Statement by Jens Olof Henriksson, Executive Director for Sweden

This 2009 Article IV Consultation highlights that Sweden has been hit hard by the global financial crisis. Two of its banks built up large exposures in the Baltics that significantly increased loan losses beyond normal recessionary levels. In response to the crisis, the authorities have taken wide-ranging measures to stabilize the financial system and support demand. Executive Directors have welcomed the authorities’ prompt and appropriate policy responses, which have allayed immediate concerns with financial sector stability, and have helped cushion domestic demand.


This 2009 Article IV Consultation highlights that Sweden has been hit hard by the global financial crisis. Two of its banks built up large exposures in the Baltics that significantly increased loan losses beyond normal recessionary levels. In response to the crisis, the authorities have taken wide-ranging measures to stabilize the financial system and support demand. Executive Directors have welcomed the authorities’ prompt and appropriate policy responses, which have allayed immediate concerns with financial sector stability, and have helped cushion domestic demand.

July 22, 2009

On behalf of my Swedish authorities, I would like to convey their appreciation to staff for constructive discussions in Stockholm and for a well written report.

The Swedish authorities broadly agree with staff’s overall assessment of the Swedish economy. The Swedish economy exhibits sound long-term prospects but is currently in a deep recession. The authorities also agree with the view that monetary and fiscal policy have been well designed for dealing with the current crisis: an accommodating monetary policy and strong automatic stabilizers at full play together with additional fiscal measures in line with the European Union Recovery Plan and specific labor market policies to avoid unemployment persistence. Staff concludes that policy actions have strengthened confidence but should continue to aim at minimizing the downturn of the Swedish economy. The authorities agree with the view that strengthening the financial sector is of particular importance. Staff furthermore expresses concerns regarding the developments of public finances and the financial market as well as the surveillance of the financial market. These concerns are partly shared by the authorities.

Near term outlook and risks

The authorities agree with staffs broad near term picture of the Swedish economy, i.e. that the Swedish economy has been hard hit by the current crisis and that it will take time for the economy to recover. But also that many factors, including the expansionary fiscal and monetary policies, strong automatic stabilizers and the flexible characteristics of the economy, have helped cushion the downturn. The authorities believe that these same factors will also contribute to turn around the economy.

The main differences between staff and the authorities regarding the near term macro outlook concern the economy’s recovery dynamics where the authorities have a somewhat more optimistic view on output growth and the support from global growth. Staffs forecasts of GDP and output gaps are on average more pessimistic than those of the authorities. Staffs forecasts include estimates of larger output gaps than the authorities in the near term. This difference may be due to differences in estimates of both actual and potential GDP. It may also be due to a difference in methodology regarding trend forecasting, i.e. estimates of potential GDP.

The authorities agree with staff that potential output has been adversely affected by the crisis. Staff suggests that potential output has decreased mainly due to a permanent change in demand for Swedish exports. The authorities recognise the concern of staff about Sweden’s heavy dependence on export developments and the fact that the composition of Swedish exports is rather unfavourable at the present juncture. However, the authorities have a more optimistic view of the developments of exports than staff, and - actually - already during the last two months export orders have increased and the Purchasing Managers Index (PMI) for Sweden is now back in the area of growth and well above the PMI both in the USA and the EU. Staff similarly has a more pessimistic forecast for imports. Despite both forecasts of lower imports and lower exports, forecasts for net exports and the current account are lower than those of the authorities. Staff forecasts higher inflation during 2009 and 2010. With regard to final domestic demand and unemployment, staffs forecasts are, on the other hand, generally more optimistic than those of the authorities.

The authorities agree with staff that the Swedish krona is likely to appreciate somewhat in the years to come. However, staff suggests that the weakening of Swedish exports due to the downturn of global demand and the composition of Swedish exports combined with weakening net factor income have lowered the equilibrium real exchange rate.

The authorities largely agree with the view concerning both the downside and upside risks and have considered these in various alternative scenarios in different reports and bills. However, the household sector or the weakening housing and property markets are not regarded as considerable risks. According to stress tests of the household sector carried out by the Riksbank, the Swedish households’ debt servicing ability is only slightly affected by increased unemployment. These stress tests show that households in general have the capacity to manage an economic downturn, with rising unemployment and higher interest rates. Lower house prices do not automatically mean that the household sector constitutes a threat to financial stability, as the effects are likely to be contained and households still will be able to pay off their loans.

Financial sector policy and framework

Sweden has in accordance with the European Council Conclusions from October 2008 implemented a framework for dealing with problems in financial institutions and for restoring confidence in the financial markets. The legal framework includes a possibility to give support to troubled credit institutions, an increase and widening of the deposit guarantee, a guarantee scheme for bank borrowing and a recapitalization scheme to support lending. The National Debt Office has been appointed as Support Authority. As a result, an acute confidence crisis has successfully been avoided.

The authorities are prepared for possible further negative outcomes. Fragilities have been assessed, as concluded by staff, in thorough stress tests by the authorities, and contingency plans have been developed and discussed by the Standing Committee consisting of the Ministry of Finance, the Riksbank, the Swedish Financial Supervisory Authority (Finansinspektionen), and the Swedish National Debt Office (Riksgälden). The banks’ operations in the Baltic countries continue to be a cause of concern. Lending to the Baltic countries accounts for a non-trivial part of total lending for two of the Swedish banks. The risk of a sharp macroeconomic deterioration in these countries has now materialised. However, stress tests show that the banks should be able to stay above minimum required Tier 1 ratios even if the situation were to further deteriorate in the Baltic countries. Notwithstanding, in line with staff’s conclusion, market concerns about the banks’ resilience will probably require banks to raise more capital. Such action would also reduce risks of curbed credit supply. In case the banks are not able to raise capital on their own, they can apply for capital in the recapitalization scheme.

The government agrees that it is important that the supervisory authority has adequate resources. The Swedish FSA has continuously been given increased resources from the government during the past years. For both 2008 and 2009 the resources were increased by more than 10 percent. It is, however, also important that the supervisory authority has the right focus. The Swedish Agency for Public Management (Statskontoret) - on commission of the Swedish government - has reviewed the operations of the Swedish FSA and come to the conclusion that additional resources are not a priority, but there are other issues, primarily governance issues, that need attention. The government is currently considering what the next step should be.

The FSA does indeed play an important role in a banking crisis situation, and also in the continued supervision of a bank subject to authority measures. However, the FSA cannot be expected to handle all issues related to crisis management. Therefore, the government has appointed the National Debt Office as Support Authority.

Fiscal policy and framework

The government broadly agrees with staff’s view of the fiscal position and the appropriate fiscal policy stance in the current economic situation.

Sweden entered the downturn in robust fiscal health and as staff points out the government’s commitment to the budgetary rules–the surplus target and the nominal expenditure ceiling–is here a key factor. The deep recession does not change the government’s view of the need to adhere to these targets. One basis of the government’s policy in the severe recession is keeping public finances in good order to ensure that the deficits are temporary and manageable. In this way, households and firms can continue to have confidence in economic policy and the foundation on which welfare rests.

The initial strong fiscal position has permitted the government to let the automatic stabilisers operate fully besides leaving room for some additional discretionary measures. Along with the measures presented since the 2009 Budget Bill, the government is allocating a total of SEK 45 billion in 2009 (1.5 percent of GDP) and SEK 60 billion in 2010 (2 percent of GDP) in response to the crisis. Besides structural tax cuts, these measures include increased municipality grants, preventing the municipalities to act pro-cyclically, and increased resources to the labor market, preventing people from becoming long-term unemployed and improving conditions for those most detached from the labor market. The size of the discretionary package is fully in accordance with the European Union Recovery Plan. Similar to staff’s projections, the fiscal stimulus - discretionary measures and automatic stabilisers taken together - is one of the largest in the EU.

Even if the government’s view is that the fiscal position is strong in the long-term and the government’s ambition is to keep deficits temporary and manageable, it must be underscored that the development of the budget balance in the near future is highly uncertain due to the crisis, which staff also points out. Tax revenues have fallen dramatically due to the economic downturn and the strong automatic stabilisers make the budget balance very sensitive to a more prolonged recession. In addition, there is no guarantee that the budget balance automatically reaches the surplus target when the economic situation becomes more favourable. This relates in part to the fact that the crisis may affect potential output in a negative way. The government agrees with the conclusion that policy decisions, in this highly uncertain situation, should not rely only on estimates of the structural budget balance, but also on close monitoring of the development of the actual budget balance. As staff points out, plausible estimates of potential output yield widely varying estimates of the structural balance and the fiscal outlook. In addition, as staff also points out, it is unclear how much public debt will rise due to financial sector rescue operations that may prove to be necessary.

The government will continue to closely monitor and examine the situation when making its policy choices. The current assessment, in line with staffs, is that there is very little room for further reforms. The government will continue to tackle the crisis, weighing each measure for the effects it will have on the jobs and the public finances.

Regarding the expenditure ceiling, staff suggests that it should be more closely linked to the surplus target by allowing the ceiling to be adjusted if tax rates are cut after the ceiling has been settled. The government agrees with staff that the principles for how the expenditure ceiling is determined might be improved, but this involves a lot of difficulties that need to be more closely looked into. The issue, together with the formulation of the surplus target, is currently under review.

Monetary policy and framework

The Riksbank welcomes staff’s conclusion that the Riksbank is one of the most transparent central banks, that the transparency has increased credibility and enhanced communication, and that its inflation targeting framework has worked well. This is indeed an aim that is given high priority by the Riksbank. The Riksbank agrees with staff that in the aftermath of the crisis it will be necessary to evaluate the functioning of the framework as well as the effectiveness of the different policy actions taken.

The Riksbank also agrees with staff that the risks of sustained disinflation in the Swedish economy are low and that monetary policy can and should currently focus on mitigating the downturn as well as on enhancing resilience to any additional shocks. Staff suggests that monetary policy, conventional and unconventional, if needed, should remain aggressive.

According to the Riksbank’s latest forecast inflation will, during 2009, fall below the lower bound of the target, remain within the bound of the target in 2010 and rise above the upper bound of the target in 2011. Inflation expectations remain steady around the target in the long run. At the last monetary policy meeting of the Riksbank the repo rate was cut to 0.25 percent and the announced repo rate path was supported by the Riksbank offer of loans to the monetary policy counterparties at a fixed interest rate and with a maturity of approximately 12 months. These actions are in line with staff suggestions concerning monetary policy.

Staff expresses concerns regarding the foreign reserves and although the Riksbank has recently raised its reserves by SEK 100 billion, and has swap agreements with both the Federal Reserve and the ECB, staff sees a need for further strengthening of reserves. This is, according to staff, motivated by possible banking sector liquidity stress and possible spillover effects on the krona. The Riksbank is currently not planning any further actions to strengthen reserves and does not have an explicit target for the exchange rate.

Final note

I look forward to conveying the outcome of the Board discussion to my authorities. This will complete the constructive dialogue in which they have been involved with the Fund’s staff during this consultation. On behalf of the authorities, I also look forward to a fruitful cooperation in the years to come. The authorities intend to authorize publication of the staff report, in accordance with normal Fund procedures.

Sweden: 2009 Article IV Consultation: Staff Report; Staff Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Sweden
Author: International Monetary Fund