Switzerland: Staff Concluding Statement of the 2021 Article IV Mission

IMF News, April 7, 2021

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Published: April 7, 2021

Mission summary and context

IMF mission led by Mark Horton conducted virtual discussions during March 17-April 7, 2021.
Switzerland navigated the Covid-19 pandemic well due to an early, strong, and sustained public health and economic policy response.
Authorities are extending fiscal support to households and firms in 2021 and vaccine roll-out is expected to pick up as supplies increase.
Policy priorities identified: ensure a strong and sustained recovery; protect vulnerable groups; mitigate labor market dislocation and scarring; keep viable firms in business; avoid early withdrawal of fiscal support; maintain accommodative monetary policy; closely monitor financial sector risks; continue focus on pension reforms, decarbonization, and climate-change mitigation and adaptation.

Key contact from IMF Communications Department: PRESS OFFICER: Wafa Amr; Phone: +1 202 623-7100; Email: MEDIA@IMF.org.

Economic outlook and risks

2020 contraction: the Swiss economy contracted by 2.9 percent.
Reasons for milder contraction: strong fiscal, financial, and household buffers; highly-competitive export industries (e.g., pharma, chemicals); large and well-capitalized financial sector; low dependency on contact-intensive sectors (e.g., tourism); well-resourced health system; carefully-targeted containment measures; ongoing adaptation.
Emergency measures: authorities quickly put in place emergency measures exceeding 10 percent of GDP targeting support for households and firms.
SNB actions and credit conditions:
- SNB made sizable foreign exchange (FX) purchases in H1:2020 to counter large safe-haven inflows.
- Non-mortgage lending increased last year at the fastest rate in over a decade.
- Non-performing loans (NPLs) remained at very low levels.
Exchange rate and external sector:
- The franc appreciated by 6 percent and 4 percent, in nominal and real effective exchange rate (ER) terms.
- External current account surplus was 3.8 percent of GDP versus 6.7 percent in 2019.
Growth projections:
- Growth should reach 3.5 percent in 2021.
- Growth should reach 2.8 percent in 2022.
Risks and uncertainty:
- Near-term risks dominated by pandemic dynamics, including more contagious or virulent strains and slow or incomplete vaccination.
- Scarring likely in sectors where demand may recover more slowly (e.g., hospitality, events).
- Potential for rises in unemployment, NPLs, and bankruptcies when support is withdrawn.
- External risks: weaker global recovery, tightening global financial conditions, worsening trade frictions, faster deglobalization, and uncertainty in EU market access discussions.
- Upside risks: positive spillovers from the large U.S. fiscal package and stronger-than-expected growth in the EU.

Fiscal policy — maintaining adequate fiscal support

Recommendation: Fiscal policy should remain accommodative until there are signs of sustained recovery.
Current measures and stance:
- Authorities are rightly extending exceptional support in 2021.
- Federal-cantonal “hardship” loans and grants and STWP, income compensation for the self-employed, and extended unemployment insurance expected to continue supporting demand.
Guidance on scaling and phasing:
- As recovery is secured and risks abate, extraordinary support should be increasingly targeted and scaled back.
- Extraordinary support is scheduled to phase out at the end of 2021; if recovery is not secure, support should be extended to avoid cliff effects.
Fiscal framework considerations:
- The debt-brake rule envisages offsetting extraordinary outlays over six years.
- Consideration is being given to a longer amortization period and offsetting Covid-19 spending against past surpluses (recorded in the “compensation account”).
- Other possible adjustments: less-conservative revenue forecasts, greater in-year calibration, and spending ceilings with a built-in buffer or margin, multi-year flexibility, or contingent features to limit underspending.
Longer-term fiscal priorities:
- Continue and enhance targeted support for green and digital growth, with attention to low-income earners.
- Consider targeted and efficient outlays for climate mitigation and adaptation, digital transformation, innovation and R&D, and productivity gains.
- Stamp duty and withholding tax reforms under consideration would ease tax and compliance burdens and improve capital market functioning.

Monetary policy — accommodative stance and tools

Recommendation: Monetary policy should remain accommodative in light of risks of an extended period of very low or negative inflation.
Tools and contingencies:
- Include unconventional policies via unsterilized FX intervention (FXI) in case of substantial safe-haven flows and particularly strong appreciation pressures that would worsen deflation risks.
- SNB should continually review its monetary policy framework and tools, considering adjustments or extensions of targets, instruments, and communications based on the Covid-19 experience.
- Assess other instruments such as purchase of a wider range of assets for quantitative easing or funding-for-lending programs (following the Covid-19 refinancing facility).
Structural considerations:
- Review of greater “home bias” of Swiss investors may identify actions to help ease appreciation pressures.

Financial stability — monitoring and prudential measures

Banking sector position:
- Swiss banking sector entered the crisis with strong buffers.
- Banks have incurred limited losses so far but benefited from monetary, prudential, and fiscal support (loan guarantees, STWP).
- Asset-quality deterioration remains a risk; exposure to contact-intensive sectors is limited.
Macroprudential measures:
- Deactivation of the countercyclical capital buffer requirements at the outset of the crisis was appropriate and helpful but should remain temporary.
- Buffers should be in place for potential real estate market developments.
Real estate risks:
- Residential property price rises have continued, increasing affordability concerns and risks; monitor especially as income support is withdrawn.
- Commercial real estate faces risks given pandemic effects and likely changes in occupancy, rents, and valuations.
Data, oversight, and fintech:
- New macro-prudential tools may be needed.
- More resources needed for high-quality data collection and oversight, including of fintech activities.
Bank responses and supervision:
- Financial firms have reacted to negative interest rates and low margins by reducing costs and seeking higher returns.
- Authorities are monitoring risk controls and buffers and should take early action if needed.

Structural challenges — labor market, pensions, and climate

Labor market policies:
- Policies should remain protective to prevent scarring and inequality.
- Crisis-related changes to eligibility, coverage, and duration of STWP support should remain in place, along with extended support for self-employed and unemployment insurance provisions, until sustained recovery is underway.
- Support labor mobility: enhanced training, lifelong learning, career guidance, language instruction, and high-quality childcare to retain women in the labor force.
- Continue efforts to support apprenticeships; identify and remove disincentives for hiring or retaining older workers.
- Recognize that keeping support measures too long may impede necessary post-Covid-19 transformation.
Pension system challenges:
- Swiss pension system is not well-aligned with demographic and economic trends.
- Without decisive reforms, the first pillar will run into sizable funding gaps by 2030.
- Low interest rates and an above-market mandatory conversion rate are straining second-pillar pension funds.
- Recommended reforms: more ambitious retirement age increase and linkage of the retirement age to life expectancy; reduction of conversion rates should go further.
- Improve pension fund investment practices, governance arrangements, and reduce the number of funds to achieve economies of scale.
Climate strategy and decarbonization:
- An ambitious new climate strategy was approved in January based on the revised CO2 law with guidelines and sectoral targets for decarbonization through 2050.
- Revised CO2 law incorporates requirements for vehicle fuel efficiency and fuel importers, standards for new construction, and a phased increase of the CO2 tax on heating fuels.
- Investment needs are substantial: energy system, transportation, and especially building renovation.
- Strategy needs firming up for agriculture and financial sectors from 2030 and for international aviation and supply chains connected to Swiss imports.
- Achieving 2030–50 targets will require carbon capture and negative-emissions technologies that have not yet been developed.
- A new Climate Fund, financed through a CO2 levy on heating fuels and new air-travel levies, will help fund decarbonization, mitigation, adaptation, and R&D.
Recommended climate actions:
- Develop a clear, monitorable emissions action plan to support the climate strategy and address gaps and risks.
- Consider further targeted investments and potential acceleration in energy sector, building renovation, transport, R&D, adaptation, and mitigation to meet CO2 targets and retain competitiveness.
- Consider transformative investments in agriculture and ensure synergies and high effectiveness and efficiency with ongoing programs.

Concluding note

The mission thanks the Swiss authorities and other counterparts for the very constructive policy dialogue and productive collaboration.

Source: Switzerland: Staff Concluding Statement of the 2021 Article IV Mission (April 7, 2021), IMF mission led by Mark Horton.