On August 30, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Sweden.1
Sweden recovered quickly from the Great Recession, leading much of the rest of Europe in 2010–11, but the economy has slowed more recently. Sweden faces a difficult external environment with growth decelerating to below 1 percent in 2012 despite continued monetary support and mildly expansionary fiscal policy. While the economy appears to have stabilized, the overall growth trend has been one of moderation, partly reflecting cooling activity abroad and Sweden’s tight trade and financial links with the rest of the Nordic region and the euro area. Meanwhile, the unemployment rate remains elevated, reflecting cyclical and structural weaknesses. Consumer price inflation has eased markedly below the 2-percent target, primarily due to the strong krona amidst safe-haven flows, and the external balance remains strongly in surplus.
Downside risks stem from financial fragilities and regional spillovers. Domestically, household debt is high and rising, reflecting tax incentives, easy access to low-amortization mortgages, and very low interest rates. As a consequence, a sudden and sizeable fall in Swedish property prices could have a knock-on effect on consumption and unemployment, with negative repercussions on banks through non-performing loans and funding costs. Owing to the extensive activity of Sweden’s very large and concentrated banking sector in Denmark, Finland, and Norway, this could have sizeable spillovers across the Nordic region. At the same time, a sudden deterioration of household financial health elsewhere in the region poses a risk to Sweden—as discussed in the Nordic Regional Report. A sudden and severe re-intensification of the euro area crisis could impact banks as well, as would a large reversal of safe-haven flows.
Reforms are under way to address many of these concerns. Financial reforms that have been introduced include measures to increase capital and liquidity buffers and the introduction of loan-to-value caps and a risk-weight floor for mortgages. However, banks remain heavily dependent on wholesale funding and credit to households continues to expand, with mortgage amortization low by international standards. Against this background and given downside risks, the Riksbank boosted borrowed currency reserves to ensure ready access to foreign currency liquidity. While the fiscal framework has served Sweden well and helped reduce general government debt after the banking crisis in the early 1990s, the authorities are examining ways to strengthen the framework to ensure both its countercyclicality and a prudent borrowing capacity adequate for a country with a large financial sector.
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.