Bank solvency and liquidity
- Stress tests suggest that bank solvency is resilient under a severe scenario.
- The Swedish authorities have strengthened capital requirements to exceed Basel III standards ahead of many peers.
- Severe stress scenario parameters and outcomes:
  - 6 percentage point rise in unemployment.
  - 30 percent fall in real housing prices.
  - No bank would break the regulatory threshold.
  - Only one bank would fall below the supervisory threshold (which does not take into account that some bank capital buffers may be released in a crisis).
  - The system-wide leverage ratio would fall by 0.3 percentage points in the stressed scenario (from 4.1 percent in 2015).
- Main drivers of capital deterioration:
  - Lower net interest income.
  - Higher provisions for credit losses, primarily on corporate exposures.
- Model and measurement concerns:
  - Doubts about the reliability of banks’ and supervisors’ models point to the need for the timely adoption of a leverage ratio as a backstop.
  - Available models may suffer from overreliance on recent historical experience and have difficulties capturing unexpected losses occurring in extreme but plausible scenarios.
  - Recommendation: Preserve the risk-based approach to supervision while adopting a leverage ratio as a simple and transparent complement to safeguard against model and measurement errors in calculating capital ratios.
- Liquidity considerations:
  - The stability impact of a house price decline with an associated loss of confidence in housing collateral could be amplified by Swedish banks’ reliance on wholesale funding.
  - Given the interconnectedness within the Nordic-Baltic financial systems, such a shock could have significant spillovers across the region.
  - The Swedish Liquidity Coverage Ratio (LCR) suggests banks are resilient to liquidity shocks.
  - Some banks would face liquidity pressures, especially in foreign currencies, if the stress scenario intensified and lasted longer than one month.
  - Recommendation: Adopt an extended (three-month) LCR in euros and U.S. dollars, initially for monitoring purposes.
  - Recommendation: Closely monitor banks’ cross-holdings of covered bonds, and consider measures to contain the concentration risk.

### Nonbank financial sector
- Overall resilience with pockets of vulnerability.
- Stress scenario outcomes for insurers and funds:
  - Only two insurance companies drop slightly below a solvency ratio of 100 percent.
  - Total additional capital needed to restore full coverage of the solvency capital requirement amounts to less than 1 percent of GDP.
  - The solvency impact is mostly due to the equity shocks and a default of largest banking counterparty.
- Medium-term risks:
  - The low interest rate environment is challenging for the life insurance sector, making it difficult to find alternative assets without taking on undue credit risks, as a large share of the current fixed-income portfolio with high coupon rates will expire in the next 5 years.
  - Investment funds have grown significantly.
  - The FSAP’s liquidity analysis suggests that corporate bonds markets may face stress if investment funds were to face tail event redemption shocks.

### Supervisory powers, resources, and cooperation
- Key data gaps reduce the efficacy of systemic risk oversight.
  - Given the high household indebtedness, a crucial missing element is data on the distribution of household financial assets, available in other countries but discontinued in Sweden.
  - Recommendation: Introduce comprehensive anonymized surveys of household balance sheets for systemic risk monitoring purposes.
- Stress testing and data improvements:
  - Recommendation: Enhance the stress testing framework for banks, insurance companies, and investment funds.
  - Recommendation: FI should improve the availability and quality of investment fund data to enhance the authorities’ ability to conduct stress testing and other analyses to assess market sensitivity to extreme redemptions from investment funds.
  - Recommendation: Undertake periodic stress tests of corporate resilience to better understand the effects of shocks on the broader economy.

### Institutional framework and microprudential supervision
- Institutional mandate issues:
  - Sweden’s macroprudential mandate was given by an ordinance to the supervisory agency (FI) that reports to the Government.
  - Recommendation: Establish a firm legal mandate that removes uncertainties around FI’s macroprudential powers and provides FI with a toolbox that can be used to address systemic risks in a timely and effective manner.
  - Recommendation: Provide the Financial Stability Council with a statutory basis.
- Strengthening supervisory intensity and resources:
  - FI needs to step up supervisory intensity, requiring financial and human resources that are sustainable and adequate given the size and complexity of the Swedish financial system.
  - Current budgeting arrangements have so far failed to meet this need.
  - Recommendation: Consider higher charges on the industry to generate more resources.
  - Recommendation: Put new staff through extensive supervisory training programs, make full use of other Nordic supervisors in support of cross border operations, and consider bringing in supervisors from foreign supervisory agencies.
  - Recommendation: Develop an HR strategy to build and retain a larger group of experienced supervisors; provide more support for senior supervision staff to reduce turnover and improve terms and conditions of service to make FI a more attractive career option.
- Regulatory mandate:
  - FI needs a broader mandate to issue binding regulations on safety and soundness issues.
  - Example: Issuance of credit risk standards has been delayed by several years awaiting legal amendments to provide the specific power required.
  - Recommendation: FI should have a broad ability to issue regulations related to any safety and soundness issues; if not feasible, the government should amend the laws or ordinances promptly to address issues identified by FI.

### Financial safety nets and crisis preparedness
- The FSAP welcomed Sweden’s new resolution framework for credit institutions and investment firms.
- Recommendations on safety nets and crisis preparedness:
  - Ensure agency-specific and national financial crisis preparedness.
  - Suggest a revamp of the Nordic-Baltic Stability Group to fulfill a similar role regionally.
  - Define strategies for liquidity assistance to banks in resolution.
  - Ensure that resources for recovery and resolution planning are commensurate with the size and complexity of Sweden’s financial sector.
  - Emphasized need to amend the law to clarify the Riksbank’s financial stability mandate, including by giving it authority to provide emergency liquidity for financial stability purposes.

*International Monetary Fund. Box 3. Main Findings of Sweden’s FSAP.*

### Box 6. Recent Initiatives to Improve Refugee Integration

### Box 6. Recent Initiatives to Improve Refugee Integration

### Overview
- The government has introduced measures aimed at improving refugee integration.
- The measures focus on speeding up introduction of the new arrivals, improving labor market access for those with skills that are in demand, and streamlining refugee establishment efforts across different government agencies.

### Specific measures
- Introducing early language and civic training and adult education for those who have been granted residence permits but are still living in reception centers (e.g., due to lack of housing delaying settlement at a municipality). This measure aims at promoting early introduction and making better use of the (currently lengthy) asylum period.
- Early skills assessment offered by the PES during the period when the refugees are still in the process of seeking asylum. This would facilitate the design of an introduction program more appropriately tailored to individual needs.
- In coordination with social partners and employers, creating “fast track” schemes to speed up labor market matching for refugees with skills in professions with labor shortages (e.g., chefs, teachers, nurses and physicians), and to facilitate entrepreneurship for migrants with start-up experience.
- Making schemes that combine work and training available to newly arrived immigrants, such as “trainee jobs” and “vocational introduction employment”.
- Increasing the standard compensation to municipalities for refugee reception while removing their autonomy over settlement decisions. The latter ensures that municipalities, especially those with housing and job availability, take sufficient responsibility for settling the refugees.
- Giving resources to the county administrative boards to (i) coordinate early measures to promote introduction during the asylum period, (ii) develop targeted measures to support the unaccompanied minors, and (iii) strengthen reception capacity in municipalities.

### Broader priorities and coordination
- The Minister for Employment and Integration has been given the mandate to coordinate policies across different ministries, with a view to manage the refugee situation in a comprehensive manner.
- Identified priority areas include, among others:
  - dealing with the housing shortages,
  - ensuring adequate capacity, including supply of teachers, in schools and language training and basic education programs,
  - streamlining establishment efforts and creating more pathways into the labor market.
- Emphasis is also placed on collaboration between different actors, including regional and county councils, municipalities, businesses and civil society organizations.

*SWEDEN  
INTERNATIONAL MONETARY FUND 31*

### Appendix I. Debt Sustainability Analysis

### Appendix I. Debt Sustainability Analysis

### Debt, Growth, Inflation, and Interest Assumptions (Baseline)
- Nominal gross public debt: 39.7 (2014), 44.6 (2015), 42.9 (2016), 41.6 (2017), 40.5 (2018), 39.4 (2019), 38.8 (2020), 37.5 (2021), 36.2 (projection for 2021? as listed)15
- Public gross financing needs: 11.1 (2014), 13.1 (2015), 9.6 (2016), 8.8 (2017), 10.7 (2018), 11.2 (2019), 10.5 (2020), 9.3 (2021), 7.8 (2021)
- Sovereign spreads: Y CDS (bp) 26
- Real GDP growth (in percent): 1.6 (2014), 2.6 (2015), 4.1 (2016), 3.4 (2017), 2.4 (2018), 2.2 (2019), 2.1 (2020), 2.0 (2021), 2.0
- Inflation (GDP deflator, in percent): 1.7 (2014), 1.8 (2015), 2.0 (2016), 1.4 (2017), 1.7 (2018), 1.7 (2019), 2.2 (2020), 2.1 (2021), 2.1
- Nominal GDP growth (in percent): 3.4 (2014), 4.4 (2015), 6.2 (2016), 4.9 (2017), 4.2 (2018), 4.0 (2019), 4.4 (2020), 4.2 (2021), 4.2
- Effective interest rate (in percent): 3/ 3.2 (2014), 1.8 (2015), 1.2 (2016), 0.3 (2017), 0.7 (2018), 0.7 (2019), 0.9 (2020), 1.1 (2021), 1.2

### Contributions to Changes in Public Debt (2005–2021; cumulative)
- Change in gross public sector debt: -0.9 (2014), 4.8 (2015), -1.6 (2016), -1.3 (2017), -1.1 (2018), -1.1 (2019), -0.5 (2020), -1.3 (2021), -1.3 (2021), -6.7 (cumulative)
- Identified debt-creating flows: -1.1 (2014), 2.2 (2015), -0.9 (2016), -1.3 (2017), -0.8 (2018), -0.9 (2019), -1.2 (2020), -1.5 (2021), -1.5 (2021), -7.2 (cumulative)
- Primary deficit: -1.1 (2014), 1.6 (2015), 0.0 (2016), 0.5 (2017), 0.6 (2018), 0.4 (2019), 0.1 (2020), -0.3 (2021), -0.4 (2021), 0.9 (cumulative)
- Primary (noninterest) revenue and grants: 50.6 (2014), 49.4 (2015), 48.4 (2016), 48.1 (2017), 48.2 (2018), 48.2 (2019), 48.0 (2020), 47.8 (2021), 47.8 (2021), 47.8 (cumulative?) 288.1
- Primary (noninterest) expenditure: 49.5 (2014), 51.0 (2015), 48.4 (2016), 48.7 (2017), 48.8 (2018), 48.6 (2019), 48.1 (2020), 47.4 (2021), 47.3 (2021), 288.9 (cumulative)

### Automatic Debt Dynamics and Decomposition
- Automatic debt dynamics: -0.1 (2014), 0.7 (2015), -0.9 (2016), -1.8 (2017), -1.4 (2018), -1.3 (2019), -1.3 (2020), -1.2 (2021), -1.1 (2021), -8.1 (cumulative)
- Interest rate/growth differential: -0.1 (2014), -1.0 (2015), -2.1 (2016), -1.8 (2017), -1.4 (2018), -1.3 (2019), -1.3 (2020), -1.2 (2021), -1.1 (2021), -8.1 (cumulative)
  - Of which: real interest rate: 0.6 (2014), 0.0 (2015), -0.4 (2016), -0.5 (2017), -0.4 (2018), -0.4 (2019), -0.5 (2020), -0.4 (2021), -0.3 (2021), -2.5 (cumulative)
  - Of which: real GDP growth: -0.7 (2014), -1.0 (2015), -1.7 (2016), -1.4 (2017), -1.0 (2018), -0.9 (2019), -0.8 (2020), -0.8 (2021), -0.7 (2021), -5.5 (cumulative)
- Exchange rate depreciation: 0.0 (2014), 1.7 (2015), 1.2 (2016), ..................... (no further values provided)
- Other identified debt-creating flows: 0.0 for all years listed
- Other (negative): 0.0 for all years listed
- Contingent liabilities: 0.0 for all years listed
- Lending to the Riksbank: 0.0 for all years listed
- Residual, including asset changes: 0.3 (2014), 2.6 (2015), -0.7 (2016), 0.0 (2017), -0.3 (2018), -0.3 (2019), 0.7 (2020), 0.2 (2021), 0.1 (2021), 0.5 (cumulative)

Notes from staff:
- Public sector is defined as general government.
- Effective interest rate defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year.
- Automatic dynamics derived per formula in footnote 5 with r, π, g, a, e as defined.
- Exchange rate contribution derived as ae(1+r).
- Residual includes asset changes and interest revenues; for projections includes exchange rate changes.
- Projections assume key variables remain at the level of the last projection year (footnote 9).

### Baseline, Historical, and Alternative Scenario Highlights (2016–2021)
- Baseline scenario (selected indicators):
  - Real GDP growth: 3.4 (2016), 2.4 (2017), 2.2 (2018), 2.1 (2019), 2.0 (2020), 2.0 (2021)
  - Inflation: 1.4 (2016), 1.7 (2017), 1.7 (2018), 2.2 (2019), 2.1 (2020), 2.1 (2021)
  - Primary Balance: -0.5 (2016), -0.6 (2017), -0.4 (2018), -0.1 (2019), 0.3 (2020), 0.4 (2021)
  - Effective interest rate: 0.3 (2016), 0.7 (2017), 0.7 (2018), 0.9 (2019), 1.1 (2020), 1.2 (2021)
- Historical scenario (selected indicators):
  - Real GDP growth: 3.4 (2016), 1.9 (2017), 1.9 (2018), 1.9 (2019), 1.9 (2020), 1.9 (2021)
  - Inflation: same as baseline for listed years
  - Primary Balance: -0.5 (2016), 0.5 (2017–2021)
  - Effective interest rate: 0.3 (2016), 0.6 (2017), 1.1 (2018), 1.5 (2019), 1.9 (2020), 2.4 (2021)
- Constant Primary Balance scenario:
  - Primary Balance fixed at -0.5 from 2016 through 2021
- Contingent Liability Shock scenario (selected):
  - Real GDP growth: 3.4 (2016), -0.8 (2017), -1.0 (2018), 2.1 (2019), 2.0 (2020), 2.0 (2021)
  - Primary Balance: -0.5 (2016), -20.6 (2017), -0.4 (2018), -0.1 (2019), 0.3 (2020), 0.4 (2021)
  - Effective interest rate: 0.3 (2016), 0.6 (2017), 2.4 (2018), 1.8 (2019), 2.1 (2020), 2.3 (2021)

### Composition of Public Debt and Market Indicators
- Charts (as described): Gross Nominal Public Debt (in percent of GDP) 2014–2021 projection; Public Gross Financing Needs (in percent of GDP) 2014–2021 projection; Debt by Maturity (Medium and long-term vs Short-term) 2005–2021 projection; By Currency (Local currency-denominated vs Foreign currency-denominated) 2005–2021 projection.
- Public gross liabilities data point: Gross liabilities were 266 percent of GDP in 2015; over a third external debt equivalent to 97 percent of GDP (2015).
- FX reserves: USD 52.9 bn in August 2016, equivalent to about 20 percent of short-term external debt of monetary and financial institutions and about 11 percent of GDP.

### External Position: Assessment and Background
- Net IIP: rose by 4.5 percentage points in 2015 to 4.1 percent of GDP; average increase in last decade about 2.2 percent of GDP annually, below average current account surplus of 6.2 percent of GDP.
- Current account balance: 5.2 percent of GDP in 2015; projected to decline gradually to 4.5 percent in 2021.
- Cyclically-adjusted current account: 5.3 percent of GDP in 2015; 7 percentage points above cyclically-adjusted EBA norm of -1.9 percent of GDP.
- Staff-adjusted current account norm: around 3 to 5 percent of GDP implying a current account gap in the range of 0 to 2 percent of GDP in 2015.
- Factors behind high saving/current account surplus:
  - Pension and welfare reforms since mid-1990s; shift to defined contributions pension scheme and decline in social supports.
  - Structural factors: systemically important financial center with banking assets over 400 percent of GDP (about 170 percent of GDP in assets outside Sweden); role in merchanting trade contributing about 1.7 percent of GDP on average to the trade balance since 2006.
  - Measurement issues: errors and omissions contributed about 2.6 percent of GDP on average to reported surplus in last decade.
- Real exchange rate (REER): krona depreciated 7 percent in 2015 in real effective terms relative to its 2014 average; as of June 2016, REER had appreciated by 2 percent compared with 2015 average.
  - EBA REER gaps for 2015: -20.1 (index approach) and -17 percent (level approach).
  - Staff assessment: krona undervalued by 0 to 12 percent; expected to appreciate once monetary easing ends.

### Financial Sector, Reserves, and Policy Assessment
- Banking vulnerabilities: large banks vulnerable to liquidity risks from global wholesale markets despite improvements in structural liquidity measures.
- Policy recommendations (staff assessment):
  - Desirable: further decline in banks’ short-term funding in favor of longer maturities.
  - Macroprudential policies to contain vulnerabilities: planned increases in capital buffers of domestic banks; raising funding stability standards; mortgage amortization regulations on the household side.
  - FX reserves: not appropriate to reduce existing reserves given dependence of banks on wholesale foreign-currency funding and past disruptions; evaluate further tightening of FX liquidity requirements on banks.
- Overall Assessment: Sweden’s external position in 2015 was moderately stronger than level consistent with medium-term fundamentals and desirable policies. As of September 2016, subsequent developments do not point to a clear change.

### Fund Relations, Data, and Statistical Adequacy
- Membership Status: Joined August 31, 1951; Article VIII.
- Quota: 4,430.00 SDR Million (100.00 percent of Quota).
- Fund holdings of currency (Exchange Rate): 4,348.81 (98.17 percent).
- Reserve Tranche Position: 81.20 (1.83 percent).
- SDR Department net cumulative allocation: 2,248.96 SDR Million (100.00 percent); Holdings 1,964.95 (87.37 percent).
- Outstanding Purchases and Loans: None. Latest Financial Arrangements: None.
- Projected Payments to Fund (Charges/Interest): 0.04 (2016), 0.22 (2017), 0.22 (2018), 0.22 (2019), 0.22 (2020). Total same as Charges/Interest for each year.
- Exchange Rate Arrangements: Krona floating freely since November 19, 1992; Article VIII accepted.
- FSAP Participation: Mandatory FSAP conducted in time for the 2016 Article IV consultation.
- Data adequacy: Data provision adequate for surveillance. Uses SDDS since May 31, 1996; ESA 2010 for national accounts and government finance statistics since September 2014; BPM6 for external sector statistics since December 2014. Monetary data for IFS based on ECB framework.
- Table of Common Indicators: latest observations and reporting frequencies listed for multiple datasets (exchange rates current, reserve assets 2016/10/07 received 2016/10/11 weekly, etc.; GDP 2016 Q2 received 2016/09 quarterly).

### Recent Policy Developments (Supplement)
- Political agreement (October 26, 2016): expand ability of Finansinspektionen (FI) to take macroprudential measures.
  - Government to introduce new legislation to provide FI a formal mandate to propose new measures for government approval.
  - Legislative proposal to be sent for public consultation by the Ministry of Finance with aim to become effective from 2018.

*Source: IMF staff (As of August 18, 2016; Supplement dated October 21, 2016).*

### 2.      This agreement is a promising step toward enabling timely

### _cr16353 - 2.      This agreement is a promising step toward enabling timely

### Macroprudential policy and legal framework
- Agreement appears to enable the adoption of new tools without specific authorizing legislation, shortening the process for implementing possible new requirements on the credit market.
- This clearer and shorter process would enable Finansinspektionen (FI) to act more quickly should there be a sharp increase in credit market risks.
- Staff notes that the strengthening of FI’s macroprudential authority should not delay measures to contain vulnerabilities, such as those related to a further rise in the share of households with high debt-to-disposable income ratios.
- The Government, together with the centre-right parties and the Left Party, agreed to expand the ability of Finansinspektionen to take measures to counteract financial imbalances on the credit market; Finansinspektionen will receive a formal mandate to draw up proposals for additional tools that will then be approved by the Government.
- A future parliamentary inquiry will revert with possible proposals for clarifying the Riksbank’s responsibilities in financial stability.

### Recent macroeconomic development and outlook
- Swedish economy: robust growth driven by household consumption, residential investment, and public consumption related to rising spending on migrants.
- Strong job creation has led to a decrease in unemployment.
- Inflation has picked up as resource utilisation has increased, supported by expansionary monetary policy.
- Growth is expected to moderate in 2017 due to slower housing investments (supply constraints) and lower public consumption growth.
- Net exports are expected to leave only small contributions to growth owing to a slow international recovery.
- Migration inflows rose sharply in 2015, totalling 163 000 individuals, with one fifth being unaccompanied minors; inflows dropped substantially in 2016 but reception capacity remains stretched.

### Financial stability and macroprudential vulnerabilities
- Household indebtedness and housing prices have continued to rise since Sweden’s last FSAP in 2011, posing macroeconomic and financial stability concerns.
- Banking system is large relative to the Swedish economy and dependent on short-term wholesale funding, to a large extent from abroad, adding to potential vulnerabilities.
- Staff analyses show direct effects of potential declines in housing prices on Swedish households appear limited; FSAP stress tests suggest financial institution solvency is resilient under severe scenarios.
- Measures taken: creation of the Financial Stability Council (FSC); increased resources to Finansinspektionen; a new resolution framework for credit institutions and investment firms.
- An amortization requirement for mortgage loans was recently introduced; it has been in place less than half a year and authorities are monitoring effects before taking further steps.

### Prudential supervision
- Government concurs on ensuring adequate resources for prudential supervision; Finansinspektionen is allocated increased resources in the recent budget bill tied to additional responsibilities and need to strengthen supervision.
- Supervision and oversight of Financial Market Infrastructures (FMIs) has been effective; authorities agree further enhancements to crisis preparedness are needed and work has been initiated.
- On leverage ratio: Government notes it will be part of upcoming EU negotiations on revised capital requirement rules; the Riksbank prefers an early introduction of a leverage ratio as a backstop.
- On banks’ foreign exchange liquidity requirements: authorities welcome analytical considerations for further tightening while noting Swedish liquidity coverage ratio implementation exceeds international norms and focuses on requirements in foreign currencies.

### Crisis readiness, management, and resolution
- Cooperation among Swedish authorities on crisis preparedness and crisis management has historically functioned well.
- Bank Recovery and Resolution Directive (BRRD) introduced into Swedish legislation; authorities agree further measures and resources are needed to ensure operational capacity to deploy recovery and resolution tools rapidly.
- A first crisis-simulation exercise was held under the FSC since the FSAP mission, enhancing crisis preparedness and inter-agency cooperation.
- Authorities agree on expediting resolution planning for systemic financial institutions and developing the resolution handbook; analysis of liquidity provision in resolution, including Emergency Liquidity Assistance (ELA), will be considered.
- Authorities see merits in swap agreements between central banks but stress they cannot substitute for liquidity coverage in foreign currency at the individual bank level, a strong financial sector, and adequate foreign exchange reserves.
- A parliamentary inquiry will report on the need for an explicit guarantee for any losses relating to ELA.

### Regional cooperation
- Financial integration in the Nordic-Baltic area is extensive; strong cross-border cooperation arrangements are essential.
- Nordic-Baltic Stability Group revamped under Swedish leadership; authorities plan a regional crisis-simulation exercise in the near future.
- Nordic-Baltic Macroprudential Forum continues work on financial stability risks and macroprudential policy; authorities remain committed to deepening regional cooperation.

### Monetary policy
- Monetary policy has supported high GDP growth, rising inflation, and long-term inflation expectations increasing towards the inflation target.
- Expansionary measures affected market interest rates, households’ and companies’ financial conditions, and the exchange rate in line with expectations.
- Negative interest rate has not impaired functioning of the financial system; no major adverse effects directly linked to unconventional monetary policy have been observed.
- In response to low inflation trends and external monetary policy in 2014/2015, the repo rate has been lowered in four steps to -0.50%, and government bond purchases of SEK 245 bn have been announced.
- The Riksbank assesses the krona will slowly strengthen in coming years; gradual strengthening is consistent with inflation increasing towards the inflation target but a too rapid strengthening could impede inflation and growth.
- The Riksbank retains scope to further cut the repo rate and to expand purchases of securities; additional tools are described in the Riksbank’s Monetary Policy Reports.
- Authorities share IMF view that prolonged very low interest rates carry risks (increased risk-taking, potential overvaluation of assets); targeted macroprudential, housing, and fiscal measures are essential to limit household debt accumulation.
- A heavily-increased repo rate would slow debt build-up but at the cost of rapid krona appreciation, lower inflation, and higher unemployment.

### Fiscal policy
- Government agrees with staff that accommodating sharp rise in migration-related costs is appropriate; the 2015 refugee influx put upward pressure on expenditure in the short run.
- Public debt is low and estimated to be on a downward trend as percent of GDP, providing fiscal space to accommodate expenditure increases without jeopardizing long-term sustainability.
- Refugee-related expenditure expected to be substantial in 2016 and 2017, then decline in following years.
- General government fiscal position is estimated to improve with unchanged policies: near balance in 2018 and reach a surplus of 1.5 percent of GDP in 2020.
- Government supports parliamentary committee agreement on the surplus target: recommended reduction from 1 percent of GDP over the cycle to one third of a percent of GDP, and recommendation to introduce a debt anchor.

### Structural issues — Labor market policy
- Swedish labor market performing well: unemployment falling and employment rate is the highest in the EU, though too many remain unemployed.
- Government objective: reduce unemployment to be the lowest in the EU by 2020.
- Integration challenges: foreign born individuals between 16 and 74 years old represented 20 percent of the Swedish population in 2015, out of which 25 percent has only primary education.
- Share of low-skilled is 48 percent in the group of newly-arrived participating in introductory activities at the Public Employment Services.
- Government offers adult education and vocational paths for newly arrived and agrees on importance of recent education initiatives.
- Authorities support trainee jobs, vocational introduction programs, subsidized employment during first years, and analysis to streamline employment subsidy programs.
- Wage formation remains the responsibility of social partners.

### Structural issues — Household debt and housing
- Government shares IMF view that addressing high household debt and housing prices is an economic challenge; approach is twofold: increase housing supply and, if needed, take further mortgage-market measures.
- Amortization requirement introduced less than half a year ago; Government wants to assess its effects on house prices and mortgage growth before further steps.
- Tax system design can influence household debt and housing transactions; any measures must be long-term, based on broad political consensus, and handled with care due to potential negative effects on growth.
- Government proposed temporary removal of the threshold for deferring capital gains tax to incentivize moves, expected to increase transactions and improve housing market allocation.
- Adequate supply of land is necessary to sustain construction of new dwellings at a high level; 2017 budget bill declares intention to regulate quantitative aspects of municipalities’ planning for housing.
- Short-term constraint: supply of qualified labour within the building and planning sector; a public inquiry is evaluating the situation and will present recommendations later this year.

*Prepared By The European Department — November 1, 2016; Statement by Mr. Thomas Östros and Mr. Thomas Pihl Gade — November 14, 2016*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16353.pdf_