April 6, 2022
A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF’s Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.
The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.
Bern: An International Monetary Fund (IMF) mission, led by Mark Horton, conducted discussions on the 2022 Article IV Consultation with Switzerland during
March 23–April 6, 2022. The mission has issued the following statement:
Switzerland recovered strongly from the pandemic in 2021, reflecting sound, supportive, and agile domestic policies and a pickup of the global economy . However, new challenges have emerged. These include spillovers from the war in Ukraine (growth, refugees, complex exposures, energy prices/supply) and higher inflation. Other challenges are real estate risks, EU relations, climate change, and population aging. Uncertainty is high, and risks are substantial. Policies should continue to be agile in responding to these challenges. Adverse spillovers from the war in Ukraine should be accommodated (automatic stabilizers, support to refugees). Looking forward, offsetting of extraordinary Covid spending should not create headwinds or depart significantly from the debt-brake rule. Longer-term fiscal policy challenges connected with aging, climate, defense, energy security, and tax reforms are expected to be addressed within the debt-brake rule framework. This will require careful planning and lower non-priority spending or higher revenues. There is space for deficits, but the fiscal framework is robust and not easy to modify. Higher inflation may be mitigated by franc appreciation, or if needed, by policy-rate adjustments. Bank credit growth, profitability, and capital have held up well during Covid-19, and NPLs have remained stable at low levels. But financial-sector risks are growing (market disruptions, complex exposures, real estate) and should be closely monitored. Reactivation of the sectoral CCyB (real estate) is welcome; further measures/tools may be needed. The authorities are taking actions to strengthen supervision, resolution planning, financial integrity, FinTech regulation, climate reporting, and sustainable finance. These should continue, along with pension reforms that would strengthen coverage and sustainability. Steps are also being taken to advance climate policies, EU relations, and energy security.
Outlook and Risks
1. The Swiss economy recovered strongly in 2021, growing by 3.7 percent and with employment surpassing pre-crisis levels. Recovery was uneven, however, notably in sectors hard hit by Covid-19 (hospitality, transport). Headline CPI inflation was 0.6 percent last year, but has risen above 2 percent in recent months, driven by both energy products and core components. The economic recovery was supported by domestic policies and the strength of the global economy. The authorities continuously adapted Covid-19 containment measures, and pandemic fiscal support remained strong. Monetary policy remained accommodative. Higher inflation in trading partners and expected policy adjustments in Europe and the U.S. eased pressures on the franc. Despite Covid challenges and negative interest rates, bank profitability and capitalization held up well, buoyed by sustained mortgage lending and fee and commissions income. NPLs remained at low levels. Strong exports (watches, precision instruments, pharmaceuticals) and merchanting contributed to a higher current account surplus.
2. Growth is expected to moderate to around 2¼ percent in 2022—above medium-term potential growth (1.5 percent), but dampened by spillovers from Russia’s invasion of Ukraine. Switzerland’s direct exposures to the war (exports, financial sector, commodity trade) appear relatively limited, although support for refugees could be significant. Indirect channels include higher energy/commodity prices, supply-chain disruptions, and lower regional and global growth. Fiscal and monetary policies remain supportive, and higher household savings during Covid-19 should buoy consumption and growth. The war in Ukraine is likely to affect activity also in 2023—growth of just under 1½ is expected next year. Inflation is expected to average 2½ percent in 2022, before easing to 1.6 percent in 2023. Lower global demand and higher energy/commodity prices are expected to narrow the external current account surplus to
6¼ percent of GDP, with a pickup in 2023 to 7 percent.
3. Russia’s invasion of Ukraine is a major source of uncertainty (duration, scope, refugees) and risks for commodity prices, financial exposures, trade, inflation, global financial conditions, and growth. Disruption of European energy supplies could lead to price spikes and a sharper slowdown. Increased global volatility could hasten flight to the franc. Other risks include adverse Covid‑19 developments and real-estate market imbalances, where a sharp interest rate rise could trigger price corrections and impacts on households, banks, non-bank financial institutions, and activity.
Fiscal Policy
4. The authorities are reducing Covid-19 support in 2022, in light of improving pandemic conditions and recovery. The underlying fiscal position (excluding Covid-19 outlays) is expected to remain broadly balanced, in line with the fiscal rule. Given heightened uncertainty and risks, the authorities should continue to monitor the situation closely and respond to adverse developments, drawing on ample fiscal space. They have budgeted still-sizable Covid-19 outlays and are gearing up to support a possibly significant influx of refugees from Ukraine (housing, health, schooling). As during the pandemic, close federal-cantonal coordination will support an agile, effective emergency response. The energy mix and pricing set-up in Switzerland have meant that households have been relatively shielded from the sharp rise of utility bills experienced elsewhere in Europe. Still, in an adverse scenario of supply cuts and price spikes, targeted, timebound, and non-distortionary support to vulnerable households might be considered, with regular automatic stabilizers (revenues and unemployment/job retention/short-term work support) operating.
5. The fiscal framework and debt-brake rule delivered robust public finances prior to the pandemic as well as flexibility in Covid-19 response via substantial extraordinary expenditures. The framework requires offsetting or amortization of extraordinary outlays through future surpluses. Ordinarily, offsetting would take place over six years, but this is 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, as it neither creates headwinds for recovery (by too-quick consolidation, higher revenues, or spending cuts), nor departs significantly from the established arrangements, e.g., by wider offsetting against past surpluses or other mechanisms that could undermine the framework (as could overly-frequent recourse to extraordinary outlays). While adverse Covid-19 impacts in the Swiss economy appear relatively muted, there are areas where effects have been more significant (e.g., railways, hospitals). Some major public enterprises ran large deficits during the pandemic, incurring sizable debt. The authorities should carefully consider the pace and magnitude of cost-cutting or fee hikes at these firms, as these may undermine service provision, and in light of uncertainties on the durability of Covid-related impacts.
6. Looking ahead, fiscal policy is encountering several key challenges. These include increasing expenses connected with the rapidly-aging population, outlays to support climate objectives, possible expenditures to enhance energy security and national defense, and tax reforms, some of which may lead to lower revenues. The implementation of OECD-led global corporate income tax reforms may lead to temporary gains. Here, compensatory measures to retain Switzerland’s business-location attractiveness are expected to be limited in scope; cantons and companies should be involved early in the reform dialogue to facilitate timely implementation and reduce risks. The debt-brake rule calls for a balanced budget over the cycle, while future surpluses and additional dividends from the Swiss National Bank (SNB) will be devoted to amortization of extraordinary Covid-19 outlays. This, plus a large share of legally-mandated expenditures, limits room for maneuver. New policy priorities and higher expenditures/lower taxes will need to be offset in other areas. While there is ample fiscal space to increase deficits, the fiscal framework is not easy to modify, requiring constitutional change. In this context, articulation of a medium-term strategic plan to facilitate increasing spending in priority areas and manage possible revenue losses would be helpful. Tax reforms should make the tax system less distortive and sustain or bolster revenues; spending reviews would help identify efficiencies and savings.
Monetary Policy
7. While high uncertainty complicates assessments, the 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. There is limited wage indexation in Switzerland, and wage pressures appear muted, despite the tight labor market. But there are risks of inflation rising further and becoming more persistent. The SNB should continue to closely monitor inflation developments and prospects, including at the international level. 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. To prepare, the SNB should continually review tools, transmission channels, sequencing of normalization steps, and communications, and adjust when needed. The differential between Swiss and external inflation is an important element in assessing developments and prospects and the value of the franc. 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
8. Bank credit growth has been strong, and NPLs have remained at low levels. While asset quality could deteriorate due to Covid-19 impacts as government support is scaled back, bank credit exposures to the most-affected sectors are limited. Profitability has proved resilient, but also has been challenged by sustained negative interest rates. Housing prices have risen relative to fundamentals with search for yield and robust mortgage lending growth. A sharp tightening of financial conditions could trigger a sell-off in the investment-led segment and increased affordability risks in general. Domestically-focused banks face important interest-rate risks. Also, while direct exposures of Swiss financial institutions to the war in Ukraine appear limited, sanctions and greater volatility have increased risks, including counter-party credit and collateral risks and risks related to commodity finance, derivatives, flows to wealth managers, financial integrity, and cyber-attacks.
9. Capital and liquidity buffers protected the financial system in Switzerland during the pandemic. Yet, a sharp rise of interest rates could trigger a real estate market correction that may have major balance sheet impacts. Tighter self-regulation rules since 2020 have helped rein in high-risk investment-property mortgages, and recent reactivation of the sectoral countercyclical buffer (CCyB) at 2.5 percent will strengthen resilience. But borrowers are taking bigger loans, and affordability risks are increasing. Rising vulnerabilities warrant early consideration of expanding the legally-mandated macroprudential toolkit. Regulatory limits on mortgage loans or tighter amortization requirements could be considered—before full implementation of Basel III standards. Actions should be based on a careful assessment of tool effectiveness, making use of flow limits to minimize impacts on mortgage-market access. Beyond macroprudential measures, adjustments to taxation (e.g., abolition of imputed-rent taxation) and actions to support the rental market (e.g., targeted subsidies, social housing) could help mitigate affordability risk. A push on supply-side constraints (e.g., zoning changes/flexibility, infrastructure investments) would also help.
10. Recent high-profile cases have shown prospects for sizable losses by globally-active banks, especially from concentrated exposures. Remediation efforts are focusing on enhanced supervisory intensity, rapid derisking, strengthened risk controls, and governance assessments. Enforcement proceedings are ongoing. While this follow-up is commendable, the authorities should also strengthen ex ante evaluation of internal governance and risk assessment in supervisory ratings. In addition, liquidity strains from recent market volatility underscore the need for enhanced special liquidity requirements for systemically-important banks and the importance of funding under resolution. These requirements are planned to enter into force on July 1, 2022. The planned proposal of a public liquidity backstop, recently announced, is welcome. The enhanced liquidity requirements and backstop will help ensure resolvability. Finally, improved ways of monitoring concentration risks in asset management, mitigating conduct risk, ensuring resolvability of systemic FMIs, further strengthening FinTech regulation (while fostering innovation), sustaining the conservative approach to VASPs, proactively implementing global prudential standards for cryptoassets, addressing novel regulatory and risk issues from integrated digital trading and settlement systems, and advancing on green/sustainable finance will help maintain Switzerland as a leading global financial center.
Structural Challenges
11. The tight labor market is facilitating post-Covid-19 reallocation, with workers able to move to other jobs or sectors, supported by well-targeted labor policies focused on counseling, guidance, and training. Closing skills gaps and promoting broader and longer participation of older workers and women will help, including to address high vacancies in health, IT/STEM, and green energy. This is expected to involve lowering early-retirement incentives, removing disincentives for hiring/retaining older workers, improving childcare, and easing tax disincentives for dual-earner families.
12. Pension reforms are advancing, but more will be needed to ensure long-term sustainability. Key actions now under consideration involve male/female reference age harmonization, additional first-pillar VAT funding, and cuts in second-pillar annuity-conversion rates. Lower system entry age, wage thresholds, and insured salary amounts should shore up pension adequacy for lower-income and multi-job workers. If approved, the reforms will close funding gaps through 2030. To ensure sustainability thereafter, further reference age increases will be needed, linked to life expectancy, along with actions to extend 65+ employment (lifelong learning, flexibility), and likely, additional second-pillar conversion-rate cuts. Measures to improve pension fund efficiency, governance, and investment performance would also be helpful.
13. The authorities are advancing emission-reduction actions. These involve extending pre-referendum CO2 law measures and targets for 2022–24, revised proposals for 2025–30, and devising policies for 2030–2050. The revised proposals through 2030 focus on regulation, incentives, subsidies, and public investment (e.g., heating systems, charging infrastructure) and will clarify the framework following last year’s public rejection of the revised CO2 law.
14. The run-up of energy prices, Russia’s invasion of Ukraine, and risks of supply cuts have focused attention on energy security. Upcoming changes to EU cross-border electricity regulations could be a risk to seasonal imports; these will require EU neighbors to reserve 70 percent of cross-border capacity for member states from 2025. The authorities are rightly working on a range of measures to strengthen resilience, including 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 (notably, counter to emissions objectives), exploring new arrangements for transmission and pooling, and speeding regulatory processes for new renewables projects. Swiss denuclearization plans are more flexible than elsewhere in Europe. These provide for continued safe operation of existing reactors, rather than mandated closure dates.
15. Termination of discussions on an institutional agreement with the EU in 2021 is leading to uncertainty regarding EU market access and changes in involvement in EU programs/mechanisms. Uncertainty and possible adverse impacts would be helped by arrangements that give stability and predictability to relations.