2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Switzerland

Abstract

2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Switzerland

Context

1. The Swiss economy has adjusted to the large cumulative exchange rate appreciation that occurred since the onset of the global financial crisis (GFC). As one of the most open and sophisticated economies, Switzerland has long been at the forefront of product and technology innovation, which has underpinned a secular trend real appreciation. However, since the GFC, safe-haven inflows and operational limits on interest rates caused the real exchange rate to temporarily overshoot its long-run trend, slowing output and employment growth, even as the large current account surplus—which includes net foreign income—remained broadly unchanged. More recently, efficiency gains and nominal and real depreciation have helped to restore profit margins, positioning the economy to benefit from the acceleration in world activity.

A01ufig1

Effective Exchange Rates

(Index, 2010=100)

Citation: IMF Staff Country Reports 2018, 173; 10.5089/9781484362167.002.A001

Sources: IMF INS database; and IMF staff calculations.

Recent Developments

2. After a subdued start to 2017, GDP growth accelerated in the second half of the year. Output grew by 1.1 percent last year, driven mainly by final domestic demand. Growth was some 0.4 percentage points lower than in 2016 partly due to the absence of foreign-generated earnings from major biennial international sporting events and whose parent-entities are based in Switzerland (Box 1). Excluding this effect, GDP growth has generally been on an increasing path, benefitting since mid-2017 from buoyant external demand, while firms rebuilt profit margins following the sizable depreciation of the franc. The positive momentum is thought to have continued in Q1:2018, although at a slightly reduced pace.

A01ufig2

GDP Growth and NEER

(SA, q/q percent change)

Citation: IMF Staff Country Reports 2018, 173; 10.5089/9781484362167.002.A001

Sources: Haver; and IMF staff calculations.
A01ufig3

Inflation by Component

(Y/y percent change)

Citation: IMF Staff Country Reports 2018, 173; 10.5089/9781484362167.002.A001

Sources: Haver; and IMF staff calculations.

3. Underlying price and wage momentum is gradually rising, although inflation remains subdued. After five years of falling or flat prices, headline inflation turned positive in mid-2016 and had risen to 0.8 percent in April 2018, largely on increasing world energy prices and depreciation of the franc since mid-2017. Domestically-sourced inflation, while now positive, was dampened by a 0.3 percentage point reduction in the VAT rate at the beginning of 2018, reaching only around 0.3 percent. After falling sharply, capacity utilization has recovered and at 84 percent in early 2018, was just short of its post-crisis peak. The labor market has tightened, with registered unemployment decreasing to 3 percent (4.8 percent on the ILO definition, which includes those ineligible for benefits) and growing shortages of skilled workers on lower immigration owing to stronger regional economic conditions. While output dropped below potential following the appreciation in 2015, the negative output gap is estimated to have narrowed to about ½ percentage point as of end-2017.

Internationally-Active Entities and Economic Statistics

Fees from trademark licensing and broadcast rights generated by the European Football Championships and the summer Olympics contributed 0.3 percentage points to Swiss GDP in 2016, even though these events were not held in Switzerland. This attribution is consistent with international statistical conventions (both ESA and SNA), whereby foreign-sourced profits are allocated to Switzerland because it is the home base of their parent associations (UEFA and IOC). The absence of similar sporting events in 2017 contributed to a decrease in GDP by 0.2 percentage point, thereby creating a year-to-year swing in GDP growth of about 0.4 percentage points. As similar sporting events are scheduled for 2018 (FIFA World Cup and winter Olympics) and every future even-numbered year, this effect on output and growth will be a biennial occurrence.

Switzerland is home to numerous merchanting companies (mainly commodity traders) that purchase and sell goods in international markets, but without the goods ever entering Switzerland. Profits from this activity accrue to Switzerland and are recorded in GDP and (on a net basis) in goods exports. With most of the income invested abroad (rather than locally), these activities raise the saving-investment balance and hence the current account. Merchanting contributes about 4 percent of GDP to the current account each year.

These examples serve to highlight the role that globalization of firms’ real and financial activities and cross-border separation of companies from their foreign owners can have on traditional economic statistics. As noted by Avdjiev and others (2018), increasing cross border integration creates a growing tension between the nature of economic activity and the measurement system that attempts to keep up with it.1 Switzerland is not unique in this regard. The growing importance of multinationals and ownership of valuable intangible assets (intellectual property (IP) or trademarks) present a challenge for understanding macroeconomic statistics.

The presence of internationally-active multinationals and entities can have important implications for macroeconomic surveillance and policymaking. First, to the extent that GDP includes activities with little domestic labor or physical-capital inputs, it may not provide an accurate picture of the cyclical position of the economy. Second, the link between the REER and the current account could be dampened, and may even turn positive, if a more appreciated currency encourages offshoring of production. Third, long-run economic forecasts could become more uncertain if GDP depends on multinationals’ decisions regarding their country of residence (and hence where income from IP is booked), and which may significantly affect debt sustainability assessments. Fourth, the current account can become disconnected from GDP (but not from national income) through offshoring of production with repatriation of profits, which tilts the current account toward investment income and away from trade.2 And fifth, the level of the current account may change depending on whether foreign-ownership of domestic firms is in the form of direct or portfolio investment (see Annex II).

1 S. Avdjiev and others, “Tracking the International Footprint of Global Firms,” Bank of International Settlements Quarterly Review, March 2018.2 Rather than the conventional view of domestically-produced goods and services (G&S) that are included in GDP and—when traded—in the trade balance of the current account, it is more realistic to consider (i) domestically-produced G&S, (ii) foreigngenerated service exports from domestically-owned IP assets (recorded in GDP and the trade balance) and (iii) foreign-earned income from offshoring of production (not in GDP, but in national income, and not in the trade balance but in the current account).

4. The better global environment had—until recently—halted safe-haven appreciation pressures. More-benign global and regional political risk sentiment and the prospect of further stimulus withdrawal by major central banks caused the franc to weaken by 7 percent in real effective terms during mid-2017 to March 2018. As a result, the REER had returned to the level that prevailed when the franc was under the floor (late 2011 -early 2015), although it remained some 15 percent above its pre-crisis level. The franc again appreciated in May on rising international political uncertainty. Interest rates on longer-maturity debt have risen in tandem with those in other advanced economies, steepening the yield curve and pushing yields on maturities of 10 years and longer above zero. Nonetheless, interest rates remain low, fueling search-for-yield that has buoyed real estate investment.

A01ufig4

Government Bond Yields

(Percent, eop)

Citation: IMF Staff Country Reports 2018, 173; 10.5089/9781484362167.002.A001

Sources: Haver; Thomson Reuters Datastream; and IMF staff calculations.

5. Despite substantial swings in the REER, the current account (CA) surplus has remained large and relatively stable. The surplus, which averaged 10 percent of GDP during the past decade, reflects a concentration on relatively price-insensitive exports (breakthrough pharmaceuticals and luxury goods) and Switzerland’s role as a financial hub and host to multinational companies, which affects the income balance. From a saving-investment perspective, the household sector is the primary contributor.

A01ufig5

Current Account and Components

(Percent of GDP)

Citation: IMF Staff Country Reports 2018, 173; 10.5089/9781484362167.002.A001

Sources: SNB; Haver; WEO; and IMF staff calculations.

Report on the Discussions

A. Outlook and Risks

6. The improved external outlook, supported by the recent depreciation, is expected to energize the Swiss economy. A boost to investment and net exports from the tailwind of external demand, together with faster expansion of household spending due to confidence effects, are forecast to lift GDP growth to 2¼ percent in 2018 (including earnings from international sporting events), before growth gradually moderates to 1¾ percent over the medium term as the global cycle matures. The output gap is forecast to close in late-2018 and to turn modestly positive during 2019–21 before growth returns to potential. Strong external demand and the lower REER will temporarily raise net exports. Inflation is expected to increase to the upper half of the price stability band (0–2 percent) in 2018–19 on the pass-through of recent nominal effective depreciation, and subsequently revert to the mid-point as tightness in the labor market and capacity utilization return to more normal levels. Excluding temporary factors, underlying inflation is expected to increase gradually to the middle of the band.

7. Positive surprises to this outlook are possible, although risks appear tilted downward (Annex I). GDP growth could exceed forecasts if the global upswing were faster and more sustained than currently envisaged. On the other hand, several factors could weaken the outlook. Rising international trade tensions could impact Switzerland’s externally-oriented economy. More uncertain geopolitics could rekindle safe-haven pressures, sharply appreciating the franc and eroding competitiveness in less-productive sectors. Financial uncertainty would increase considerably and the exchange rate could be affected in the event the “sovereign money” initiative is approved in the June referendum.1 A resurgence in global inflation could trigger an abrupt policy tightening by major central banks, leading to volatility spikes in financial markets and spillovers to Swiss property prices. Uncertainty regarding a framework agreement governing Swiss-EU relations could affect cross-border flows. Further delays in meeting international standards on corporate income taxation (CIT) could reduce Switzerland’s appeal as an investment destination.

Authorities’ Views

8. The growth outlook has improved considerably, supported by robust external demand. Following the exit from the exchange rate floor, realized and potential GDP growth decreased and profit margins were squeezed. The acceleration in global output since early 2017 supported a recovery in Swiss activity, with the impulse from stronger world demand exceeding that from the moderate real depreciation. The positive momentum continued in Q1:2018. The negative output gap has narrowed and is likely to close in the first half of 2018. Export-oriented industries were the first to see demand pick up, with the benefits expected to become more broad-based as the recovery continues. Predicated on sustained robust global growth, Swiss GDP is forecast to expand by 2.4 percent in 2018, driven mainly by exports and investment in equipment. Over the medium term, still-low interest rates and further population growth would sustain growth, although at a somewhat slower pace than in 2018. Under the assumption of a constant policy interest rate at the current level, year-average inflation is forecast to gradually increase to just below 2 percent in 2020.

9. Global economic conditions and pressures on the Swiss franc are key uncertainties for the growth outlook. Protectionist tendencies could weaken external demand, including by disrupting international supply chains and dampening firms’ propensity to invest at the global level. All this would negatively affect Swiss exports. Resumption of international political risk could renew demand for the franc as a safe-haven asset. Abrupt decompression of term premia and reduced risk appetite could accompany even a gradual tightening of monetary policies by major central banks. Moreover, if global growth were to turn down, there would be limited scope for further support from monetary policy around the world. On the domestic front, the housing market and construction activity could adjust more abruptly than expected.

B. External Sector Assessment

Background

10. The size and composition of the external accounts reflect Switzerland’s role as a financial center and headquarters for entities with foreign operations. Persistent large CA surpluses are attributable to the balance on trade in goods and services, merchanting and investment income. Accumulation of these net savings has resulted in a positive net international investment position (NIIP) of 127 percent of GDP, although this is considerably smaller than implied by cumulating past current account surpluses. Gross financial flows and stocks are both very large relative to GDP, owing to the presence of two global systemically-important banks and sizable pass-through investment by foreign-controlled finance and holding companies. International reserves were small prior to the global financial crisis but have risen to 120 percent of GDP (including valuation changes) on several episodes of large-scale purchases as well as more frequent—but smaller—acquisitions. Nonetheless, as of end-March, the REER and NEER were 15 and 31 percent higher than before the crisis, although they have fluctuated more recently.

Staff’s Views

11. Several structural factors contribute to Switzerland’s large and persistent CA surpluses. High per capita income, a large prime-saver-aged population alongside rising longevity, and high NIIP whose returns add to the income balance, push up the CA. Switzerland is an attractive location for multinationals and other entities, and their activities influence the balance on trade (merchanting and royalties) and income (return on net foreign assets), although—conceptually—the overall CA balance would unlikely be affected. The recent stability of the CA to large REER swings is partly explained by shifts in the income balance. However, the trade balance has been very stable despite variations in real quantities of net exports, suggesting a role for offsetting changes in the terms of trade.

A01ufig6

Net Lending/Borrowing by Sector, 2016

(Percent of GDP)

Citation: IMF Staff Country Reports 2018, 173; 10.5089/9781484362167.002.A001

Source: OECD.

12. Since the GFC, the Swiss franc has appreciated considerably. High global uncertainty led to strong safe-haven demand for the franc and to a large nominal and real appreciation. At the same time, the SNB purchased foreign currency to partially lean against the appreciation pressures and, in the process, accumulated a large amount of reserves.2 Nonetheless, the REER significantly overshot its long-term trend. In recent years, the excessive appreciation was unwound through—on the one hand—a combination of lower Swiss inflation than in trading partners and nominal effective depreciation of the franc due to more benign global economic and political outlooks, and continued trend appreciation on the other (Box 2).

13. Switzerland’s external position in 2017 was broadly consistent with medium-term fundamentals and desirable policies. Based on a cyclically-adjusted CA surplus of 9.6 percent of GDP and an external balance assessment (EBA) norm of 6.1 percent, the total gap including the unexplained residual equaled 3.5 percentage points of GDP (Annex II). Some Switzerland-specific factors not appropriately treated in the measured CA serve to reduce the CA gap. In particular, the measured CA treats as income (and hence saving) compensation for valuation losses on some debt instruments and considers some retained earnings of multinational corporations (MNCs) owned by foreigners as Swiss income. After accounting for these factors, which amount to around 2¾ percent of GDP, the remaining CA gap is about 0.8 percent of GDP, with an uncertainty band of ±2 percentage points. Notwithstanding especially-high uncertainty, this remaining gap implies that the external sector is within—but close to the upper bound of—the “broadly consistent” range. Given the complexity of Switzerland’s external accounts and its status as a financial sector, further exploration of the implications of measurement issues is warranted.

Switzerland’s Trend Real Appreciation

In addition to high short-term volatility attributable to safe-haven effects, Switzerland’s REER is characterized by a gradual long-term appreciation. Depending on the method of estimation (linear or exponential trend), the annual long-run appreciation has been between 0.5 and 0.9 percent since 1980.

The REER can be expressed as a function of the relative price of tradables to nontradables (“internal real exchange rate”) across countries.1 Therefore, developments in the internal real exchange rate may explain the evolution of the REER. Theory suggests two potential explanations.

First, according to the Balassa-Samuelson hypothesis, faster productivity growth in the tradable sector relative to the nontradable sector drives up wages across the economy but raises the relative price of nontradables, resulting in a real appreciation. Measured productivity in tradables has grown considerably faster than for nontradables in Switzerland. The EBA’s REER level regression also finds that differences in productivity growth of tradable versus nontradable sectors explain much of Switzerland’s real appreciation.2 However, productivity in Switzerland is likely subject to significant measurement error, especially in knowledge-based sectors where wages are used as the deflator to derive real output. Looking at Switzerland, Natal and others (2015) find no significant role for Balassa-Samuelson effects on the REER.3

A01ufig7

Switzerland: Real Effective Exchange Rate

(CPI-Based, end-2000 = 100)

Citation: IMF Staff Country Reports 2018, 173; 10.5089/9781484362167.002.A001

Sources: Haver; and IMF staff calculations.

An alternative more-plausible explanation is that of Dutch disease, whereby high-income-generating tradable sectors (typically associated in the literature with natural resources) exert upward pressure on wages and prices of nontradables. The Dutch disease hypothesis relies on growth of real income (rather than productivity differentials) to generate the increase in the internal real exchange rate. A Dutch disease-like phenomenon appears to be a plausible explanation for Switzerland’s trend appreciation given a number of large and highly-profitable tradable sectors, including pharmaceuticals and merchanting.

1In addition, the RER depends on the nominal exchange rate-adjusted price of tradables across countries. See Reynard, S., “What Drives the Swiss Franc?” Swiss National Bank Working Papers, 2008–14, 2008.2The REER level regression suggests that much of the increase in the estimated REER since 1991 is explained by the change in the relative productivity between tradables and nontradables in Switzerland compared with other countries.3Natal, J. M., T. Mancini Griffoli, C. Meyer and A. Zanetti, “Determinants of the Swiss Franc Real Exchange Rate,” Swiss Journal of Economics and Statistics (SJES), vol. 151(IV), December 2015.

Authorities’ Views

14. The Swiss franc remains highly valued but the extent of overvaluation has diminished over the past year. The depreciation of the nominal effective exchange rate that occurred since mid-2017 has helped to moderate the substantial overvaluation that existed previously because of safe-haven pressures. This has helped firms to rebuild their profit margins. Nonetheless, while the REER has declined to the level under the exchange rate floor, it remains above its long-term average. The CA reflects demographic factors (population aging, rising longevity and mandatory pension contributions) and—consistent with international statistical standards—also includes compensation for valuation losses due to inflation and corporate saving belonging to foreign-owned MNCs. While the CA balance does not vary appreciably with changes in the exchange rate, the effect of an appreciation on the real economy varies significantly across the different sectors, with some sectors being highly responsive. The size of the SNB’s balance sheet is a by-product of its monetary policy decisions; its increase entails a potentially higher volatility of the SNB’s profits in absolute value.

C. Economic Policy Challenges

Challenge One: Preserving Internal and External Balance While Navigating the Cyclical Upswing

Monetary and Exchange Rate Policy

Background

15. Since exiting the exchange rate floor in early 2015, the SNB has utilized dual instruments to pursue an accommodative monetary policy. The interest rate on sight deposits placed at the SNB was set at −0.75 percent, the lowest in the world,3 and unsterilized foreign exchange intervention has leaned against appreciation pressures.4 This combination of tools was intended to reduce the attractiveness of the Swiss franc, thereby easing appreciation pressures on the currency, while also supporting domestic demand and raising inflation toward its target. Official reserves and sight deposits at the SNB have been broadly unchanged since mid-2017, indicating that discretionary intervention has ceased, although interest income and dividends on the SNB’s portfolio would continue to passively expand its balance sheet.

A01ufig8

Interest Rate Gap

(3-Month Rate)

Citation: IMF Staff Country Reports 2018, 173; 10.5089/9781484362167.002.A001

Sources: Haver; and IMF staff calculations.

Negative Policy Interest Rates

article image
Sources: Bloomberg Finance L.P.; and Haver Analytics.Note: As of May 2018.
A01ufig9

Total Assets of Major Central Banks

(Percent of GDP)

Citation: IMF Staff Country Reports 2018, 173; 10.5089/9781484362167.002.A001

Source: Haver.
A01ufig10

Change in the Monetary Base

(CHF billions)

Citation: IMF Staff Country Reports 2018, 173; 10.5089/9781484362167.002.A001

Sources: SNB; and IMF staff calculations.
Staff’s Views

16. The improved outlook for the Swiss and world economies, together with normalizing steps by major central banks, has relieved pressure on domestic monetary policy. The SNB’s two-pronged approach has supported the return of modest inflation and the recovery of growth while shielding the economy from safe-haven surges.5 However, both tools face limits. To avoid testing the effective lower bound or excessively pressuring banks’ profit margins, the SNB kept its policy rate unchanged since 2015, even as rate reductions by other central banks compressed the negative interest differential, contributing to persistent appreciation pressure. Instead, the SNB prevented a further tightening of monetary conditions through foreign currency purchases—in large amounts at times of intense pressure and in smaller quantities on a more frequent basis. However, a large balance sheet also has its limitations as it is more exposed to valuation risk. The need for further loosening has been alleviated by the strengthening economy and reversal of safe-haven appreciation pressures since mid-2017.

17. The monetary policy stance is appropriate at this point, and any future tightening should depend on domestic conditions and policy decisions by major central banks. As domestic conditions strengthen and inflation picks up, monetary policy tightening should be gradual and well communicated, accompanied by tools to help absorb any excess liquidity. However, with underlying inflation forecast to rise slowly, the domestic cyclical outlook does not suggest the need for a near-term tightening. Nonetheless, given the elevated uncertainty ahead, policy should remain data-dependent to avoid falling behind the curve that may require potentially-disruptive catchup responses.

18. Exit from the SNB’s accommodative policies during the current economic upswing is unlikely to return the pre-crisis configuration of tools. If—as markets currently expect—policy rates of major central banks peak well-below pre-crisis levels, scope for the SNB to raise its policy rate may be constrained, especially if re-widening the negative interest rate differential against other currencies is desired. The SNB, alongside other central banks, is likely to maintain a considerably larger balance sheet than prior to the crisis, with divestments falling well-short of the previous buildup to avoid excessive tightening of monetary conditions. Maintaining large reserves makes earnings and equity susceptible to changes in the value of the franc and volatility in asset prices.

19. A clear assignment of policy tools would enhance effective communication and avoid the impression of targeting the exchange rate. Given lags in policy transmission, the interest rate is best suited for addressing slow-moving cyclical conditions and expected inflation. On the other hand, intervention should be reserved for responding to volatility associated with foreign exchange market surges that would otherwise cause temporary fluctuations in inflation and output, while still accommodating a modest secular trend real appreciation that derives from rising per capita income.

Authorities’ Views

20. Monetary policy has been effective at restoring positive inflation in the context of strong safe-haven demand for the Swiss franc. The exchange rate is an important determinant of Swiss inflation and real activity. The SNB’s definition of price stability—CPI inflation between 0 and 2 percent—accommodates some pass-through of exchange rate fluctuations. The dual instruments of negative interest rates and foreign exchange intervention, as required, have been necessary to mitigate strong appreciation pressures and stabilize inflation. Exemption thresholds have helped limit the effects of the negative policy rate on banks’ profitability. There are no signs of cash hoarding and, in fact, cashless payment transactions have risen.

21. The prevailing monetary policy remains appropriate. Underlying inflation is expected to remain low despite the fact that the negative output gap has narrowed, suggesting that maintaining the current expansionary monetary policy is warranted. Policy decisions are based on the forecast for inflation, which is influenced by the interest rate differential with major reserve-currency central banks. Continued normalization of policies by these large central banks would increase room for maneuver for others. Foreign exchange purchases have diminished alongside moderating safe haven pressures. But with the franc remaining a safe-haven currency and conditions in the foreign exchange market still fragile, the SNB continues to reiterate its willingness to intervene as needed. Tightening prematurely could reignite exchange rate pressures and undermine price stability. Any financial stability concerns should be addressed using macroprudential, rather than monetary, policies.

Fiscal Policy

Background

22. Switzerland’s fiscal position is strong, with sustained small surpluses and declining public debt. The tax burden is low by international comparison. The federal-level “debt brake” rule, introduced in 2003, together with similar rules in many cantons, has reduced general government debt from around 60 percent of GDP to 42 percent of GDP in 2017. The federal rule calls for a structural (cyclically-adjusted) balance on an ex ante basis. In case of ex post spending overruns, offsetting structural surpluses are required in subsequent years. However, no similar requirement exists for ex post under-spending. Since 2006, spending has been below budgeted amounts each year, on average by 0.3 percent of GDP. New global-budgeting procedures (complementing line-item budgeting) were introduced in 2017 to achieve more-complete execution of appropriated expenditures, but underspending continued.

A01ufig11

General Government Debt

(Percent of GDP)

Citation: IMF Staff Country Reports 2018, 173; 10.5089/9781484362167.002.A001

Sources: Federal Finance Administration; Haver; and IMF staff calculations.
Staff’s Views

23. Recent measures to curtail within-year underspending are welcome, although the tightening bias in the rule’s design remains. New measures to raise spending execution closer to budgeted levels (including reserve funds to carry forward allocations to subsequent years) are expected to gain effectiveness over time. Spending outside the perimeter of the rule has also risen, although this reduces budget transparency and efficiency. Preferably, the rule’s ex post provision would operate symmetrically—permitting spending to catch up in the following year. This would achieve the stated objective of structural balance, resulting in moderately-higher fiscal spending each year, and also allowing the rule to better serve its countercyclical function in the event of a downturn. With the public debt ratio projected to decrease to 34 percent of GDP by 2023, consideration could also be given to allowing a larger (smaller) countercyclical response when debt is below (above) long-term sustainable levels.

A01ufig12

Structural Fiscal Balance

(Percent of GDP)

Citation: IMF Staff Country Reports 2018, 173; 10.5089/9781484362167.002.A001

Sources: Haver; and IMF staff calculations.

24. The substantial fiscal space affords valuable flexibility for a discretionary stimulus during a severe or prolonged downturn. Consistent with low public debt and borrowing costs and persistent structural surpluses, this substantial fiscal space exists in macroeconomic and financial market terms (Annex III), in contrast to monetary policy where further large-scale accommodation could be constrained. Substantial space also exists in the context of the debt brake rule, which envisages utilizing fiscal policy to respond to significant adverse events through the “exceptional financial circumstances” clause, which was invoked during the GFC.

25. A symmetric rule would support a better macroeconomic policy mix. A somewhat looser fiscal policy would relieve pressure on monetary policy tools during periods of low inflation. Over the long term, a rebalancing of the mix could increase the contribution of domestic demand, making output less sensitive to currency appreciation.

Authorities’ Views

26. The debt brake rule simultaneously delivers debt reduction and economic stabilization, and enjoys broad popular support. The rule has significantly reduced nominal debt, thereby building resilience and creating policy space for extraordinary times. Annual underspending and its macroeconomic consequences are modest. The case for removing the structural surplus by raising spending, rather than lowering taxes, is not obvious as available funding for public infrastructure and education at the federal level is adequate. That said, simplified procedures for within-year supplementary budgets that should reduce incentives to maintain safety margins in spending execution are under consideration. Furthermore, the Federal Council will consider early next year whether structural surpluses should be used to compensate for potential revenue loss from tax reforms or to finance higher expenditure.

27. Policy assignment for economic stabilization depends on the nature of the shock. While Switzerland has fiscal space, whether to use it depends on the source of the downturn. Fiscal spending is effective in offsetting shortfalls in domestic demand. However, additional fiscal spending is less effective at responding to an exchange rate shock, in which case a monetary policy response is more appropriate. Nonetheless, even in that situation, fiscal policy would contribute to macroeconomic stabilization through the automatic stabilizers on tax revenue and provision of unemployment benefits.

Challenge Two: Maintaining Financial Stability Amid Tightening Global Conditions

Background

28. Private sector leverage and real estate exposure is high. The growth rate of mortgage claims has slowed from a high base, but these claims increase by about 5 percentage points of GDP per year. Liquidity and capital of domestically-focused banks exceed regulatory minima, and profits have held up despite narrowing interest spreads. 6 Following a series of macroprudential tightening measures during 2012–14, property prices subsequently stabilized, but have risen again recently alongside moderating mortgage interest rates. Reflecting their status as attractive global cities and internationally-traded assets, property prices in Geneva and Zurich have been among the fastest growing in the world. However, standard housing-price metrics do not indicate significant misalignment. Newer-vintage mortgages appear riskier, with nearly half exceeding indicative affordability thresholds and also carrying higher loan-to-value ratios, especially those for purchasing investment properties.

A01ufig13

Increase in Domestic Loans 1/

(In percent of previous year’s GDP)

Citation: IMF Staff Country Reports 2018, 173; 10.5089/9781484362167.002.A001

Sources: SNB; and IMF staff calculations.1/ Jump in 2006 reflects wider coverage of credit institutions beginning that year. Data for 2017 covers the period through November, and is annualized.
A01ufig14

Nominal House Price Index

(2005 in USD = 100)

Citation: IMF Staff Country Reports 2018, 173; 10.5089/9781484362167.002.A001

Sources: EMF, Wuest Partner, Statistics Canada, Haver, and IMF staff calculations.Note: Major cities reported in European Mortgage Federation (EMF), Hypostat 2017, plus Toronto, Ottawa, Vancouver, Bern, Geneva and Zurich.
A01ufig15

OECD Countries: Price-to-Rent Ratio and Price-to-Income Ratio

(Deviation from period mean, percent)

Citation: IMF Staff Country Reports 2018, 173; 10.5089/9781484362167.002.A001

Sources: OECD, Haver Analytics, and IMF staff calculations.Note: Calculated as deviation of 2017Q2 or the latest observation from the average for the respective period.

Switzerland: Selected Macroprudential Regulations Targeting the Real Estate Sector

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Source: Vujanovic (2016), “Policies to Tame the Housing Cycle in Switzerland,” OECD Economics Department Working Paper, No. 1279.

A 100-percent risk-weighting applies to the full amount of new mortgages that do not meet these FINMA-approved requirements, in accordance with the Capital Adequacy Ordinance, Article 72(5).

Capital Adequacy Ordinance, Article 66(2) and Annex 3.

The CCyB was introduced at zero in July 2012, and with a maximum ceiling of 2½ percent. Switzerland was the first country to activate the CCyB. The Swiss CCyB may cover specific credit exposures, in contrast to the EU’s CCyB that may only be applied across the board.

Capital Adequacy Ordinance, Article 44 and Annex 7.

Staff’s Views

29. Considerable progress has been made in strengthening banking sector resilience. Capital and liquidity buffers have increased across all categories of banks, including as a result of the counter-cyclical capital buffer on real estate exposure. A series of macroprudential and regulatory measures was introduced in 2012–14 that, together with the slowing economy, were effective at containing property prices and moderating mortgage credit growth. For the global systemically-important banks, too-big-to-fail regulations are appropriately calibrated to the relatively small size of their home-country’s economy.

30. Sustained low interest rates are encouraging risk taking in some market segments. Low and flattened yield curves and the rebound in economic activity have reignited the search for yield. Competition from nonbanks is putting downward pressure on loan interest rates, even as most retail deposit rates remain floored at zero. 7 Domestically-oriented banks have stepped up the pace of mortgage lending and increased duration mismatch. Lending standards have slipped, with a significant share of new mortgages clustered near the indicative minimum down-payment level and falling short of loan affordability norms. Construction of new rental properties continues even though vacancy rates are rising and rents are declining. These developments have occurred from a starting point of high concentration of bank lending into mortgages and high house prices and mortgage debt relative to income. In addition, domestic balance sheets are heavily exposed to real estate, which could generate adverse wealth effects that amplify the effect of a fall in real estate prices. New complex financial products have not been tested in a period of heightened financial market volatility, and could impact profits of G-SIBs.

Direct and Indirect Exposure to Real Estate

Notwithstanding large net asset positions, balance sheet exposure to real estate is a concern. On the asset side, households and nonfinancial firms have large real estate exposure through direct ownership of property and indirectly through savings in bank deposits, pension and insurance vehicles, and holdings of real-estate-linked equities and investment funds.1 While much smaller than assets, household’s liabilities—at 130 percent of GDP—are among the highest in the world and mostly relate to mortgage borrowing. Eighty six percent of bank loans are for mortgages (83 percent for G-SIBs), while pension funds and insurance companies have shifted their assets toward real estate.2

A01ufig16

Balance Sheet of Households

(CHF billions)

Citation: IMF Staff Country Reports 2018, 173; 10.5089/9781484362167.002.A001

Source: SNB.
1 In addition, households may pledge part of their private pension savings to cover minimum down-payment requirements on mortgages.2 Pension funds invest nearly one-quarter of their assets in various real estate-related vehicles. While pension funds and insurance companies account for less than 10 percent of the direct mortgage lending market, their mortgage books are growing faster than that of banks.

31. Reinforcing the macroprudential framework for real estate is needed. A gradual unwinding of ultra-loose global financial conditions would help to support financial stability, while a rapid tightening—which cannot be precluded—could be disruptive. Measures requiring banks to hold additional capital if they choose to assume more risk helps to absorb future losses but may not curtail the buildup of risk when banks have ample capital buffers or if higher risk is priced into interest rates. Also, current self-regulation by banks may not be sufficiently timely or fully internalize the additional system-wide risk their lending generates. A more-flexible system for amending regulation would ensure the timeliness of policy responses.

32. Several measures are advised to limit future risk buildup and increase capacity to respond if risks materialize. Stricter regulatory limits on loan-to-value and debt-to-income ratios should be adopted, with only limited exemptions allowed. The tax deductibility of mortgage interest payments for private households should be removed alongside the elimination of taxation of imputed rental income. Mortgages on investment property should carry a surcharge on the applicable risk weight in a manner consistent with Basel III requirements as published in December 2017. Intensified monitoring of individual banks that share similar business models, especially in regionally-concentrated markets, is advised. Guarantees on cantonal banks should be removed. To prevent regulatory arbitrage, nonbank mortgage lending should be subject to similar macroprudential standards as for banks, where it is not already the case. The strengthened supervisory focus on cyber risk in the financial sector is welcome, and stress testing and building defenses against cybersecurity attacks, which could be highly-disruptive and impose large costs, should be stepped up. Financial sector oversight should remain vigilant and independent.

Authorities’ Views

33. Misalignment in the mortgage and real estate markets has inched up. Driven by search for yield, investor’s demand for rental apartments and other investment properties is high. Leverage in the build-to-let segment is also high, accounting for about one-third of bank mortgages. Loan affordability risk has risen, with about half of new loans issued exhibiting increased loan-to-income ratios. While only a small share of the mortgage market, nonbanks are exerting downward pressure on banks’ lending rates. Nonetheless, stress tests indicate that domestically-oriented banks have sufficient capital to cope with a sharp increase in interest rates or correction in house prices, although a combined shock could have significant effects on some banks. The market share of G-SIBs in the Swiss mortgage market has decreased, although risks may rise under adverse global scenarios.

34. Previous measures to contain financial stability risks were successful, and further measures are being considered. Demand-side measures—such as minimum down-payment and amortization requirements—may be more effective than capital-based measures at preventing the buildup of risk when banks exceed capital requirements. Nonetheless, sufficient capital is needed to absorb any losses that may incur, and greater differentiation of risk weights will be introduced between income-generating and owner-occupied mortgages on the one hand, and among different loan-to-value buckets, consistent with new Basel III guidelines. With changes in mandatory regulation requiring legal amendments, voluntary self-regulation by banks may be more timely and, moreover, any measures must be endorsed and supervised by FINMA. In addition, FINMA exercises close oversight of activities where regulation may not fully reflect prevailing risks. Eliminating mortgage interest deductibility for individuals and imputed rental income from the tax base would reduce incentives for households to maintain high debt. Switzerland exceeds global minimum standards as regards regulation of systemic banks, reflecting the large size of these banks’ balance sheets relative to Swiss GDP. While delineating supervisory and regulatory authority is appropriate, preserving independent and robust supervision is critical.

Challenge Three: Supporting Resilience and Competitiveness While Meeting the Demands of Aging

Background

35. Long-term sustainability of the public (first-pillar) and occupational (second-pillar) pension systems remains a concern, especially given rejection of a previous reform proposal. A referendum proposal that was voted down in late 2017 would have raised the retirement age for women from 64 to 65 years (same as for men), lowered the minimum conversion rate at which pension savings are converted into annuities in the private defined-contribution pillar, and raised the VAT rate by 0.3 percentage points with earmarking to support the public pay-as-you-go pension pillar. Implications for the long-term trajectory of public debt will depend on population growth, labor force participation, number of years in work and life expectancy.

36. Considerable heterogeneity exists across sectors in terms of labor productivity, consistent with the uneven effect of real appreciation. While some sectors adapted by increasing foreign procurement or relocating all or part of production abroad, more immobile sectors, such as tourism and retail trade, which face foreign competition and also tend to be relatively labor intensive, were more heavily impacted.

A01ufig17

Employment and Real GDP Shares, 2016

(Percent)

Citation: IMF Staff Country Reports 2018, 173; 10.5089/9781484362167.002.A001

Sources: Haver; and IMF staff calculations.

37. Compliance with international standards and obligations is being strengthened. A recent follow-up report on progress in adopting priority AML/CFT recommendations concluded that considerable progress had been made in addressing deficiencies, and that effective implementation to address significant risks arising from tax evasion, private wealth management, and crypto-assets should continue. The automatic exchange of information on tax matters with the EU and other states and territories began in 2018 and the list of countries has been broadened. Following the rejection in a referendum of an earlier proposal, parliament is discussing a new proposal for reforming CIT that abolishes preferential tax regimes, in compliance with the OECD’s Base Erosion and Profit Shifting project and initiatives by the EU, including by equalizing treatment of multinationals and local firms (Box 4). The major part of the reform—abolishing preferential tax regimes—would enter into effect in 2020, at the earliest.

Reforming the Corporate Income Tax1

A hallmark of the Swiss corporate income tax (CIT) system is the large role played by sub-national taxes. On average, the combined (federal, cantonal, and municipal) weighted effective tax rate on corporate income is about 19.6 percent, but with considerable heterogeneity across cantons. Additionally, Switzerland has preferential tax regimes that significantly reduce effective rates for Swiss-based companies.

The Swiss government has proposed a reform of the CIT, but agreement has yet to be reached. The current proposal—known as “Tax Proposal 17”—foresees, inter alia, (i) phasing out preferential tax regimes to meet international standards; (ii) introducing tax deductions for R&D expenditure; and (iii) introducing a patent box regime that offers a lower effective CIT rate on income from qualified intellectual property assets. The reform maintains the federal structure, whereby cantons and municipalities may offer different CIT rates, provided a minimum level of taxation is applied. The proposed CIT reform has implications for tax competition between cantons. Moreover, revenue-sharing from the federal government to the cantons is expected to increase, and cantons are expected to lower their statutory CIT rates in response. The new expected combined CIT rate (13.9 percent unweighted average)—together with the incentives for innovation—would maintain Switzerland’s position as a relatively low tax location while meeting international standards. Following the reform, some MNCs would face a higher CIT rate, while others—mainly domestic firms—would see a tax cut. The patent box mitigates the increase in the tax rate for MNCs with qualifying income, but the rate would remain higher than the pre-reform rate for companies that currently benefit from preferential tax regimes

Eliminating preferential regimes can make cross-cantonal CIT differences significantly more important in firms’ location and investment decisions. Potential decisions by firms to relocate across cantons, and by MNCs to potentially relocate abroad, would affect aggregate revenue, and these effects remain somewhat uncertain. The revenue effect on individual cantons would also depend on the share of CIT revenue they derive from non-MNCs, which will benefit from a tax rate cut, and the revenue elasticity of taxable income. Measures to prevent potential corporate income shifting between cantons should be strengthened.

1See the accompanying selected issues paper “Taxation of Corporations in Switzerland.”
Staff’s Views

38. Population aging makes pension system reform essential. Life expectancy in Switzerland is high and rising, but has not been reflected in the official retirement age. Longer time in retirement encourages people to save increasing amounts, which tends to compress investment yields and induce even more saving, supported by tax incentives for pension contributions. Working longer or linking the official retirement age to life expectancy is an effective way to improve system viability and ensure the population has sufficient post-retirement resources. Immigration and raising the full-time employment of women—whose participation is discouraged by high childcare costs—remain important sources of new pension contributors. For the second pillar, sustainability would be improved by linking the guaranteed conversion rate to the market yield on a long-term sovereign bond and life expectancy at retirement.

39. A flexible and dynamic economy affords resilience to appreciation pressures, and all sectors should benefit from Switzerland’s highly-profitable activities. High value-added sectors bring numerous advantages to the Swiss economy, but also pull up wages and prices. The resulting real appreciation may encourage offshoring of production with re-shoring of profits that gradually reduce the sensitivity of GDP and the CA to the exchange rate. Nonetheless, more labor-intensive, less internationally-mobile sectors that compete internationally may still be affected unless they raise productivity. Improving competitiveness in sectors where productivity growth is lagging is therefore essential. Adopting the recently-proposed CIT reform could support this goal by lowering the cost of investment for SMEs. Continued adequate funding of science, technology, engineering and mathematics (STEM) education and expanding the pool of highly-skilled Swiss and foreign workers would help to sustain innovation and ensure a workforce ready for life-long learning. These measures would help to preserve Switzerland’s high-and-stable share of labor income in GDP and relatively-low inequality of post-redistribution income.

40. Maintaining Switzerland’s reputation as a global business destination and innovation leader requires regulatory certainty and continued adherence to international commitments. Meeting international standards on CIT in a timely manner is critical to dispel uncertainty and avoid reputational risk that could negatively impact investment and growth. The reform is also an opportunity to encourage R&D activities and SME investment. With capital often channeled through chains of related companies located in different countries, the macroeconomic effects will also depend on CIT reforms in other jurisdictions. The proactive and balanced approach to regulation of fintech and initial coin offerings is consistent with Switzerland’s receptiveness to cutting-edge technologies. The authorities are cognizant of the associated money laundering risks, and controls are required when converting into and out of fiat money. To better address ML/TF risks inherent in cross-border activity, priority should be given to addressing shortcomings identified in the 2016 FATF mutual evaluation report (including enhancing preventative measures, entity transparency and international cooperation). Switzerland continues to make progress on improving tax transparency, with the first automatic exchange of tax information due this year.

Authorities’ Views

41. Pension funds face the dual challenge of low interest rates and rising longevity. Pension reform remains a priority, notwithstanding the earlier setback. The current plan is to initially focus on the first pillar and to unify the retirement age at 65 while also increasing earmarked revenue, either through a higher contribution or VAT rate. Curtailing incentives for early retirement is also under consideration. Demographic developments, in particular, the relatively large proportion of prime-age savers and a high life expectancy, as well as the relatively large and highly developed mandatory pension system, contribute to the high household saving rate.

42. Switzerland’s competitiveness and prosperity depend on its capability to spur productivity growth through competition in the domestic market. Switzerland’s productivity growth is below average by international comparison. While productivity growth remains high in the export-oriented sectors, it has been modest in the domestic oriented sectors. The new growth policy of the Swiss government reflects these challenges. The main principles include, inter alia, the enhancement of competition on the domestic market, the continuation of the integration of Switzerland in the global economy, and the strengthening of framework conditions to facilitate entrepreneurship. Switzerland welcomes new technologies, and has set light regulatory requirements for fintech startups to encourage innovation and competition, while ensuring the integrity of the financial system. The proposed corporate tax reform would abolish non-compliant tax regimes while remaining internationally competitive and benefiting domestic companies and their employees. The macroeconomic implications of the reform also depend on changes to the international tax environment and dynamic factors. Prompt adoption is critical to dispel uncertainty about the investment environment.

Staff Appraisal

43. The Swiss economy has largely absorbed the substantial real appreciation that occurred since the onset of the global financial crisis. Several bouts of intense safe-haven pressure caused the exchange rate to overshoot its long-run appreciation trend, slowing output and employment growth and squeezing profit margins, even as the current account surplus remained largely unchanged. Sustained efficiency gains by the private sector, very accommodative monetary policy and—more recently—robust global growth and a weaker appetite for safe assets have enabled the Swiss economy to gradually normalize. As a result, growth has picked up, the output gap has narrowed, and inflation is firmly above zero, although still low.

44. Prospects for the Swiss economy are favorable, but risks are present. The tailwind of strong foreign demand is expected to fuel net exports and investment, with GDP growth rising to 2¼ percent in 2018 and then moderating gradually to 1¾ percent over the medium term. The current account, inflation and the output gap are forecast to temporarily overshoot their longer-run levels, before subsiding and converging to internal and external balance. However, this outlook could be affected by global developments, including rising international trade tensions, renewed geopolitical risk or an abrupt tightening of financial conditions. Switzerland-specific considerations, such as high mortgage debt and property prices, delays with CIT reform, adoption of the “sovereign money” initiative and lack of clarity on long-term Swiss-EU relations, could also depress growth.

45. Switzerland’s external position is broadly in line with medium-term fundamentals. Saving net of investment is pushed up by high per-capita income, the large prime-saver-aged population and rising longevity. Excluding items not appropriately treated in conventional measures, the current account is close to the level predicted on the basis of Switzerland’s economic fundamentals. The overvaluation of the REER that followed the exit from the exchange rate floor in 2015 had been unwound by 2017 through a combination of equilibrium appreciation and depreciation of the actual REER. Until recently, the REER had seen some further depreciation.

46. The current accommodative monetary policy remains appropriate. Improved outlooks for the Swiss and world economies, in addition to normalizing steps by some central banks, alleviated the need for further loosening by the SNB, and no foreign exchange purchases occurred since mid-2017. With underlying inflation expected to increase only slowly, the policy interest rate should remain on hold for now. Future policy decisions should depend on domestic conditions and the inflation outlook while also considering actions by major central banks that affect the interest rate differential with the franc. A clearer assignment of policy tools would enhance communications, with the interest rate focusing on slow-moving cyclical conditions, and foreign exchange intervention best-suited to countering strong exchange market pressures that would otherwise create temporary volatility in inflation and output. However, policy should accommodate a moderate trend real appreciation in line with relative income.

47. Operating the fiscal debt brake rule in a symmetrical manner would support a more balanced macroeconomic policy mix. The tightening bias in the rule’s execution contributed to a rapid and sizable reduction in public debt. Substantial fiscal space now exists for adopting a balanced structural position, as the debt brake rule itself stipulates. This would also help to relieve pressure on monetary policy tools, especially during periods of low inflation, while gradually increasing the role of domestic demand in GDP, which would make output less-sensitive to future appreciation pressures. Recent measures to promote higher fiscal spending both within and outside the perimeter of the rule are welcome. However, allowing the rule’s ex post provision to operate symmetrically—such that underspent amounts could be carried forward to the following year—would bring greater transparency and efficiency.

48. Targeted macroprudential measures are needed to contain risk-taking in the property market. Resilience of internationally-active and domestically-focused banks has been strengthened. A series of earlier measures helped to contain property prices and moderate mortgage credit growth. However, sustained low interest rates and the pickup in economic activity have reignited search for yield, particularly in the build-to-let real estate segment. Given households’ high direct and indirect exposure to real estate, a price correction could generate large negative wealth effects. In the presence of sizable capital buffers, capital-based measures may not be effective on their own at preventing the build-up of risk. Therefore, stricter regulatory limits on loan-to-value and debt-to-income ratios should accompany higher risk weights on mortgages on investment property. Relying on self-regulation by banks may not produce an adequate or timely tightening response.

Eliminating the tax deductibility of mortgage interest payments from the personal income tax, and removing imputed rental income from the tax base, would reduce incentives for leveraged real estate acquisition. Financial supervision should remain vigilant and independent.

49. Adjustment of the pension system parameters would support the sustainability of the social safety net. Population aging, together with high and rising life expectancy, will increase future obligations. Raising the retirement age or linking it to life expectancy would improve system viability. Tying the guaranteed conversion rate to the market yield on long-term sovereign bonds and life expectancy at retirement would strengthen the stability of the second pillar scheme.

50. Continuing to meet international standards and maintain regulatory certainty is essential to preserve Switzerland as a prime destination for foreign investment. Adopting the CIT reform would signal stability and encourage domestic investment in R&D. It would also help support competitiveness of the more labor-intensive sectors with weaker productivity growth. Continuing to address remaining deficiencies in the AML/CFT framework, continuing to improve tax transparency, and balancing receptiveness to innovation with a proactive approach to protecting financial stability and integrity is urged.

51. It is recommended that the next Article IV consultation be held on the standard 12-month cycle.

Figure 1.
Figure 1.

Switzerland: The Long View, 2000–17

Citation: IMF Staff Country Reports 2018, 173; 10.5089/9781484362167.002.A001

Sources: Haver Analytics; Federal Finance Administration; Information Notice System; State Secretariat for Economic Affairs; and Swiss National Bank.
Figure 2.
Figure 2.

Switzerland: Monetary Policy, 2000–18

Citation: IMF Staff Country Reports 2018, 173; 10.5089/9781484362167.002.A001

Sources: Swiss National Bank; Haver; and IMF staff calculations.1/ SARON (Swiss Average Rate Overnight) is an overnight average rate referencing the Swiss Franc interbank repo market.
Figure 3.
Figure 3.

Switzerland: Selected Monetary Indicators, 2007–18

Citation: IMF Staff Country Reports 2018, 173; 10.5089/9781484362167.002.A001

Sources: HaverAnalytics; Swiss Federal Statistics Office; and Swiss National Bank.1/ Nominal rate minus inflation.
Figure 4.
Figure 4.

Switzerland: Selected Financial Indicators, 2007–18

Citation: IMF Staff Country Reports 2018, 173; 10.5089/9781484362167.002.A001

Sources: Thomson Reuters Datastream; Haver; and IMF staff calculations.
Figure 5.
Figure 5.

Switzerland: Indicators for Global Systemic Banks, 2006–17 1/

Citation: IMF Staff Country Reports 2018, 173; 10.5089/9781484362167.002.A001

Sources: Thomson Reuters Datastream database; S&P Global Market Intelligence database; and IMF staff calculations.1/ Switzerland numbers are for Credit Suisse and UBS. “Other”includes Citigroup, Deutsche Bank, HSBC, JP Morgan Chase, Barclays, BNP, Bank of America, New York Mellon, Goldman Sachs, Mitsubishi, Morgan Stanley, Royal Bank of Scotland, Bank of China, BBVA, BPCE, Crédit Agricole, ING, Mizuho, Nordea, Santander, Société Générale, Standard Chartered, State Street, Sumitomo, UniCredit, Wells Fargo, Commerzbank, and Lloyds.
Figure 6.
Figure 6.

Switzerland: External Accounts and Exchange Rates, 2000–2017

Citation: IMF Staff Country Reports 2018, 173; 10.5089/9781484362167.002.A001

Sources: Swiss National Bank; World Development Indicators database; and Haver Analytics.
Figure 7.
Figure 7.

Switzerland: Housing Markets, 1985–2017

Citation: IMF Staff Country Reports 2018, 173; 10.5089/9781484362167.002.A001

Sources: Haver Analytics; IMF Global House Price Index; OECD; State Secretariat for Economic Affairs; Swiss National Bank; and Wuest and Partner.1/ Refers to rents in this segment.2/ 2015 data for HUN, RUS and CHL.
Table 1.

Switzerland: Selected Economic Indicators, 2016–23

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Sources: Haver Analytics; IMF’s Information Notice System; Swiss National Bank; and IMF Staff estimates.

Contribution to growth. Inventory accumulation also includes statistical discrepancies and net acquisitions of valuables.

Reflects new GFSM 2001 methodology, which values debt at market prices. Calculated as the sum of Federal, Cantonal, Municipal and Social security gross debts.

Based on relative consumer prices.

Table 2.

Switzerland: Balance of Payments, 2016–23

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Sources: Haver Analytics; Swiss National Bank; and IMF staff estimates.
Table 3.

Switzerland: SNB Balance Sheet, 2010–17

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Sources: Swiss National Bank; and IMF staff estimates.

Currency in circulation and sight deposits of domestic banks.

Table 4.

Switzerland: General Government Finances, 2016–23

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Sources: Federal Ministry of Finance; and IMF staff estimates.

Includes the balance of the Confederation and extrabudgetary funds (Public Transport Fund, ETH, Infrastructure Fund, Federal Pension Fund).

Includes old age, disability, survivors protection scheme as well unemployment and income loss insurance.

Forcasted

Table 5.

Switzerland: General Government Operations, 2008–17

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Source: Federal Ministry of Finance.