Sweden: Staff Report for the 2014 Article IV Consultation

International Monetary Fund. European Dept.

doi:10.5089/9781498300308.002.A001

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Sweden: Staff Report for the 2014 Article IV Consultation

Author: International Monetary Fund. European Dept.

Publication Date:: 29 Aug 2014

eISBN:: 9781498300308

Language:: English

Keywords:: ISCR; CR; center; monetary policy; government; core inflation; fund staff calculation; banking sector; inflation expectation; current account; Inflation; Housing prices; Financial sector risk; Global

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Sweden’s economy has re-gained speed, following supportive macroeconomic policies and strong household demand. Employment has been rising, but the labor force expanded even more, resulting in higher unemployment mostly among vulnerable groups. Inflation remains very low, driven by external and domestic factors. At the same time, financial stability risks are an increasing concern, reflecting high and rising household debt, accelerating house prices, and Sweden’s very large banking system.

Abstract

Recent Economic Developments and Outlook

A. Recent Economic Developments

1. Sweden’s economy has re-gained speed. Following a moderate slowdown in 2011–12, GDP growth reached 1.6 percent in 2013, driven by accelerating private consumption in the second half of the year. This lifted real GDP at end-2013 to nearly 15 percent above its 2009 trough, compared to the EU average of less than 4 percent. Consistent with this robust performance, various methodologies point to a narrowing output gap, estimated to average about -¾ percent of potential GDP in 2013.

2. Unemployment has remained high, reflecting largely structural factors. Despite solid employment growth of around 1 percent in 2013, driven mostly by strong employment growth in the services sector, an even stronger expansion of the labor force resulted in the unemployment rate remaining flat at around 8 percent, well above its pre-crisis level of around 6½ percent. The increase in the labor force reflected both past reforms and Sweden’s growing immigrant population. The increase in unemployment has been borne disproportionately by the young, the low-skilled, and the foreign-born. Combined with a reduced responsiveness of unemployment with respect to growth (i.e., Okun’s law), this suggests that much of the increase in unemployment is structural.

3. Despite accelerating domestic demand, inflation has continued to decline. Headline consumer price index (CPI) inflation averaged 0 percent in 2013 and declined slightly to -0.2 percent in the first half of 2014.¹ Core inflation, measured as CPI with constant mortgage rates and excluding energy, averaged 1.1 percent in 2013 and 0.6 percent in the first half of 2014. In part, low inflation reflected imported global price trends and the continuing strength of the krona, a moderate depreciation during the second half of 2013 notwithstanding (see Box 1). Service sector inflation in particular has slowed since early 2013, partly due to second-round effects of declining fuel prices on transportation costs. Favorable unit labor cost (ULC) developments in services, with productivity improvements roughly compensating for nominal wage growth of around 2 percent in 2013, also reduced pressure on prices (see Figure 2). While inflation expectations have drifted downward, they remain relatively well-anchored at the policy horizon.

4. The large and positive external balance largely reflects structural factors. The current account surplus reached 6.4 percent of GDP in 2013, a moderate increase from 6 percent in 2012. Among the structural factors are the very large financial sector and pension and household savings patterns, which are consistent with Sweden’s population aging dynamics. These trends have been reinforced by social protection reforms since the mid-1990s. In addition, Swedish investment income rose in 2013, on account of high returns from equity assets and low interest payments on debt liabilities, as did net trade in services, driven by an increase in merchanting trade. The moderate depreciation of the krona exchange rate helped as well. Overall, staff estimates the krona to be broadly in equilibrium, with Sweden’s strong external position reflecting mostly structural factors (see Box 1).

5. Housing prices and household indebtedness have increased from already high levels. Reflecting strong demand fueled by low interest rates, as well as structural factors such as ongoing urbanization and insufficient housing supply, house price increases have picked up again, at about 7½ percent annual growth for single-family homes and nearly 13 percent for tenant-owned apartments in the first half of 2014. Household credit growth remained equally strong, pushing household indebtedness to almost 175 percent of disposable income in 2013, and over 190 percent if debt from tenant-owned housing associations is included. Amortization rates are very low, with about 40 percent of households having increased or failed to reduce their debt stock in 2013. Recent data indicate that debt ratios are particularly high for indebted lower-income households who are especially vulnerable to income, interest rate, and house price shocks.

6. Economic policies have supported the recovery and strengthened the resilience of the large banking sector. In particular:

Financial sector reforms continued. The authorities have rolled out Basel III measures ahead of schedule, including implementing systemic risk buffers and plans to impose counter-cyclical buffer and strengthen liquidity coverage ratios (LCRs), in addition to increasing mortgage risk weights. However, with assets close to four times GDP, the Swedish banking sector is large and leverage ratios are low, having improved little in recent years.
Monetary policy has been supportive while stressing financial stability risks. The Riksbank reduced the repo rate by 25 basis points in December 2013 and a further 50 basis points in July 2014, setting it at 0.25 percent, but highlighted the growing tension between addressing low inflation and further fueling household borrowing.
Fiscal policy remains expansionary for now. Net lending is projected to increase to -1.9 percent of GDP in 2014, up from -1.3 percent in 2013, primarily on account of lower revenues. Given strengthening growth, this implies—at least in hindsight—a procyclical structural expansion of about ½ percent of potential GDP.

B. Outlook and Risks

7. The outlook is for accelerating growth. Real GDP growth is projected to strengthen further, to about 2.6 percent in 2014 and about 2.8 percent in 2015. Exports are expected to pick up along with euro area growth and global trade, but private consumption and investment should provide most of the dynamics, while fiscal policy is set to consolidate. With the output gap fully closing, staff expects inflation to gradually rise to around 1½ percent in 2015, as disinflationary pressures from falling imported prices dissipate and wage growth picks up.

8. Financial instability is a key downside risk. Household debt ratios have continued to rise and remain particularly high among indebted lower-income households, and the share of new mortgages with a variable rate has increased from over one half in 2012 to more than two thirds in 2013. While many households show large net asset positions, a significant share of assets is illiquid. As a consequence, adverse shocks to interest rates, house prices, or income could quickly translate into lower consumption, employment, and growth, and ultimately impact the banking system, especially if these shocks occurred at a time of high global funding stress.² Sweden’s large and regionally connected banks are also vulnerable to a sudden increase in financial tensions in the wider Nordic region or to surges in global financial market volatility. Conversely, financial instability in Sweden would quickly spread to other Nordic and Baltic countries.³ (See also the Risk Assessment Matrix, Box 3.)

9. Low inflation and moderating global trade also pose risks. An extended period of very low inflation could cause longer-run inflation expectations to fall significantly below the inflation target. This, in turn, could act as a drag on growth if households and firms defer expenditures in anticipation of lower prices in the future. At the same time, rising oil prices or a depreciation of the krona could help lift Swedish inflation above the baseline. Geopolitical tensions could lead to lower external demand.

The Authorities’ Views

10. The authorities broadly agreed with staff on the outlook and the risks. They saw a recovery driven by private domestic demand and a gradual increase of inflation to the Riksbank’s target of 2 percent, with risks stemming from lower external demand and financial instability related to high household debt. The authorities, however, also noted upside risks from stronger than currently anticipated global growth.

Policy Agenda

11. Sweden’s main challenge is to reduce financial risks, while additional structural reforms will help lower unemployment.

Progress on the financial stability agenda is urgent. This will take measures targeted directly at household credit demand and further strengthening banking resilience. More fundamentally, tax reforms and improving housing supply will help arrest the rise in house prices and credit growth in the medium to long term.
The Riksbank still has to balance financial stability and low-inflation concerns. Effective macroprudential policy should be the first line of defense and would allow the Riksbank to pursue its inflation target with less concern about financial risks.
Lowering unemployment requires structural reforms. With vulnerable groups experiencing substantially higher unemployment rates than others, there is scope for improvement.
The time has come for fiscal consolidation. Fiscal policy has supported the recovery, but with robust growth ahead, a steady consolidation path will help preserve fiscal buffers.

A. Financial Policies: Addressing Stability Risks

12. A number of financial reforms are on the way. The authorities have announced plans to further improve banks’ capital buffers, including raising minimum mortgage risk weights to 25 percent at the end of 2014 and introducing Basel III measures such as systemic risk and countercyclical capital buffers. This should help to further improve the balance sheets of Swedish banks. However, reflecting very low borrowing costs and strong expectations that house prices will continue to increase, household credit has picked up again recently and, under current policies, is projected by the Riksbank to continue rising in 2014 and 2015.

13. Macroprudential policies focused more directly on mortgage demand stand a better chance of curbing credit growth. Further measures on the credit supply side are likely to have limited additional impact, not least given banks’ favorable funding conditions and the low mortgage rates they allow.⁴ On the demand side, following an agreement with the Financial Supervisory Authority (FSA), banks are committed to encourage new customers to agree to voluntary amortization plans. However, with no sign of credit slowing down, real progress might require the gradual introduction of mandatory amortization requirements. Such regulation has been enforced, for example, in Singapore in 2012, where new mortgages have to be amortized within 35 years.

14. A gradual introduction of a debt service-to-income (DSTI) limit, combined with a lower binding loan-to-value (LTV) cap, would further help contain mortgage demand. The LTV cap of 85 percent is relatively generous compared with that in many other advanced economies. Nevertheless, in 2013, about 10 percent of households have taken on supplementary unsecured loans that were in part used to help finance house purchases. In addition, given rising housing values, even a more binding LTV cap might not keep debt-to-income ratios from rising. This suggests that adding a DSTI limit to the Swedish macroprudential toolbox could help keep debt at sustainable levels. It would tie households’ debt to their income level, independent of house values, and could work as an automatic stabilizer that helps contain excessive increases in credit (and asset prices) relative to income, further reducing household vulnerabilities.

15. Mortgage interest tax deductibility contributes to high household debt by providing an incentive to accumulate debt and keep it at high levels.⁵ As a result, many Swedish households are more leveraged and vulnerable to economic or financial shocks than they would otherwise be. A gradual reduction in mortgage interest deductibility—as is, for example, being done in Finland—would reduce this distortion.

16. A longer-term solution to rising house prices and mortgage levels will require alleviating housing supply constraints. Insufficient housing supply growth is a fundamental factor behind the rise in residential property prices, especially in metropolitan areas, where ongoing urbanization and immigration trends boost demand. This has resulted in higher housing prices, driving up the size of mortgages. While some steps have been taken, containing house price pressures will require a continuing effort to expand the stock of affordable housing and further reforms to zoning, permitting, and the rent-setting process. Public infrastructure investments, coordinated with municipalities, would also make private housing investments more attractive.

17. Recent progress notwithstanding, there is scope for additional measures to increase the resilience of Sweden’s banking system. This includes:

Capital. While the average core Tier I risk-weighted capital ratio rose from 11.8 to 16.8 percent between end-2010 and end-2013, most of the improvement reflected changes in average risk weights, in part driven by the introduction of new risk models. The average leverage ratio (measured by core Tier 1 capital as share of total assets) has increased only slightly from 3.6 percent to 3.9 percent, which remains low in comparison to other large banking systems. A higher leverage ratio requirement, such as the 5 percent minimum leverage ratio requirement proposed by the U.S. Federal Reserve, would ensure a more substantial increase in shock-absorbers. Introducing the countercyclical capital buffer at or close to 2½ percent—the maximum value subject to international reciprocity—would also help.
Liquidity. Over half of Swedish bank funding comes from wholesale sources, consisting mostly of relatively short-maturity covered bonds and certificates. According to the Riksbank’s measure of structural liquidity, the resulting maturity mismatch has improved only marginally in recent years and remains low compared to other European banks. Rapid progress towards fulfilling the Basel III Net Stable Funding Ratio (NSFR) requirement at 100 percent would help in this regard; and introducing a minimum LCR requirement in Swedish krona could add to banks’ ability to withstand a short-term krona liquidity squeeze.

18. The size and regional orientation of Sweden’s banks makes cross border cooperation essential. The coordinated Nordic approach to raising mortgage lending standards in Norway—with the Swedish and Danish authorities ensuring the compliance of local bank branches—marks important progress towards the necessary macroprudential cooperation in the highly integrated regional banking market. The implementation of the EU Bank Recovery and Resolution Directive (BRRD) should allow the completion of the work of the Nordea Crisis Management Group (CMG) and facilitate a binding ex-ante burden sharing agreement. Retaining the option of Sweden joining the Banking Union would keep the door open to further improving the level of regulatory and macroprudential cooperation and coordination across the Nordic-Baltic region.

The Authorities’ Views

19. The authorities broadly concurred with staff’s assessment of financial vulnerabilities and stressed that measures were under way to address them. They saw household indebtedness as high both from a historical and international perspective. However, they also noted that the ongoing push for higher capital and liquidity standards—often well in advance of the Basel III timetable—should help contain emerging risks. There was also support for the call for demand-side measures, with the Riksbank and the Ministry of Finance emphasizing the need to make further progress on improving the amortization culture. The FSA argued that to assess whether further policy action would be warranted, the effects of the already implemented measures, such as increased risk weights and voluntary amortization plans, needed to be evaluated first.

B. Monetary Policy: Balancing Price and Financial Stability

20. Inflation has been persistently below target, driven by a combination of external and domestic factors. “Flight to safety” dynamics in financial markets, together with relatively higher interest rates in Sweden, contributed to a strong appreciation of the krona and lowered import prices. In 2013, even as krona appreciation eased, declines in global oil and food prices created additional disinflationary pressures.⁶ Domestic inflation also slowed, in part reflecting the indirect impact of lower energy prices on transportation services inflation. Moderate nominal wage growth along with slightly stronger productivity growth, helped bring aggregate ULC growth down from 2.7 percent in 2012 to 1.4 percent in 2013, reducing cost-push pressures on inflation (see Figure 2).

21. Staff analysis suggests that inflation will converge back to the two-percent target, but there is uncertainty around the baseline. A Philips curve model confirms that the forces to lift inflation from its current low level are in place, including dissipating external disinflationary pressures and a pick-up in growth supported by very low interest rates (see Box 2). However, the speed of convergence back to the target depends on the pace of domestic growth and external developments, including in particular oil price and exchange rate dynamics.

22. As long as inflation remains low, the presence of increasing financial stability risks forces monetary policy into a difficult balancing act. A reduction in interest rates tends to depreciate the krona and raise domestic demand, which should increase inflation. At the same time, lower policy rates are associated with a reduction in mortgage rates, higher overall mortgage credit growth, and a shift from fixed to variable interest rate mortgages. For example, a simple VAR exercise suggests that, over a two-year period, a 50 basis point decrease in the policy rate increases the ratio of debt to disposable income by about 2 percentage points and the share of variable rate mortgages in the total mortgage stock by about 5 percentage points. This increases financial stability risks, particularly in an environment where buoyant expectations in the housing market invite speculative price dynamics.

23. The balance between price and financial stability can change. The policy rate cuts in December 2013 and July 2014 have reaffirmed the Riksbank’s commitment to achieving its inflation objective. However, while effective macroprudential policies must be the first line of defense, a substantial rise in financial stability risks—such as a further acceleration in house price increases and mortgage credit growth—might mean interest rates will have to rise sooner than otherwise to help contain financial vulnerabilities.

24. This only adds to the urgency of implementing a comprehensive set macroprudential policy measures to contain rising household credit. While monetary policy can “lean against the wind” to help subdue mortgage growth, higher interest rates than warranted by macroeconomic conditions alone are an economically costly instrument, as the cost of credit would increase for all borrowers, including firms. Instead, successfully addressing financial stability risks with macroprudential measures would allow monetary policy to more freely pursue its inflation target.

The Authorities’ Views

25. The authorities agreed that low inflation and rising financial stability concerns are pulling monetary policy in different directions. They welcomed further inquiries into the external and domestic sources of low inflation, including the role played by monetary policy. At the same time, they shared the view that the repo rate was not the first-best policy instrument to address financial sector risks and that, to ensure financial stability, macroprudential and fiscal policies required continued attention—especially given the recent reduction in policy rates.

C. Structural Reforms: Reducing Unemployment

26. Recent reforms and relatively strong GDP growth have fostered employment—but unemployment remains high especially among vulnerable groups. The introduction of an Earned-Income Tax Credit (EITC), reforms to disability insurance, and enhanced Active Labor Market Programs (ALMPs) have resulted in a substantial expansion of the labor force. Increased immigration inflows have added to these dynamics. Despite solid employment growth overall, unemployment rates have risen markedly among the low-skilled, especially youths, foreign-born, and older workers while they have remained low among others, suggesting that much of the rise in unemployment is structural.

27. Further reforms can help accelerate and sustain the transition of vulnerable groups into employment. The Swedish wage formation process has contributed to creating one of the most compressed wage distributions among OECD economies. While Sweden’s collective bargaining institutions have, on average, delivered wage growth in line with productivity, a narrow wage range can limit employment opportunities at the lower end where unemployment is most pronounced. Here, social partners have an important role to play—for example, by exploring ways to increase wage flexibility at the firm level. They, and the government, can also help the young and the low-skilled add to their human capital. For example, developing vocational training programs that are aligned with employers’ needs would allow these groups to gain better-paying, higher-productivity jobs. An expansion of training-based ALMPs can also help in this context.⁷

28. Addressing structural housing market constraints will facilitate labor mobility and improve financial stability. High urbanization rates and immigration flows have added to high and rising demand for housing and boosted residential property prices.

Meeting this demand will require expanding the supply of affordable housing, including by tackling well-known problems with zoning regulations and adjusting the rent setting mechanism, which can prevent the efficient allocation of the existing stock of properties and, by keeping the average rent below market levels, limits incentives for the construction of rental properties.⁸ Exempting new construction from rental regulations for longer than is currently the case would help.
Tax reforms also have a role to play. The capital gains tax acts as a deterrent to moving and complicates the efficient allocation of the existing stock of housing. A reform in this area could be complemented by an increase in the property tax on private residences. Property taxation, reduced in 2008 to a municipal property fee capped at 0.75 percent, is below the values in many other advanced countries, such as up to 4 percent in the U.S. and up to 3 percent in Denmark.

The Authorities’ Views

29. The authorities shared staff’s concern over high unemployment and housing market rigidities. They were concerned over the high level of unemployment and how vulnerable groups are affected. The authorities noted that the persistent recession, combined with an expansion of the labor force, has contributed to the relatively high unemployment rate. However, there were differing views among the authorities on whether the high level of unemployment is mainly cyclical or structural. On housing, the authorities agreed with the need to address supply constraints and noted several measures they had already taken and that over time are expected to increase housing supply. However, in this context, they saw little scope for substantial tax reforms in the near term.

D. Fiscal Consolidation: Moving To Protect Buffers

30. Fiscal policy is rightly turning toward consolidation. Underpinned by the “krona-for-krona” strategy, which requires any reforms to be (at least) counterfinanced, the government has suggested a structural consolidation path with annual adjustments of about ½ percent of potential GDP starting in 2015. On staff’s numbers, this would help achieve a headline fiscal surplus of above 1 percent of GDP by 2018 and reduce the public debt-to-GDP ratio to around 30 percent of GDP, from nearly 42 percent currently (see the DSA in the Appendix). The Swedish fiscal framework requires a 1 percent surplus “over the cycle,” a target chosen to build up sizable fiscal buffers. While the length of a “cycle” is open to interpretation, under most definitions the target will not be met until later.

31. The current fiscal framework serves Sweden well. While public debt is not high, prudent policy requires maintaining a borrowing capacity at or below this level—in line with the potentially large contingent government liabilities arising in a small open economy with an aging population and a large financial sector.⁹ This means making clear progress towards the current net lending target and keeping it in place for some time. In this context, there are synergies between fiscal consolidation needs and efforts to rein in financial stability risks, including gradual reforms of mortgage interest deductibility and the property tax to contain mortgage credit growth.

The Authorities’ Views

32. The authorities were in broad agreement with the staff’s fiscal assessment. They agreed on the importance of adhering to the ambitious consolidation plan to retain the credibility of the fiscal framework. They also saw the need to further strengthen fiscal buffers given the size of Sweden’s banking sector and the associated risks, and to ensure the possibility for fiscal policy to weather serious economic downturns without incurring large deficits. The authorities saw no substantial need for modifications of the framework in the near future. The Ministry of Finance also noted that it saw higher spare capacity than estimated by staff.

Staff Appraisal

33. Sweden’s economy is doing well. Growth is gaining speed ahead of many European peers, helped by buoyant household consumption and supportive macroeconomic policies. Employment has been rising, but the labor force expanded even more. The resulting increase in unemployment is largely structural, borne disproportionately by the young, the low-skilled, and the foreign-born. Inflation is low, reflecting global commodity price trends and a still strong krona. Domestically, lower imported energy prices and moderate nominal wage growth along with strong productivity gains have reduced cost pressures. While Sweden’s external position is moderately stronger than the level consistent with medium-term fundamentals and desirable policies, structural factors, including demographics and the large banking sector, explain much of Sweden’s high and persistent current account surplus. This suggests that the krona is moderately undervalued or close to its equilibrium level.

34. However, financial stability risks are high and increasing. Sweden’s banking system is large and wholesale-dependent, and household debt has grown to 190 percent of disposable income on some measures while house prices are increasing rapidly. Behind this are very low interest rates and structural factors, such as housing supply constraints and tax incentives that keep amortization rates low. With indebtedness particularly high among lower-income households, their vulnerability to income, interest rate, and house price shocks is high as well.

35. Containing mortgage demand is urgent. Policies to further strengthen banks need to continue, including higher mortgage risk weights and the introduction of many Basel III measures ahead of schedule. However, there is little evidence that mortgage credit or house price growth is slowing in the current low-interest rate environment. This will require macroprudential measures directly targeting credit demand, including the gradual introduction of statutory amortization rates if voluntary measures remain ineffective, lower LTV caps, and the introduction of DSTI limits to improve households’ resilience to shocks. More fundamentally, gradually phasing-out the tax deductibility of mortgage interest rates would reduce incentives to accumulate debt.

36. Longer term, housing supply rigidities need to be addressed. A fundamental factor behind the growth in Swedish housing prices and mortgage lending is insufficient housing supply growth in the face of strong urbanization trends. A number of policies are available to expand the stock of affordable housing, including continuing reforms to zoning, permitting, and the rent-setting process, and through public infrastructure investments. In addition, it will be important to improve the allocation of the existing housing stock—for example through a tax reform that reduces capital gains taxation while raising very low property tax rates.

37. Monetary policy still has to balance price and financial stability risks. The outlook is for a gradual increase in inflation, as external disinflationary forces dissipate and the output gap is set to close on the back of strong GDP growth. However, while the policy rate cut to 0.25 percent in July 2014 will help in this regard, very low interest rates are also likely to fuel household borrowing. In the absence of effective macroprudential measures, a further acceleration in housing prices and mortgage credit growth could mean that interest rates will have to rise sooner than otherwise to help reduce the resulting financial stability risks. This will require careful consideration of the trade-off between the possible impact on the recovery and the ultimate cost of rising financial vulnerabilities. It also adds to the urgency of implementing a comprehensive set macroprudential policy measures to contain household credit demand.

38. Structural unemployment requires structural reforms. High unemployment is concentrated among vulnerable groups where the gap between entry-level sectoral wages and productivity can be large. Social partners have an important role to play, both by exploring ways to increase wage flexibility at the firm level and, together with the government, to develop vocational training programs that are aligned with employers’ needs. This would help the vulnerable add to their human capital, which would allow them to gain better-paying, higher-productivity jobs.

39. It is time for fiscal consolidation. Given the strong growth outlook, 2015 is the right time to embark on a consolidation path towards the one-percent net lending surplus target over the cycle. Doing so would help preserve the prudent borrowing capacity adequate for a small open economy preparing for an aging population and facing potentially significant contingent liabilities from a large financial sector.

40. It is recommended that Sweden remains on the standard 12-month Article IV consultation cycle.

Box 1.

Current Account, External Assessment and the Equilibrium Real Exchange Rate

Since its trough in early 2009, the krona has appreciated nearly 20 percent against the euro and in real effective terms, partly driven by safe-haven flows reflecting Sweden’s relatively strong growth and solid fiscal position.¹ Despite this, the IMF’s External Balance Assessment (EBA) methodology, using data up to June 2014, suggests that the krona remains substantially undervalued relative to the value consistent with medium-term fundamentals and desirable policies. Similarly, the EBA approach estimates Sweden’s current account to have exceeded the level implied by fundamentals and policies in 2013 by about 8½ percent. These results are reflective of Sweden’s relatively large and persistent current account surplus, which reached 6.4 percent of GDP in 2013.

External Balance Assessment (EBA) Methodologies, 2013 ^1/

Source: Fund staff calculations.

^{^1/}CA gaps: minus indicates overvaluation. REER gaps: minus indicates undervaluation. EBA estimates are based on data available as of June 2014.

External Balance Assessment (EBA) Methodologies, 2013 ^1/

Methodology	CA gap	REER gap
	(percent of GDP)	(percent)
EBA CA Analysis	8.4	−28
EBA REER Analysis	-	−6
Staff Assessment	−½ to + 3½	−10 to +2

Source: Fund staff calculations.

^{^1/}CA gaps: minus indicates overvaluation. REER gaps: minus indicates undervaluation. EBA estimates are based on data available as of June 2014.

External Balance Assessment (EBA) Methodologies, 2013 ^1/

Methodology	CA gap	REER gap
	(percent of GDP)	(percent)
EBA CA Analysis	8.4	−28
EBA REER Analysis	-	−6
Staff Assessment	−½ to + 3½	−10 to +2

Source: Fund staff calculations.

^{^1/}CA gaps: minus indicates overvaluation. REER gaps: minus indicates undervaluation. EBA estimates are based on data available as of June 2014.

In 2013, gross external assets reached 298.5 percent of GDP and gross external liabilities at 304.0 percent of GDP, including sizable external liquid liabilities from Sweden’s large banking sector. The resulting Swedish net international investment position (IIP) of -5.6 percent of GDP in 2013 is a substantial improvement from -12.7 percent in 2012, but the discrepancy between the recorded net IIP and the balance implied by cumulative past current account balances has widened over time. Valuation effects account for much of the difference. For example, if FDI was valued at market prices, instead of the standard book value, the Swedish net IIP would be nearly 25 percentage points higher in 2013.

A number of factors are important when evaluating the Swedish external position:

The krona is freely floating and there are no significant policy gaps that would impact the current account.
Demographic factors tend to influence the current account but these can be difficult to capture fully in a cross-country approach such as the EBA. Sweden’s high saving rate is not unusual for an aging society, and has been reinforced by pension and other social protection reforms since the mid 1990s, notably a phased shift to a defined contributions pension scheme and a progressive shrinkage in transfers. High private savings tend to be associated with high capital exports and current account surpluses (see also the text figure in ¶4).
In addition, the EBA-estimated gap does not reflect important other structural factors shaping the current account. Sweden operates as regional financial center for the Nordic region (with total assets about four times GDP, Sweden’s banks are among the largest in Europe) and plays a significant role in merchanting trade². Both characteristics have been shown to lead to persistently larger current account balances, with merchanting trade in particular having accounted for a substantial share of the past decade’s current account dynamics.

In staff’s view, this suggests that a significant part of the Swedish current account surplus is structural in nature and likely to persist into the medium term. Staff assesses Sweden’s adjusted current account norm to be around 2–6 percent of GDP and the current account gap to be in the range of -½ to +3½ percent of GDP in 2013. In line with this, the REER gap is assessed to be in the range of -10 to +2.

¹ A moderate nominal depreciation against the euro and the dollar since December 2013, in part reflecting reductions in the repo rate, still leaves the krona in a position of relative strength.² Merchanting trade refers to transactions in which a resident purchases a good from a non-resident and subsequently resells the good to another non-resident without the good entering the resident merchant’s economy. The difference between the value of goods when acquired and when sold represents the value of merchanting services provided.

Box 2.

Inflation Simulations Based on a Philips Curve Model

Swedish inflation is projected to reach the 2-percent target towards the end of 2016. However, with a number of external and domestic factors at play, there is uncertainty in both directions. To allow for a more structured discussion, a simple, small open economy Philips curve is estimated based on the following equation:

π_{t} = α_{1} + α_{2} π_{t - 1} + α_{3} y_{t} + α_{4} π_{t}^{E A} + α_{5} o i l_{t} + α_{5} N E E R_{t} + ε_{t}

where π is HICP inflation in Sweden and y is the output gap estimated based on the Hodrick-Prescott filter (with λ = 1,600). Euro area core inflation $(π_{t}^{E A})$ is used to capture imported inflation from Sweden’s main trading partners, in addition to oil prices (oil_t) and the nominal effective exchange rate (NEER_t).¹ The disturbance term ε_t can be seen as representing supply (cost-push) shocks, and the lagged inflation term represents adaptive inflation expectations. The model is estimated by two-stage least-squares (2SLS) using quarterly data during 1994Q1–2013Q4. Alternative estimation approaches, including GMM and system estimation, yield similar results.

The estimated model allows the simulation of alternative scenarios of inflation going forward. While not an inflation forecast, the exercise sheds light on some of the factors entering staffs’ projections. In a baseline scenario, the output gap is assumed to close by early 2015, while the euro area recovery drives up euro area core inflation, and the oil price continues to decline. In this scenario, simulations suggest that HICP inflation will exceed 1½ percent in mid-2016 and converge to the 2-percent mark sometime between end-2016 and mid-2017 (see the text chart above).²

Alternative assumptions about domestic growth, the euro area recovery, and energy price dynamics alter the simulated inflation path. To illustrate possible deviations from the baseline simulation, four scenarios are considered:

Scenario 1: External Downside Scenario. Euro area inflation reaches currently predicted levels only with a two-year delay; imported oil prices fall by 20 percent by end of 2018; and the krona strengthens by 1 percentage point a year over the simulation horizon.

Scenario 2: External Upside Scenario. Euro area inflation reaches 2 percent by end of 2016, two years earlier than in the baseline projection; and the NEER depreciates moderately as safe haven flows dissipate.

Scenario 3: Domestic Downside Scenario. The Swedish output gap closes by around end-2016, two years later than in the baseline scenario.

Scenario 4: Domestic Upside Scenario. The Swedish output gap closes by end of 2014, and the Swedish economy will be running a slightly larger (positive) output gap than in the baseline during 2016-2018.

The simulation results show that under the downside scenarios, the expected pick-up in inflation would be delayed until mid-2018, converging to the target of 2 percent with a 6-8 quarter delay relative to the baseline. Conversely, under the upside scenarios, inflation would reach 2 percent already 2-4 quarters earlier, in early 2016.

¹ Euro area core inflation is used instead of the headline CPI to avoid potential endogeneity as oil is separately included as an explanatory variable in the Philips curve model.² In the Riksbank’s July 2014 forecast, CPIF inflation (which is very similar to the HICP) reaches 2 percent in 2016, while CPI inflation is projected to rise to around 3 percent reflecting the impact of forecast repo rate hikes.

Box 3.

Sweden: Risk Assessment Matrix^1/

Potential Deviations from Baseline

Source of Risks	Overall Level of Concern
Source of Risks	Relative Likelihood	Impact if Realized
1. Surges in global financial market volatility.	High	Medium
1. Surges in global financial market volatility.	Triggered, e.g., by geopolitical tensions or revised market expectations on UMP exit. Swedish banks are reliant on wholesale funding and directly and indirectly exposed to international financial markets.	Bank losses and funding stress could translate into curtailed lending, with negative effects for investment, consumption, and growth. Adverse impact could be partially mitigated by safe-haven flows.
Policy response:	Preventively, reduce vulnerabilities of the financial sector and preserve fiscal buffers. In the event, provide liquidity support, including in foreign currency using Sweden’s large borrowed reserves and possible swap arrangements.
2. Protracted period of slow European growth.	High	Medium
2. Protracted period of slow European growth.	Exacerbated, e.g., by geopolitical tensions. Sweden’s exports are tightly linked to European markets.	As exports and income decline, domestic demand will slow as well, further reducing growth.
Policy response:	Provide monetary support, let automatic fiscal stabilizers operate, consider slowing structural fiscal adjustment.
3. Significant house price decline in Sweden (or an interconnected neighboring Nordic country).	Medium	High
	Household debt is high due to easy access to credit, low interest rates, and housing tax incentives. Property prices remain elevated. Swedish banks are active throughout the Nordic region.	The flow-on effect to consumption and employment will lower growth. Rising non-performing loans (NPLs) and bank funding costs, e.g., during times of high global financial stress, could translate into curtailed lending, with negative effects on investment.
Policy response:	Preventively, reduce vulnerabilities in the housing market through macroprudential measures. Failing to do so will add to the risk. In the event, lower the policy rate and provide liquidity support to banks.
4. Significant and lasting decline in inflation expectations leading to lower growth.	Low	Medium
	Following a strong negative shock to inflation (e.g., linked to much weaker euro area growth or dropping global energy prices), inflation and inflation expectations drop persistently to very low or negative levels. Wage growth could fall to very low or negative levels along with inflation.	This could drag down growth if households and firms deferred expenditure in anticipation of lower prices in the future. Falling nominal income could trigger debt sustainability issues for households.
Policy response:	Lower the policy rate and keep low for longer; reconsider fiscal consolidation.

Potential Deviations from Baseline

Source of Risks	Overall Level of Concern
Source of Risks	Relative Likelihood	Impact if Realized
1. Surges in global financial market volatility.	High	Medium
1. Surges in global financial market volatility.	Triggered, e.g., by geopolitical tensions or revised market expectations on UMP exit. Swedish banks are reliant on wholesale funding and directly and indirectly exposed to international financial markets.	Bank losses and funding stress could translate into curtailed lending, with negative effects for investment, consumption, and growth. Adverse impact could be partially mitigated by safe-haven flows.
Policy response:	Preventively, reduce vulnerabilities of the financial sector and preserve fiscal buffers. In the event, provide liquidity support, including in foreign currency using Sweden’s large borrowed reserves and possible swap arrangements.
2. Protracted period of slow European growth.	High	Medium
2. Protracted period of slow European growth.	Exacerbated, e.g., by geopolitical tensions. Sweden’s exports are tightly linked to European markets.	As exports and income decline, domestic demand will slow as well, further reducing growth.
Policy response:	Provide monetary support, let automatic fiscal stabilizers operate, consider slowing structural fiscal adjustment.
3. Significant house price decline in Sweden (or an interconnected neighboring Nordic country).	Medium	High
	Household debt is high due to easy access to credit, low interest rates, and housing tax incentives. Property prices remain elevated. Swedish banks are active throughout the Nordic region.	The flow-on effect to consumption and employment will lower growth. Rising non-performing loans (NPLs) and bank funding costs, e.g., during times of high global financial stress, could translate into curtailed lending, with negative effects on investment.
Policy response:	Preventively, reduce vulnerabilities in the housing market through macroprudential measures. Failing to do so will add to the risk. In the event, lower the policy rate and provide liquidity support to banks.
4. Significant and lasting decline in inflation expectations leading to lower growth.	Low	Medium
	Following a strong negative shock to inflation (e.g., linked to much weaker euro area growth or dropping global energy prices), inflation and inflation expectations drop persistently to very low or negative levels. Wage growth could fall to very low or negative levels along with inflation.	This could drag down growth if households and firms deferred expenditure in anticipation of lower prices in the future. Falling nominal income could trigger debt sustainability issues for households.
Policy response:	Lower the policy rate and keep low for longer; reconsider fiscal consolidation.

^1/ The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.

Table 1.

Sweden: Selected Economic Indicators, 2011–19

Sources: Haver Analytics, IMF Institute, Sveriges Riksbank, Sweden Ministry of Finance and Fund staff calculations.

^{^1/}Based on relative unit labor costs in manufacturing.

^{^2/}Based on Balance of Payments Manual 5.

Table 1.

Sweden: Selected Economic Indicators, 2011–19

						Projections
			2011	2012	2013	2014	2015	2016	2017	2018	2019
Real economy (in percent change)
		Real GDP	2.9	0.9	1.6	2.6	2.8	2.7	2.6	2.5	2.4
		Domestic Demand	3.2	0.3	1.6	2.8	2.4	2.6	2.7	2.7	2.6
		CPI inflation	3.0	0.9	0.0	0.1	1.4	1.9	2.1	2.1	2.0
		Unemployment rate (in percent)	7.8	8.0	8.0	8.1	7.7	7.5	7.4	7.3	7.1
		Gross national saving (percent of GDP)	26.0	24.9	24.6	25.6	25.9	26.3	26.6	26.9	27.2
		Gross domestic investment (percent of GDP)	19.5	18.8	18.4	19.1	19.3	19.7	20.1	20.6	21.1
		Output Gap (as a percent of potential)	0.5	−0.5	−0.8	−0.5	0.3	0.7	1.0	0.9	0.8
Public finance (in percent of GDP)
		Total Revenues	51.5	51.4	51.7	50.3	50.9	51.2	51.2	51.2	51.2
		Total Expenditures	51.5	52.1	53.0	52.2	51.4	51.1	50.6	49.9	49.5
		Net lending	0.0	−0.7	−1.3	−1.9	−0.6	0.1	0.6	1.3	1.7
		Structural balance (as a percent of potential GDP)	−0.2	−0.4	−0.9	−1.6	−0.7	−0.2	0.2	0.8	1.3
		General government gross debt, official statistics	38.6	38.3	40.5	41.8	40.7	38.5	35.9	32.6	29.1
Money and credit (year-on-year, percent change, eop)
		M1	0.9	5.9	9.0	…	…	…	…	…	…
		M3	6.9	3.1	3.1	…	…	…	…	…	…
		Bank lending to households	6.0	11.7	3.8	…	…	…	…	…	…
Interest rates (year average)
		Repo rate (end of period)	1.8	1.0	0.8	…	…	…	…	…	…
		Three-month deposit rate	1.7	1.3	0.9	…	…	…	…	…	…
		Ten-year government bond yield	2.6	1.6	2.1	…	…	…	…	…	…
Balance of payments (in percent of GDP) ^2/
		Current account	6.1	6.0	6.4	6.0	6.1	6.1	5.9	5.8	5.6
		Trade balance	5.3	5.3	5.3	4.9	5.0	5.0	4.9	4.7	4.6
		Foreign Direct Investment, net	−3.2	−2.4	−4.2	−4.2	−4.2	−4.2	−4.2	−4.2	−4.2
		International reserves, changes (in billions of US dollars)	−0.7	−0.5	−14.6	…	…	…	…	…	…
		Reserve cover (months of imports of goods and services)	2.8	2.7	3.5	3.4	3.2	3.1	2.9	2.7	2.6
Exchange rate (period average, unless otherwise stated)
		Exchange rate regime				Free floating exchange rate
		SEK per U.S. dollar (as of July 24, 2014)					6.8
		Nominal effective rate (2010=100)	105.7	107.0	110.1	…	…	…	…	…	…
		Real effective rate (2010=100) ^1/	97.0	98.3	100.4	…	…	…	…	…	…
Fund Position (May 31, 2014)
		Holdings of currency (in percent of quota)					78.5
		Holdings of SDRs (in percent of allocation)					92.6
		Quota (in millions of SDRs)					2395.5
Other Indicators
	GDP per capita (2013, USD): 58.014; Population (2013, million): 9.6; Main products and exports: Machinery, motor vehicles, paper products, pulp and wood; Key export markets: Germany, Norway, United Kingdom

Sources: Haver Analytics, IMF Institute, Sveriges Riksbank, Sweden Ministry of Finance and Fund staff calculations.

^{^1/}Based on relative unit labor costs in manufacturing.

^{^2/}Based on Balance of Payments Manual 5.

Table 1.

Sweden: Selected Economic Indicators, 2011–19

						Projections
			2011	2012	2013	2014	2015	2016	2017	2018	2019
Real economy (in percent change)
		Real GDP	2.9	0.9	1.6	2.6	2.8	2.7	2.6	2.5	2.4
		Domestic Demand	3.2	0.3	1.6	2.8	2.4	2.6	2.7	2.7	2.6
		CPI inflation	3.0	0.9	0.0	0.1	1.4	1.9	2.1	2.1	2.0
		Unemployment rate (in percent)	7.8	8.0	8.0	8.1	7.7	7.5	7.4	7.3	7.1
		Gross national saving (percent of GDP)	26.0	24.9	24.6	25.6	25.9	26.3	26.6	26.9	27.2
		Gross domestic investment (percent of GDP)	19.5	18.8	18.4	19.1	19.3	19.7	20.1	20.6	21.1
		Output Gap (as a percent of potential)	0.5	−0.5	−0.8	−0.5	0.3	0.7	1.0	0.9	0.8
Public finance (in percent of GDP)
		Total Revenues	51.5	51.4	51.7	50.3	50.9	51.2	51.2	51.2	51.2
		Total Expenditures	51.5	52.1	53.0	52.2	51.4	51.1	50.6	49.9	49.5
		Net lending	0.0	−0.7	−1.3	−1.9	−0.6	0.1	0.6	1.3	1.7
		Structural balance (as a percent of potential GDP)	−0.2	−0.4	−0.9	−1.6	−0.7	−0.2	0.2	0.8	1.3
		General government gross debt, official statistics	38.6	38.3	40.5	41.8	40.7	38.5	35.9	32.6	29.1
Money and credit (year-on-year, percent change, eop)
		M1	0.9	5.9	9.0	…	…	…	…	…	…
		M3	6.9	3.1	3.1	…	…	…	…	…	…
		Bank lending to households	6.0	11.7	3.8	…	…	…	…	…	…
Interest rates (year average)
		Repo rate (end of period)	1.8	1.0	0.8	…	…	…	…	…	…
		Three-month deposit rate	1.7	1.3	0.9	…	…	…	…	…	…
		Ten-year government bond yield	2.6	1.6	2.1	…	…	…	…	…	…
Balance of payments (in percent of GDP) ^2/
		Current account	6.1	6.0	6.4	6.0	6.1	6.1	5.9	5.8	5.6
		Trade balance	5.3	5.3	5.3	4.9	5.0	5.0	4.9	4.7	4.6
		Foreign Direct Investment, net	−3.2	−2.4	−4.2	−4.2	−4.2	−4.2	−4.2	−4.2	−4.2
		International reserves, changes (in billions of US dollars)	−0.7	−0.5	−14.6	…	…	…	…	…	…
		Reserve cover (months of imports of goods and services)	2.8	2.7	3.5	3.4	3.2	3.1	2.9	2.7	2.6
Exchange rate (period average, unless otherwise stated)
		Exchange rate regime				Free floating exchange rate
		SEK per U.S. dollar (as of July 24, 2014)					6.8
		Nominal effective rate (2010=100)	105.7	107.0	110.1	…	…	…	…	…	…
		Real effective rate (2010=100) ^1/	97.0	98.3	100.4	…	…	…	…	…	…
Fund Position (May 31, 2014)
		Holdings of currency (in percent of quota)					78.5
		Holdings of SDRs (in percent of allocation)					92.6
		Quota (in millions of SDRs)					2395.5
Other Indicators
	GDP per capita (2013, USD): 58.014; Population (2013, million): 9.6; Main products and exports: Machinery, motor vehicles, paper products, pulp and wood; Key export markets: Germany, Norway, United Kingdom

Sources: Haver Analytics, IMF Institute, Sveriges Riksbank, Sweden Ministry of Finance and Fund staff calculations.

^{^1/}Based on relative unit labor costs in manufacturing.

^{^2/}Based on Balance of Payments Manual 5.

Table 2.

Sweden: General Government Statement of Operations, 2012–19

Sources: 2008-2013 Fiscal Policy Bills and Fund staff calculations.

^{^1/}Structural balance takes into account output and employment gaps.

^{^2/}Overall balance adjusted for the output gap, based on authorities’ measure.

Table 2.

Sweden: General Government Statement of Operations, 2012–19

					Projections
			2012	2013	2014	2015	2016	2017	2018	2019
						*Billions of SEK*
Revenue			1,825	1,882	1,893	1,996	2,102	2,204	2,305	2,408
Tax revenue			1,309	1,362	1,359	1,442	1,524	1,601	1,675	1,750
	Taxes on income, profits, and capital gains		636	664	682	713	755	800	844	882
		Payable by individuals	540	568	579	605	639	677	710	742
		Payable by corporations	95	96	102	108	116	123	134	140
	General taxes on goods and services		448	459	467	483	501	520	539	563
	Other Taxes		225	238	210	246	269	281	293	306
Social Contributions			275	273	279	288	299	312	325	340
Grants			3	3	3	3	3	3	3	3
Other revenue			238	244	252	263	275	289	302	316
	Interest income		33	33	34	36	38	39	41	43
Expenditure			1,850	1,930	1,962	2,018	2,098	2,177	2,248	2,328
Compensation of employees			504	522	540	554	569	589	610	637
Intermediate consumption			323	350	362	377	395	414	433	452
Interest payments			33	31	35	37	38	38	38	38
Social benefits			645	673	660	676	708	735	751	766
Expense not elsewhere classified			306	316	329	338	349	362	377	393
Net acquisition of nonfinancial assets			38	38	37	35	38	40	40	41
Gross operating balance			13	−11	−33	13	42	68	97	122
Net lending / borrowing			−25	−49	−70	−22	4	28	57	80
Net financial worth, transactions			−12
Net acquisition of financial assets			−25
Net incurrence of liabilities			−11
						*Percent of GDP*
Revenue			51.4	51.7	50.3	50.9	51.2	51.2	51.2	51.2
Tax revenue			36.9	37.4	36.1	36.8	37.1	37.2	37.2	37.2
	Taxes on income, profits, and capital gains		17.9	18.2	18.1	18.2	18.4	18.6	18.7	18.7
		Payable by individuals	15.2	15.6	15.4	15.4	15.6	15.7	15.8	15.8
		Payable by corporations	2.7	2.6	2.7	2.7	2.8	2.9	3.0	3.0
	General taxes on goods and services		12.6	12.6	12.4	12.3	12.2	12.1	12.0	12.0
	Other Taxes		6.3	6.5	5.6	6.3	6.5	6.5	6.5	6.5
Social Contributions			7.7	7.5	7.4	7.3	7.3	7.3	7.2	7.2
Grants			0.1	0.1	0.1	0.1	0.1	0.1	0.1	0.1
Other revenue			6.7	6.7	6.7	6.7	6.7	6.7	6.7	6.7
	Interest income		0.9	0.9	0.9	0.9	0.9	0.9	0.9	0.9
Expenditure			52.1	53.0	52.2	51.4	51.1	50.6	49.9	49.5
Compensation of employees			14.2	14.3	14.4	14.1	13.9	13.7	13.5	13.5
Intermediate consumption			9.1	9.6	9.6	9.6	9.6	9.6	9.6	9.6
Interest payments			0.9	0.9	0.9	1.0	0.9	0.9	0.8	0.8
Social benefits			18.2	18.5	17.5	17.2	17.3	17.1	16.7	16.3
Expense not elsewhere classified			8.6	8.7	8.7	8.6	8.5	8.4	8.4	8.4
Net acquisition of nonfinancial assets			1.1	1.0	1.0	0.9	0.9	0.9	0.9	0.9
Gross operating balance			0.4	−0.3	−0.9	0.3	1.0	1.6	2.1	2.6
Net lending / borrowing			−0.7	−1.3	−1.9	−0.6	0.1	0.6	1.3	1.7
Net financial worth, transactions			−0.3
Net acquisition of financial assets			−0.7
Net incurrence of liabilities			−0.3
Structural Balance (percent of potential GDP) ^1/			−0.4	−0.9	−1.6	−0.7	−0.2	0.2	0.8	1.3
	Fiscal Impulse (expansionary +)		0.2	0.5	0.7	−0.9	−0.4	−0.4	−0.7	−0.6
Memorandum items:
	Compliance with fiscal rule
		Overall balance 10-year average	0.6	0.6	0.3	0.1	0.0	−0.2	−0.2	0.0
		Overall balance 7-year rolling average (±3 years)	0.8	0.3	−0.4	…	…	…	…	…
		Structural balance (percent of potential GDP) ^2/	−0.4	−0.9	−1.6	−0.7	−0.3	0.1	0.8	1.3
	Gross Public Debt (percent of GDP)		38.3	40.5	41.8	40.7	38.5	35.9	32.6	29.1
	Real GDP growth (percent change)		0.9	1.6	2.6	2.8	2.7	2.6	2.5	2.4
	Output gap (percent of potential GDP)		−0.5	−0.8	−0.5	0.3	0.7	1.0	0.9	0.8
	Nominal GDP (in billions of SEK)		3550	3641	3762	3922	4106	4302	4503	4705

Sources: 2008-2013 Fiscal Policy Bills and Fund staff calculations.

^{^1/}Structural balance takes into account output and employment gaps.

^{^2/}Overall balance adjusted for the output gap, based on authorities’ measure.

Table 2.

Sweden: General Government Statement of Operations, 2012–19

					Projections
			2012	2013	2014	2015	2016	2017	2018	2019
						*Billions of SEK*
Revenue			1,825	1,882	1,893	1,996	2,102	2,204	2,305	2,408
Tax revenue			1,309	1,362	1,359	1,442	1,524	1,601	1,675	1,750
	Taxes on income, profits, and capital gains		636	664	682	713	755	800	844	882
		Payable by individuals	540	568	579	605	639	677	710	742
		Payable by corporations	95	96	102	108	116	123	134	140
	General taxes on goods and services		448	459	467	483	501	520	539	563
	Other Taxes		225	238	210	246	269	281	293	306
Social Contributions			275	273	279	288	299	312	325	340
Grants			3	3	3	3	3	3	3	3
Other revenue			238	244	252	263	275	289	302	316
	Interest income		33	33	34	36	38	39	41	43
Expenditure			1,850	1,930	1,962	2,018	2,098	2,177	2,248	2,328
Compensation of employees			504	522	540	554	569	589	610	637
Intermediate consumption			323	350	362	377	395	414	433	452
Interest payments			33	31	35	37	38	38	38	38
Social benefits			645	673	660	676	708	735	751	766
Expense not elsewhere classified			306	316	329	338	349	362	377	393
Net acquisition of nonfinancial assets			38	38	37	35	38	40	40	41
Gross operating balance			13	−11	−33	13	42	68	97	122
Net lending / borrowing			−25	−49	−70	−22	4	28	57	80
Net financial worth, transactions			−12
Net acquisition of financial assets			−25
Net incurrence of liabilities			−11
						*Percent of GDP*
Revenue			51.4	51.7	50.3	50.9	51.2	51.2	51.2	51.2
Tax revenue			36.9	37.4	36.1	36.8	37.1	37.2	37.2	37.2
	Taxes on income, profits, and capital gains		17.9	18.2	18.1	18.2	18.4	18.6	18.7	18.7
		Payable by individuals	15.2	15.6	15.4	15.4	15.6	15.7	15.8	15.8
		Payable by corporations	2.7	2.6	2.7	2.7	2.8	2.9	3.0	3.0
	General taxes on goods and services		12.6	12.6	12.4	12.3	12.2	12.1	12.0	12.0
	Other Taxes		6.3	6.5	5.6	6.3	6.5	6.5	6.5	6.5
Social Contributions			7.7	7.5	7.4	7.3	7.3	7.3	7.2	7.2
Grants			0.1	0.1	0.1	0.1	0.1	0.1	0.1	0.1
Other revenue			6.7	6.7	6.7	6.7	6.7	6.7	6.7	6.7
	Interest income		0.9	0.9	0.9	0.9	0.9	0.9	0.9	0.9
Expenditure			52.1	53.0	52.2	51.4	51.1	50.6	49.9	49.5
Compensation of employees			14.2	14.3	14.4	14.1	13.9	13.7	13.5	13.5
Intermediate consumption			9.1	9.6	9.6	9.6	9.6	9.6	9.6	9.6
Interest payments			0.9	0.9	0.9	1.0	0.9	0.9	0.8	0.8
Social benefits			18.2	18.5	17.5	17.2	17.3	17.1	16.7	16.3
Expense not elsewhere classified			8.6	8.7	8.7	8.6	8.5	8.4	8.4	8.4
Net acquisition of nonfinancial assets			1.1	1.0	1.0	0.9	0.9	0.9	0.9	0.9
Gross operating balance			0.4	−0.3	−0.9	0.3	1.0	1.6	2.1	2.6
Net lending / borrowing			−0.7	−1.3	−1.9	−0.6	0.1	0.6	1.3	1.7
Net financial worth, transactions			−0.3
Net acquisition of financial assets			−0.7
Net incurrence of liabilities			−0.3
Structural Balance (percent of potential GDP) ^1/			−0.4	−0.9	−1.6	−0.7	−0.2	0.2	0.8	1.3
	Fiscal Impulse (expansionary +)		0.2	0.5	0.7	−0.9	−0.4	−0.4	−0.7	−0.6
Memorandum items:
	Compliance with fiscal rule
		Overall balance 10-year average	0.6	0.6	0.3	0.1	0.0	−0.2	−0.2	0.0
		Overall balance 7-year rolling average (±3 years)	0.8	0.3	−0.4	…	…	…	…	…
		Structural balance (percent of potential GDP) ^2/	−0.4	−0.9	−1.6	−0.7	−0.3	0.1	0.8	1.3
	Gross Public Debt (percent of GDP)		38.3	40.5	41.8	40.7	38.5	35.9	32.6	29.1
	Real GDP growth (percent change)		0.9	1.6	2.6	2.8	2.7	2.6	2.5	2.4
	Output gap (percent of potential GDP)		−0.5	−0.8	−0.5	0.3	0.7	1.0	0.9	0.8
	Nominal GDP (in billions of SEK)		3550	3641	3762	3922	4106	4302	4503	4705

Sources: 2008-2013 Fiscal Policy Bills and Fund staff calculations.

^{^1/}Structural balance takes into account output and employment gaps.

^{^2/}Overall balance adjusted for the output gap, based on authorities’ measure.

Table 3.

Sweden: Public Sector Balance Sheet

Sources: Eurostat and Fund staff calculations.

Table 3.

Sweden: Public Sector Balance Sheet

		2003	2004	2005	2006	2007	2008	2009	2010	2011	2012
						*(In billions of SEK)*
Assets		2,981	3,097	3,333	3,575	3,681	3,503	3,743	3,867	3,875	3,990
Financial assets		1,559	1,674	1,909	2,150	2,256	2,077	2,315	2,438	2,446	2,560
	Currency and deposits	50	48	52	76	73	119	79	65	90	75
	Securities other than shares	211	232	262	317	349	362	366	399	397	425
	Loans	318	329	355	376	383	406	499	504	533	548
	Shares and other equity	725	790	931	1,074	1,116	921	1,088	1,150	1,128	1,203
	Other financial assets	256	275	310	308	335	269	282	320	298	309
Capital stock net of depreciation		1,421	1,422	1,423	1,424	1,425	1,426	1,427	1,428	1,429	1,430
Liabilities		1,560	1,608	1,696	1,600	1,555	1,601	1,621	1,645	1,730	1,732
Financial liabilities		1,560	1,608	1,696	1,600	1,555	1,601	1,621	1,645	1,730	1,732
	Currency and deposits	46	47	51	29	37	58	50	53	64	70
	Securities and other equity	1,224	1,262	1,327	1,214	1,106	1,112	1,077	1,109	1,131	1,123
	Loans	137	143	149	168	209	213	271	230	287	270
	Other liabilities	152	156	170	189	203	218	223	253	247	269
Net worth		1,421	1,489	1,636	1,975	2,126	1,903	2,122	2,222	2,146	2,258
Financial net worth		0	67	213	551	701	476	694	793	716	828
						*(In percent of GDP)*
Assets		117.1	116.4	120.3	121.4	117.8	109.3	120.5	115.9	111.3	112.4
Financial assets		61.3	62.9	68.9	73.0	72.2	64.8	74.5	73.1	70.3	72.1
	Currency and deposits	2.0	1.8	1.9	2.6	2.3	3.7	2.6	2.0	2.6	2.1
	Securities other than shares	8.3	8.7	9.5	10.8	11.2	11.3	11.8	12.0	11.4	12.0
	Loans	12.5	12.4	12.8	12.8	12.3	12.7	16.1	15.1	15.3	15.4
	Shares and other equity	28.5	29.7	33.6	36.5	35.7	28.7	35.0	34.5	32.4	33.9
	Other financial assets	10.0	10.3	11.2	10.5	10.7	8.4	9.1	9.6	8.6	8.7
Capital stock net of depreciation		55.9	53.5	51.4	48.4	45.6	44.5	46.0	42.8	41.1	40.3
Liabilities		61.3	60.4	61.2	54.3	49.8	50.0	52.2	49.3	49.7	48.8
Financial liabilities		61.3	60.4	61.2	54.3	49.8	50.0	52.2	49.3	49.7	48.8
	Currency and deposits	1.8	1.7	1.8	1.0	1.2	1.8	1.6	1.6	1.8	2.0
	Securities and other equity	48.1	47.4	47.9	41.2	35.4	34.7	34.7	33.2	32.5	31.6
	Loans	5.4	5.4	5.4	5.7	6.7	6.6	8.7	6.9	8.3	7.6
	Other liabilities	6.0	5.8	6.1	6.4	6.5	6.8	7.2	7.6	7.1	7.6
Net worth		55.8	56.0	59.1	67.1	68.0	59.4	68.3	66.6	61.6	63.6
Financial net worth		0.0	2.5	7.7	18.7	22.4	14.9	22.4	23.8	20.6	23.3
Memorandum items:
GDP (SEK billions)		2,545	2,661	2,769	2,944	3,126	3,204	3,106	3,338	3,481	3,550

Sources: Eurostat and Fund staff calculations.

Table 3.

Sweden: Public Sector Balance Sheet

		2003	2004	2005	2006	2007	2008	2009	2010	2011	2012
						*(In billions of SEK)*
Assets		2,981	3,097	3,333	3,575	3,681	3,503	3,743	3,867	3,875	3,990
Financial assets		1,559	1,674	1,909	2,150	2,256	2,077	2,315	2,438	2,446	2,560
	Currency and deposits	50	48	52	76	73	119	79	65	90	75
	Securities other than shares	211	232	262	317	349	362	366	399	397	425
	Loans	318	329	355	376	383	406	499	504	533	548
	Shares and other equity	725	790	931	1,074	1,116	921	1,088	1,150	1,128	1,203
	Other financial assets	256	275	310	308	335	269	282	320	298	309
Capital stock net of depreciation		1,421	1,422	1,423	1,424	1,425	1,426	1,427	1,428	1,429	1,430
Liabilities		1,560	1,608	1,696	1,600	1,555	1,601	1,621	1,645	1,730	1,732
Financial liabilities		1,560	1,608	1,696	1,600	1,555	1,601	1,621	1,645	1,730	1,732
	Currency and deposits	46	47	51	29	37	58	50	53	64	70
	Securities and other equity	1,224	1,262	1,327	1,214	1,106	1,112	1,077	1,109	1,131	1,123
	Loans	137	143	149	168	209	213	271	230	287	270
	Other liabilities	152	156	170	189	203	218	223	253	247	269
Net worth		1,421	1,489	1,636	1,975	2,126	1,903	2,122	2,222	2,146	2,258
Financial net worth		0	67	213	551	701	476	694	793	716	828
						*(In percent of GDP)*
Assets		117.1	116.4	120.3	121.4	117.8	109.3	120.5	115.9	111.3	112.4
Financial assets		61.3	62.9	68.9	73.0	72.2	64.8	74.5	73.1	70.3	72.1
	Currency and deposits	2.0	1.8	1.9	2.6	2.3	3.7	2.6	2.0	2.6	2.1
	Securities other than shares	8.3	8.7	9.5	10.8	11.2	11.3	11.8	12.0	11.4	12.0
	Loans	12.5	12.4	12.8	12.8	12.3	12.7	16.1	15.1	15.3	15.4
	Shares and other equity	28.5	29.7	33.6	36.5	35.7	28.7	35.0	34.5	32.4	33.9
	Other financial assets	10.0	10.3	11.2	10.5	10.7	8.4	9.1	9.6	8.6	8.7
Capital stock net of depreciation		55.9	53.5	51.4	48.4	45.6	44.5	46.0	42.8	41.1	40.3
Liabilities		61.3	60.4	61.2	54.3	49.8	50.0	52.2	49.3	49.7	48.8
Financial liabilities		61.3	60.4	61.2	54.3	49.8	50.0	52.2	49.3	49.7	48.8
	Currency and deposits	1.8	1.7	1.8	1.0	1.2	1.8	1.6	1.6	1.8	2.0
	Securities and other equity	48.1	47.4	47.9	41.2	35.4	34.7	34.7	33.2	32.5	31.6
	Loans	5.4	5.4	5.4	5.7	6.7	6.6	8.7	6.9	8.3	7.6
	Other liabilities	6.0	5.8	6.1	6.4	6.5	6.8	7.2	7.6	7.1	7.6
Net worth		55.8	56.0	59.1	67.1	68.0	59.4	68.3	66.6	61.6	63.6
Financial net worth		0.0	2.5	7.7	18.7	22.4	14.9	22.4	23.8	20.6	23.3
Memorandum items:
GDP (SEK billions)		2,545	2,661	2,769	2,944	3,126	3,204	3,106	3,338	3,481	3,550

Sources: Eurostat and Fund staff calculations.

Table 4.

Sweden: Balance of Payments Accounts, 2012–19

Sources: Statistics Sweden and Fund staff calculations.

^{^1/}Positive number indicates an accumulation of foreign assets.

^{^2/}Percent changes of exports of G&S and imports of G&S are calculated using numbers in USD terms.

Note: Based on Balance of Payments Manual 5.

Table 4.

Sweden: Balance of Payments Accounts, 2012–19

						Projections
				2012	2013	2014	2015	2016	2017	2018	2019
							*Billions of SEK*
Current Account Balance				212	235	225	239	249	255	260	265
	Trade Balance			189	194	183	196	205	210	214	218
		Exports of G&S		1678	1626	1677	1757	1850	1952	2062	2179
		Imports of G&S		−1490	−1432	−1494	−1561	−1645	−1742	−1848	−1961
	Factor income, net			88	102	105	107	110	113	116	118
	Current Transfers, net			−65	−61	−63	−64	−66	−68	−69	−71
Financial Account Balance				−77	−124	−209	−217	−226	−228	−239	−249
	Investment Abroad ¹			388	72	−27	−52	−71	−109	−136	−166
	Investment in Sweden ²			−461	−101	−181	−165	−157	−121	−104	−86
	Reserves, change			−4	−95	0	0	0	0	0	0
							*Percent of GDP*
Current Account Balance				6.0	6.4	6.0	6.1	6.1	5.9	5.8	5.6
	Trade Balance			5.3	5.3	4.9	5.0	5.0	4.9	4.7	4.6
		Exports of G&S		47.3	44.7	44.6	44.8	45.1	45.4	45.8	46.3
		Imports of G&S		−42.0	−39.3	−39.7	−39.8	−40.1	−40.5	−41.0	−41.7
	Factor income, net			2.5	2.8	2.8	2.7	2.7	2.6	2.6	2.5
	Current Transfers, net			−1.8	−1.7	−1.7	−1.6	−1.6	−1.6	−1.5	−1.5
Financial Account Balance				−2.2	−3.4	−5.5	−5.5	−5.5	−5.3	−5.3	−5.3
	Investment Abroad ^1/			10.9	2.0	−0.7	−1.3	−1.7	−2.5	−3.0	−3.5
		Direct Investment		−5.5	−6.2	−6.2	−6.2	−6.2	−6.2	−6.2	−6.2
		Portfolio Investment		18.8	13.9	11.4	10.8	10.4	9.3	8.8	8.3
			Financial Derivatives	25.0	19.3	17.8	17.2	16.8	15.8	15.3	14.8
		Other Investment		−2.3	−5.7	−5.9	−5.9	−5.9	−5.7	−5.7	−5.7
		Reserves		−0.1	−2.6	0.0	0.0	0.0	0.0	0.0	0.0
	Investment in Sweden ^1/			−13.0	−2.8	−4.8	−4.2	−3.8	−2.8	−2.3	−1.8
		Direct Investment		3.1	2.0	2.0	2.0	2.0	2.0	2.0	2.0
		Portfolio Investment		−15.0	−4.2	−6.4	−5.8	−5.4	−4.4	−3.9	−3.4
			Financial Derivatives	−23.9	−17.5	−17.8	−17.2	−16.8	−15.8	−15.3	−14.8
		Other Investment		−1.1	−0.6	−0.4	−0.4	−0.4	−0.4	−0.4	−0.4
Errors and Omissions				−0.5	−0.4	0.0	0.0	0.0	0.0	0.0	0.0
							*Percent change*
Exports of G&S ^2/
	Value			−4.8	0.8	1.8	5.3	6.4	7.5	8.2	8.2
	Volume			−3.4	3.6	3.5	6.1	6.4	7.0	7.5	7.3
	Deflator			−1.4	−2.8	−1.6	−0.7	0.0	0.5	0.7	0.8
Imports of G&S ^2/
	Value			−5.1	0.0	2.9	5.0	6.6	8.0	8.7	8.6
	Volume			−4.1	2.9	4.3	5.6	6.6	7.7	8.2	8.1
	Deflator			−1.0	−2.8	−1.4	−0.5	0.0	0.3	0.5	0.5
Memorandum
Nominal GDP (SEK billion)				3550	3641	3762	3922	4106	4302	4503	4705

Sources: Statistics Sweden and Fund staff calculations.

^{^1/}Positive number indicates an accumulation of foreign assets.

^{^2/}Percent changes of exports of G&S and imports of G&S are calculated using numbers in USD terms.

Note: Based on Balance of Payments Manual 5.

Table 4.

Sweden: Balance of Payments Accounts, 2012–19

						Projections
				2012	2013	2014	2015	2016	2017	2018	2019
							*Billions of SEK*
Current Account Balance				212	235	225	239	249	255	260	265
	Trade Balance			189	194	183	196	205	210	214	218
		Exports of G&S		1678	1626	1677	1757	1850	1952	2062	2179
		Imports of G&S		−1490	−1432	−1494	−1561	−1645	−1742	−1848	−1961
	Factor income, net			88	102	105	107	110	113	116	118
	Current Transfers, net			−65	−61	−63	−64	−66	−68	−69	−71
Financial Account Balance				−77	−124	−209	−217	−226	−228	−239	−249
	Investment Abroad ¹			388	72	−27	−52	−71	−109	−136	−166
	Investment in Sweden ²			−461	−101	−181	−165	−157	−121	−104	−86
	Reserves, change			−4	−95	0	0	0	0	0	0
							*Percent of GDP*
Current Account Balance				6.0	6.4	6.0	6.1	6.1	5.9	5.8	5.6
	Trade Balance			5.3	5.3	4.9	5.0	5.0	4.9	4.7	4.6
		Exports of G&S		47.3	44.7	44.6	44.8	45.1	45.4	45.8	46.3
		Imports of G&S		−42.0	−39.3	−39.7	−39.8	−40.1	−40.5	−41.0	−41.7
	Factor income, net			2.5	2.8	2.8	2.7	2.7	2.6	2.6	2.5
	Current Transfers, net			−1.8	−1.7	−1.7	−1.6	−1.6	−1.6	−1.5	−1.5
Financial Account Balance				−2.2	−3.4	−5.5	−5.5	−5.5	−5.3	−5.3	−5.3
	Investment Abroad ^1/			10.9	2.0	−0.7	−1.3	−1.7	−2.5	−3.0	−3.5
		Direct Investment		−5.5	−6.2	−6.2	−6.2	−6.2	−6.2	−6.2	−6.2
		Portfolio Investment		18.8	13.9	11.4	10.8	10.4	9.3	8.8	8.3
			Financial Derivatives	25.0	19.3	17.8	17.2	16.8	15.8	15.3	14.8
		Other Investment		−2.3	−5.7	−5.9	−5.9	−5.9	−5.7	−5.7	−5.7
		Reserves		−0.1	−2.6	0.0	0.0	0.0	0.0	0.0	0.0
	Investment in Sweden ^1/			−13.0	−2.8	−4.8	−4.2	−3.8	−2.8	−2.3	−1.8
		Direct Investment		3.1	2.0	2.0	2.0	2.0	2.0	2.0	2.0
		Portfolio Investment		−15.0	−4.2	−6.4	−5.8	−5.4	−4.4	−3.9	−3.4
			Financial Derivatives	−23.9	−17.5	−17.8	−17.2	−16.8	−15.8	−15.3	−14.8
		Other Investment		−1.1	−0.6	−0.4	−0.4	−0.4	−0.4	−0.4	−0.4
Errors and Omissions				−0.5	−0.4	0.0	0.0	0.0	0.0	0.0	0.0
							*Percent change*
Exports of G&S ^2/
	Value			−4.8	0.8	1.8	5.3	6.4	7.5	8.2	8.2
	Volume			−3.4	3.6	3.5	6.1	6.4	7.0	7.5	7.3
	Deflator			−1.4	−2.8	−1.6	−0.7	0.0	0.5	0.7	0.8
Imports of G&S ^2/
	Value

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Abstract

Recent Economic Developments and Outlook

A. Recent Economic Developments

B. Outlook and Risks

The Authorities’ Views

Policy Agenda

A. Financial Policies: Addressing Stability Risks

The Authorities’ Views

B. Monetary Policy: Balancing Price and Financial Stability

The Authorities’ Views

C. Structural Reforms: Reducing Unemployment

The Authorities’ Views

D. Fiscal Consolidation: Moving To Protect Buffers

The Authorities’ Views

Staff Appraisal