Switzerland: Staff Concluding Statement of the 2022 Article IV Mission
IMF News, April 6, 2022
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- Published: April 6, 2022
Executive summary
- An IMF mission, led by Mark Horton, conducted discussions on the 2022 Article IV Consultation with Switzerland during March 23–April 6, 2022.
- Switzerland recovered strongly from the pandemic in 2021, reflecting sound, supportive, and agile domestic policies and a pickup of the global economy.
- New challenges: spillovers from the war in Ukraine (growth, refugees, complex exposures, energy prices/supply), higher inflation, real estate risks, EU relations, climate change, and population aging.
- Uncertainty is high and risks are substantial; policies should continue to be agile and responsive.
Outlook and Risks
- 2021 outcomes and drivers:
- Real GDP growth in 2021: 3.7 percent.
- Headline CPI inflation in 2021: 0.6 percent; has risen above 2 percent in recent months.
- Employment surpassed pre-crisis levels; recovery uneven across sectors (hospitality, transport).
- Strong exports (watches, precision instruments, pharmaceuticals) and merchanting contributed to a higher current account surplus.
- 2022–2023 projections:
- Growth in 2022: expected to moderate to around 2¼ percent (above medium-term potential growth of 1.5 percent).
- Growth in 2023: expected at just under 1½.
- Inflation: expected to average 2½ percent in 2022, easing to 1.6 percent in 2023.
- External current account surplus: expected to narrow to 6¼ percent of GDP in 2022, with a pickup in 2023 to 7 percent.
- Major risks:
- Russia’s invasion of Ukraine: uncertainty on duration, scope, refugees; risks to commodity prices, financial exposures, trade, inflation, global financial conditions, and growth.
- Potential disruption of European energy supplies could cause price spikes and a sharper slowdown.
- Increased global volatility could hasten flight to the franc.
- Adverse Covid‑19 developments and real-estate market imbalances; a sharp interest rate rise could trigger price corrections and impacts on households, banks, non-bank financial institutions, and activity.
Fiscal policy
- Current stance and recent actions:
- Authorities are reducing Covid-19 support in 2022; underlying fiscal position (excluding Covid-19 outlays) expected to remain broadly balanced, in line with the fiscal rule.
- Authorities have budgeted still-sizable Covid-19 outlays and are preparing to support a possibly significant influx of refugees from Ukraine (housing, health, schooling).
- Debt-brake framework and offsetting:
- Extraordinary outlays must be offset/amortized through future surpluses; ordinary offsetting would take place over six years, widely viewed as too short given the large magnitude of extraordinary outlays (possibly 3 percent of GDP or more by end-2022).
- The Federal Council’s proposal to extend the amortization period is welcome.
- Recommendations and constraints:
- Continue to monitor and respond to adverse developments, drawing on ample fiscal space.
- Targeted, timebound, and non-distortionary support to vulnerable households could be considered in adverse energy scenarios, with regular automatic stabilizers operating.
- Long-term challenges: rapidly-aging population, climate objectives, energy security, national defense, and tax reforms that may lower revenues.
- The debt‑brake rule limits room for maneuver; articulation of a medium-term strategic plan would be helpful.
- Tax reforms should make the tax system less distortive and sustain or bolster revenues; spending reviews should identify efficiencies and savings.
- Cantons and companies should be involved early in dialogues on OECD-led global corporate income tax reforms.
Monetary policy
- Current assessment:
- Pickup of inflation is expected to be temporary at this time, with inflation returning to the SNB’s 0–2 percent price stability band in the first half of 2023.
- Nominal appreciation of the franc has been a mitigating factor; limited wage indexation and muted wage pressures despite a tight labor market.
- Policy guidance:
- The SNB should continue to closely monitor inflation developments and prospects, including international factors.
- After a long period of very accommodative monetary policy—a policy rate of -0.75 percent since 2015—the time may be approaching to normalize monetary policy.
- The SNB should review tools, transmission channels, sequencing of normalization steps, and communications, and adjust when needed.
- The differential between Swiss and external inflation is important in assessing prospects; inflation gaps versus the euro area and the U.S. suggest possible room for nominal franc appreciation to ease inflation pressures.
Macroprudential and financial policies
- Financial-sector performance during Covid:
- Bank credit growth strong; NPLs remained at low levels.
- Profitability and capital held up reasonably well despite negative interest rates; mortgage lending and fee/commission income buoyed banks.
- Emerging vulnerabilities:
- Housing prices have risen relative to fundamentals; search for yield and robust mortgage lending growth noted.
- Borrowers are taking bigger loans and affordability risks are increasing.
- Direct exposures of Swiss financial institutions to the war in Ukraine appear limited, but sanctions and volatility increased counterparty credit and collateral risks, commodity finance and derivatives risks, flows to wealth managers, financial integrity, and cyber-attack risks.
- Policy measures and recommendations:
- Reactivation of the sectoral countercyclical buffer (CCyB) at 2.5 percent is welcome.
- Consider early expansion of the legally-mandated macroprudential toolkit: regulatory limits on mortgage loans or tighter amortization requirements could be considered—before full implementation of Basel III standards.
- Use flow limits to minimize impacts on mortgage-market access; assess tool effectiveness carefully.
- Consider adjustments to taxation (e.g., abolition of imputed-rent taxation) and actions to support the rental market (targeted subsidies, social housing).
- Push on supply-side constraints (zoning changes/flexibility, infrastructure investments) to ease affordability pressures.
- Strengthen ex ante evaluation of internal governance and risk assessment in supervisory ratings.
- Implement enhanced special liquidity requirements for systemically-important banks; these requirements are planned to enter into force on July 1, 2022.
- The planned proposal of a public liquidity backstop is welcome; enhanced liquidity requirements and backstop will help ensure resolvability.
- Improve monitoring of concentration risks in asset management, mitigate conduct risk, ensure resolvability of systemic FMIs, further strengthen FinTech regulation while fostering innovation, sustain conservative approach to VASPs, proactively implement global prudential standards for cryptoassets, address novel regulatory and risk issues from integrated digital trading and settlement systems, and advance on green/sustainable finance.
Structural challenges and reforms
- Labor market and skills:
- Tight labor market facilitating post-Covid-19 reallocation; well-targeted labor policies (counseling, guidance, training) support transitions.
- Policy actions to close skills gaps and increase participation of older workers and women: lower early-retirement incentives, remove disincentives to hiring/retaining older workers, improve childcare, ease tax disincentives for dual-earner families.
- Pensions:
- Reforms under consideration: male/female reference age harmonization, additional first-pillar VAT funding, cuts in second-pillar annuity-conversion rates.
- Lower system entry age, wage thresholds, and insured salary amounts should strengthen adequacy for lower-income and multi-job workers.
- If approved, reforms will close funding gaps through 2030; further reference age increases linked to life expectancy and likely additional second-pillar conversion-rate cuts will be needed thereafter.
- Measures to improve pension fund efficiency, governance, and investment performance would be helpful.
- Climate and energy:
- Authorities advancing emission-reduction actions: extending pre-referendum CO2 law measures and targets for 2022–24, revised proposals for 2025–30, and devising policies for 2030–2050.
- Revised proposals through 2030 focus on regulation, incentives, subsidies, and public investment (e.g., heating systems, charging infrastructure).
- Energy security actions being examined: securing short-term supplies, support for conversion of home-heating systems, boosting hydroelectric capacity and reservoir management, examining new dual-fuel (gas-diesel) base-load power stations and back-up fuel reserves, exploring new arrangements for transmission and pooling, and speeding regulatory processes for new renewables projects.
- Swiss denuclearization plans allow continued safe operation of existing reactors rather than mandated closure dates.
- Upcoming EU cross-border electricity regulation changes require EU neighbors to reserve 70 percent of cross-border capacity for member states from 2025; this could be a risk to seasonal imports.
- EU relations:
- Termination of discussions on an institutional agreement with the EU in 2021 increases uncertainty regarding EU market access and involvement in EU programs/mechanisms.
- Arrangements that give stability and predictability to relations would help mitigate uncertainty and possible adverse impacts.
Switzerland: Staff Concluding Statement of the 2022 Article IV Mission.