Sweden: 2023 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Sweden
Author:
International Monetary Fund. European Dept.
Search for other papers by International Monetary Fund. European Dept. in
Current site
Google Scholar
PubMedClose
Publication Date:
16 Mar 2023
eISBN:
9798400237478
ISBN:
9798400237478
Language:
English
Keywords:
potential GDP; inflation expectation; inflation condition; core inflation; structural surplus; Inflation; Housing prices; Fiscal stance; Consumption; Global
Download PDF (1.5 MB)

1. Sweden’s economy experienced a strong recovery after the pandemic, which continued well into 2022. GDP growth is projected at around 3 percent in 2022. It was broad-based, reflecting high, albeit declining, private consumption, investment, and exports. The labor market was tight and general shortages persisted. Labor market participation was high, and the employment rate (69.5 percent in November) and hours worked continued to increase. However, the unemployment rate remained one of the highest in the region (7.2 percent in November).

Abstract

1. Sweden’s economy experienced a strong recovery after the pandemic, which continued well into 2022. GDP growth is projected at around 3 percent in 2022. It was broad-based, reflecting high, albeit declining, private consumption, investment, and exports. The labor market was tight and general shortages persisted. Labor market participation was high, and the employment rate (69.5 percent in November) and hours worked continued to increase. However, the unemployment rate remained one of the highest in the region (7.2 percent in November).

Context and Recent Developments

1. Sweden’s economy experienced a strong recovery after the pandemic, which continued well into 2022. GDP growth is projected at around 3 percent in 2022. It was broad-based, reflecting high, albeit declining, private consumption, investment, and exports. The labor market was tight and general shortages persisted. Labor market participation was high, and the employment rate (69.5 percent in November) and hours worked continued to increase. However, the unemployment rate remained one of the highest in the region (7.2 percent in November).

2. Inflationary pressures remained elevated in 2022 despite the Riksbank’s actions. High electricity and food prices resulted from external price pressure, krona depreciation, and a pass-through of higher prices to consumers. Responding to pressures, the Riksbank brought forward the path of normalization, raising the policy rate from zero by 25 basis points (bps) in April 2022, and communicated a reduction path for its balance sheet. By end-2022, the policy rate stood at 2.5 percent. In 2022, the average and core HICP were at 8.1 and 5.6, respectively.

3. After a small fiscal deficit in 2021, a surplus of 0.7 percent of GDP is projected for 2022, double the fiscal surplus target. This overperformance was largely due to stronger energy VAT revenue and lower-than-expected social security benefits, which reflected the recovery and high employment. Small fiscal support was provided to households and firms to partially offset the sharp rise in energy bills (Box 1). The surplus and favorable interest-rate-growth differential helped push down public debt to about 32 percent of GDP, which is below its pre-pandemic level, bolstering Sweden’s substantial fiscal space (Annex I).

4. The real estate market is experiencing substantial weakening. Mortgage and CRE borrowing grew strongly during the pandemic. Like in other advanced countries, house prices were fueled by the easing of monetary policy and macroprudential regulation, fiscal support, and a change in dwelling preferences towards larger units. Both residential real estate (RRE) prices and total household debt in relation to income peaked in Q4 2021. RRE prices started to decline in the second half of 2022, registering a 16 percent decline by end-year from their March peak. Shares of CRE firms listed in Stockholm have lost more than 40 percent of their value in 2022, and more companies face the risk of downgrades spurred by their deteriorating debt profiles as they need to rollover maturing bonds at higher interest rates.

5. Sweden’s current account (CA) surplus is projected to narrow substantially in 2022 but the external position is assessed to be stronger than what would be implied by the medium-term fundamentals and desirable policies. This assessment is preliminary pending full-year data for 2022. The CA surplus should fall to around 3.8 from 6.3 percent of GDP on the back of lower net exports of goods and high recovery-driven imports of services. The krona depreciated by 6.5 and 12.4 percent against the euro and the US dollar (average, yoy, in December 2022), respectively. In real effective terms—against its unit labor cost-based average—it depreciated as well, resulting in an undervaluation of about 11 percent (Annex II). Reserves remained adequate.

6. Elections took place on September 11, 2022. Gang violence and immigration policies were among the main concerns for voters. The new conservative coalition government consists of the Moderate Party, the Christian Democrats, and the Liberals. The Sweden Democrats, now the second largest party in the parliament after the Social Democrats, is conditionally backing the government without being part of it. Sweden is holding the EU presidency as of January 2023.

Impact and Response to High Energy Prices

Energy dependence: Sweden’s dependence on natural gas is very low. In 2019, gas made up about 2 percent of its energy mix. Sweden’s net imports of crude and gas in 2021 were about 1 percent of GDP. Its main energy sources are nuclear (35 percent), biofuels and waste (26 percent), oil (18 percent), and hydro (11 percent). More than 75 percent of crude and gas is imported from Norway, about 10 percent from the UK and Russia, respectively (though imports from the later decline substantially after the war) and the rest from others. However, because of the EU wholesale market pricing, electricity prices have soared, especially in the South where the electricity grid is connected to Germany and Denmark rather than Sweden’s North that has ample supply. Energy bidding zones impede efficient connectivity between the North and South of Sweden, and the energy grid needs investment.

Support to households: Energy subsidies and support measures to households totaling about 0.3 percent of GDP have been provided in 2022. Initially these were untargeted and did not encourage conservation as they were usage-based. During the summer, electricity support measures were discontinued. Recently, additional electricity subsidies of 1.1 percent of GDP were announced for 2023. They are aimed at households and companies, mainly in southern Sweden, are based on retroactive electricity consumption (during Sep 2021–Oct 2022 and Nov-Dec 2022) and are financed by congestion revenue surpluses from the state-owned power distribution enterprise (SOE) “Svenska Kraftnät". Across-the-board fuel tax reductions of 0.3 percent of GDP over three years were announced as part of the new budget.

Support to companies: Due to skyrocketing prices in September, the Nordic electricity companies faced unexpectedly higher margin calls. To avert a default, the Swedish, Danish, and Finnish governments offered loan guarantees, which have stabilized the market. The 2023 budget mentions limited electricity subsidies for energy intensive businesses (listed outside the budget to the tune of 0.04 percent of GDP) to be paid by congestion revenue surpluses of the SOE “Svenska Kraftnät".

uA001fig01

Total Energy Supply by Source, 1990–2021

(Percent of total energy supply)

Citation: IMF Staff Country Reports 2023, 111; 10.5089/9798400237478.002.A001

Source: IEA World Energy Balances 2022.
uA001fig02

Fiscal Costs of Household Support Measures in 2022–23

(Percent of GDP)

Citation: IMF Staff Country Reports 2023, 111; 10.5089/9798400237478.002.A001

Source: Based on a September 2022 survey of country desk economists at the IMF’s European Department. Sweden data is updated with most recent measures.Note: (i) Fiscal support measures specifically targeting firms and sectors were excluded. (ii) Only 24 of the 39 surveyed countries provided fiscal costs estimates for 2023. For those countries with no such estimates, the numbers shown in the table likely underestimated the total fiscal costs for 2022 and 2023.

Figure 1.
Figure 1.

Selected Real Sector Indicators

Citation: IMF Staff Country Reports 2023, 111; 10.5089/9798400237478.002.A001

Outlook and Risks

7. The short-term outlook is subject to substantial risks due the uncertainties surrounding geopolitical and global developments (Annex III). In addition, long-standing structural shortcomings remain. While GDP grew much above expectations in Q3 2022, consumption and investment are expected to decline in 2023 as the purchasing power and operating margins catch up with higher costs and possibly tighter financial conditions. The higher-than-expected inventories build-up in Q3 could also mean weaker growth ahead. This is coupled with a slowdown in external demand (notably, from Germany). Inflation is likely to recede somewhat because of the reduced domestic demand and global inflation. Wage increases have been moderate thus far, and the labor market could also be losing some steam. Markets expect house prices to decline by 15–20 percent from their peak but remain at their pre-pandemic level, implying a correction from a post pandemic boom, and with the attenuating factor being an accumulation of large savings during the pandemic. Corporate bankruptcies have started to pick up, mostly in the construction sector, reflecting the housing slump and the increase in financing costs and electricity prices. Financial sector risks are balanced, as banks are entering the slowdown with large buffers. However, household debt and CRE vulnerabilities significantly weigh on the outlook. Potential funding pressures could arise, given the structural shortcomings in bond markets and high level of interconnectedness, for instance in the CRE sector. A mild recession is thus anticipated in 2023.

8. Concrete progress on structural reform is needed to boost inclusive growth. Reaching consensus on several important reforms will be crucial. This is particularly relevant for addressing longstanding sector-specific impediments to inclusive growth such as the dysfunctional housing market, educational gaps, and the high unemployment among the youth and foreign-born. Thus, it would be necessary to rationalize rent-control, increase property taxes, enhance active labor market policies, and reduce the labor tax wedge while monitoring the roll out of the new labor market reforms. Increasing in funding for programs and regional services would better integrate the less educated and the foreign-born. A timely upgrade of the South-North electricity connections would contribute to more stable and secure energy for households and businesses.

Authorities’ Views

9. The authorities broadly shared staff’s assessment. They expect a somewhat deeper recession in 2023 due to the interest rate sensitivity of households and a continuing decline in housing investment. However, they noted that there has not been a large decline in consumption yet, which makes risks more balanced. The authorities’ view is that reduced inflation needs to be a priority and believe that achieving this objective will be helped by the ongoing constructive wage negotiations and their conservative monetary and fiscal policies.

Policy Discussions

Like elsewhere in Europe, risks are elevated. Sweden is relatively well placed to face the headwinds due to its strong fundamentals. In the short-term, the policy mix should aim at stabilizing prices while ensuring financial stability. Monetary policy should continue to forcefully attack inflation, aided by a slightly contractionary fiscal stance. Given the high uncertainty, both the monetary and fiscal stance should remain data driven and responsive to developments in growth and inflation. Over the medium term, as inflation decelerates, it would be desirable to use the substantial fiscal space to increase infrastructure and social investment to boost potential growth and make it greener and more inclusive.

A. Fiscal Policy

10. Relentless inflation and a relatively mild projected downturn suggest a need for a slightly contractionary fiscal stance in the short-term. The fiscal stance in 2023 is thus appropriate. While the nominal surplus is expected to narrow due to lower tax revenue amid the recession, the structural surplus would be widening by an estimated 0.2 percentage point of potential GDP, pointing to a mild contractionary stance, notwithstanding estimation uncertainties.1 This would support monetary policy by containing aggregate demand. The fiscal stance should remain flexible, and automatic stabilizers should be allowed to operate fully. If the recession deepens, discretionary spending should be adjusted. However, it would be important that any such adjustments concentrate on bringing structural improvements to the budget, which promote the green transition, increase incentives to work, and support inclusiveness.

11. The budget contains several new measures and a partial reversal of previous commitments. The gross impact on the budget is around 0.6 percent of GDP (Text Table 1). This includes energy support measures, support to regions and municipalities, permanently higher unemployment support, infrastructure investments, and substantially higher police and defense funding (given the forthcoming NATO membership obligations). Most of the new measures are in line with the new government’s reform (“Tidö”) agreement, but the intended substantial structural reforms such as income and corporate tax cuts or reforms that tackle the dysfunctional housing market are missing. The increased support for regions and municipalities, including in the health sector is welcome, but additional support will be necessary, while ensuring the quality and efficiency of the regional fiscal expenditure, given the demographic headwinds and the experience from the pandemic (OECD, 2021 ). The permanently higher unemployment benefits are not conducive to increasing employment and hours worked. Means-tested transfers are a more efficient way to support the vulnerable. Furthermore, the discontinuation of the climate bonus for electric cars and lower taxes on fuels could hinder meeting Sweden’s 2030 EU climate obligations (Annex IV).

12. Energy support measures could be better targeted. Compensation measures to households will total 1.1 percent of GDP during 2022–23, which is below the European average of around 2 percent. Many measures are not targeted, and some impede energy conservation (Box 1). The fuel tax cuts, which will affect budgets over the next three years, should be gradually phased out during this period as energy prices decline. Although the recently announced retroactive electricity support to households and companies in the south region is small, temporary, and preserved price signals, it is not means-tested. Moreover, Sweden should replicate some of the better practices in other European countries where support was linked to the household income level.

Text Table 1.

2023 Budget

article image

Below the line because financed from congestion revenue surpluses by Svenska Kraftnät

13. Over the medium term, as inflation decelerates, Sweden should increase social investment to boost and broaden potential growth. Sweden ranks high in terms of infrastructure investment, as well as digitalization and climate change actions (Figure 2). However, more investment is needed for education, elderly health care, and its ambitious green transition agenda. Studies by the Ministry of Finance and the Swedish Association of Local Authorities and Regions point out the need for building at least 1,400 schools, 700 elderly nursing compounds, and 93 healthcare facilities. Meeting Sweden’s climate goal will also require more investment in fossil-free energy generation and further developing the aging and insufficient electricity grid at an estimated cost of more than 10 percent of GDP (Annex IV). Given the substantial fiscal space and favorable debt dynamics, the next fiscal framework review—set to begin in 2024—should consider increasing growth-enhancing infrastructure and social spending. Furthermore, the authorities should gradually increase property taxes from their extremely low level and phase out mortgage interest deductibility, while reducing labor taxation in order to make the tax mix more growth friendly (OECD, 2021). The 2022 pension and labor market reform that links retirement age to life-expectancy and reduces extensive employment protection are welcome as in the long run this will substantially reduce debt and increase labor supply (Figure 2).

Authorities’ Views

14. The authorities agree that fiscal policy stance should support monetary policy in reducing inflation. They note that the energy support package is relatively broadly targeted in order to reach different income groups, given the wide impact of the shock. Moreover, a swift delivery of support measures was a key priority. The government plans to consider lowering the wage tax wedge during the term of office but there is no appetite to increase property taxes.

Figure 2.
Figure 2.

Selected Indicators

Citation: IMF Staff Country Reports 2023, 111; 10.5089/9798400237478.002.A001

B. Monetary Policy

15. To arrest inflation pressures, policy tightening started in April 2022, but further action is needed. Core inflation has been above projections, including driven by second round effects of high electricity and food prices, and short-term inflation expectations are somewhat elevated (Figure 3). However, long-term expectations remain anchored. Monetary policy should remain flexible, and future actions be set against a risk of inflation remaining sticky or winding down as its temporary drivers moderate. In addition, it should consider a continued tight labor market, economic slack, transmission lags, and an overarching objective of anchoring short-term inflation expectations, not least with the view of steering wage negotiations. Considering an exceptionally high level of uncertainty, continuous review of the pace and magnitude of monetary tightening is appropriate. The potential costs of under-tightening (including weakening of Riksbank’s credibility) outweigh those of over-tightening (risk of recession).

16. At the time of the discussions in January, staff analysis suggested that the policy rate would need to be slightly higher to achieve the desired inflation path. The Taylor rule-implied policy rate paths were somewhat higher comparing to the Riksbank’s path. Thus, the policy rate could be increased to slightly above 300 basis points in 2023–24 and then converge towards Riksbank’s announced peak of 2.84 percent. This would be somewhat tighter than the ECB’s projected stance. On February 9, Riskbank raised the policy rate by 0.5 percentage points to 3 percent, indicating that the rate would be raised further during the spring. This should allow for inflation to start moving towards the target in 2024. Such a decline is also contingent on a slowing down of inflation globally and the abatement of pandemic-related supply shocks. In view of high uncertainty, the monetary stance should be continually assessed. Reliance on forward guidance should be reduced, while preserving clear communication to avoiding de-anchoring of medium-term inflation expectations, which are currently well anchored (Figure 3).

17. The planned Asset Purchase Program tapering is appropriate but should be recalibrated if the need arises to safeguard corporate liquidity. The Riksbank started a purchase program of about 10 percent of GDP in March 2020. Compared with many other central banks, the Riksbank’s securities holdings are smaller and have a shorter time to maturity. Most of them are covered bonds, reflective of the low level of public debt. Purchases in 2022 focused on reinvestment purchases (restricted to half of the maturing bond) and have ceased by end-2022. Holdings will now decline steadily as they fully mature over the next few years. The pace of this path should be revisited if needed as market conditions allow in response to significant developments in inflation. On February 8, Riksbank decided to reduce their asset holdings at a faster pace, by selling until further notice nominal and real government bonds with longer maturities at a nominal value of SEK 3 billion and SEK 0.5 billion respectively per month, starting in April.

18. The Riksbank continued to carefully explore the introduction of e-krona and more in-depth studies are needed. An e-krona pilot aims to test technological design details while limiting risks, including financial disintermediation and cybersecurity concerns, as well as to consider the appropriate legal framework. In February 2021, Phase 2 of the pilot was concluded, and tests showed possible integration into existing infrastructure, as well as the possibility to have off-line e-krona transactions. The pilot is entering Phase 3, which focuses on specific parts of the technical solution (e.g., role of DLT and token-based solutions in innovations in payments) and preparing the requirements of an e-krona.

Authorities’ Views

19. The authorities highlighted that the interest rate path is intended to indicate a projection for the inflation and future interest rates rather than a commitment. The current disinflation path reflects the expectation of a steady dissipation of the supply shock. They believed that risks to the real economy were tilted to the downside due to the impact of both energy prices and high interest rates on consumption, while uncertainty concerning inflation was high, with risks tilted to the upside. However, their decisions on the rate path will be data driven. They saw merit in publishing the forecast path for transparency reasons. With regards to quantitative tightening, the Riksbank plans to continue to reduce its balance sheet by not replacing maturing bonds and by selling government bonds with longer maturity, while being mindful of the impact on liquidity.

Figure 3.
Figure 3.

Selected Monetary and Financial Indicators

Citation: IMF Staff Country Reports 2023, 111; 10.5089/9798400237478.002.A001

C. Financial Sector and Macroprudential Policies

20. Sweden’s banking sector entered the current economic juncture with generally solid fundamentals. Banks have structurally higher profitability than its European peers, high regulatory capital, and liquidity positions exceeding regulatory minima of 100 percent in all banks (Figure 4). The sector’s assets were around 300 percent of GDP at end–2021, with the five largest banks accounting for over 75 percent of deposits and lending. Swedish banks are highly interconnected regionally, as they are active across the Nordic-Baltic region, and the UK.2 They depend on international markets and domestic non-bank financial institutions for their mortgage funding via covered bonds. The share of wholesale funding in the three major banks remains high at around 63 percent.

Figure 4.
Figure 4.

Selected Banking Indicators

Citation: IMF Staff Country Reports 2023, 111; 10.5089/9798400237478.002.A001

21. Structural vulnerabilities highlighted in the previous FSAPs have intensified. The 2022 FSAP identified that banks have maintained high exposure to residential real estate, with the largest banks accounting for 75 percent of the total mortgage lending. The housing market has been affected by long-standing supply and demand issues, but historical defaults rates have been extremely low given the low amortization requirements, very long maturities, generous social protection in the case of a job loss (Section D). Mortgages and lending to CRE constitute about 40 and 20 percent of banks’ lending portfolios, respectively. While banks have high capital ratios, low risk weights on mortgages imply that these buffers are not as high when measured in SEK. These capital cushions could be challenged in case of a very large macro-financial shock, amplified by the high sensitivity to interest rates of households and corporates owing to their high level of indebtedness and short rate fixation (Figure 4).3 Systemic risks are now elevated but remain manageable. Risks to financial stability have increased stemming from limited liquidity in the corporate bond markets, exposing especially the investment funds sector (Annex V).

22. FSAP stress tests suggest that banks could on average withstand severe shocks, but enhancements to the already comprehensive macroprudential policy toolkit can help further attenuate cyclical and structural risks.4

  • Countercyclical capital buffer (CCyB): By June 2023, the CCyB will be at 2 percent. Since this level reflects a standard risk environment, the authorities should recalibrate the level of capital that would be required in a more heightened risk environment. While it could be too restrictive to raise it further at present, sectoral application could be considered for CRE, if the EU legislation permits. A regulation resulting in a very low level of risk weighted assets (RWAs) in the calibration of capital buffers, given low historical defaults on mortgages, could also be reviewed (Figure 5).

Figure 5.
Figure 5.

Risk Weighted Assets

(Percent)

Citation: IMF Staff Country Reports 2023, 111; 10.5089/9798400237478.002.A001

Sources: ECB; and Haver Analytics

  • Mortgages: Amortization requirements are currently 1 percent per year for loan-to-value (LTV) below 70 and 2 percent for LTV below 85 percent. These rates are low compared to international lending standards. As financial conditions stabilize, the requirement should be gradually increased to safeguard against greater borrowing and perpetual mortgages (Figure 6). Caps on the length of mortgage loans and/or debt-to-income (DTI) and debt-service-to-income (DSTI) ratios should also be introduced. Collecting better data on household assets and liabilities would help calibrate better the macroprudential policies (Box 2).

Figure 6.
Figure 6.

Maximum Implied Mortgage Length

Citation: IMF Staff Country Reports 2023, 111; 10.5089/9798400237478.002.A001

Source: OECD.

  • CRE supervision: Greater use of “soft powers” and joint communication by institutions comprising the Financial Stability Council could help influence firms’ behavior. CRE firms could also be required to disclose their contingency funding plans in their annual reports and bond prospectuses (Annex VI, 2023 Selected Issues paper). In addition, higher capital requirements, or sectoral CCyB or Systemic Risk Buffer (SRB) for banks’ exposures to CRE risks—due to notable amplification and spillover channels from CRE solvency to the macro-economy—should be considered (Annex VI).

23. Banking and fintech supervision and crisis management framework have improved but could be strengthened further. The frequency and intrusiveness of onsite inspections need to increase, and more efficient analytical tools and dashboards could facilitate offsite monitoring of banks. The crisis management framework would benefit from greater clarity and guidance in multiple areas (Annex V). Regulation and cross-border supervisory arrangements need to adapt. The fintech sector is growing rapidly in size and relevance and needs to be better understood. Cyber threats/attacks have become more prominent, hitting many Swedish financial institutions. Thus, a framework for comprehensive operational and cyber resilience is needed. Given a potential increase in bankruptcies, bankruptcy framework should be strengthened, including by streamlining procedures, reducing barriers to restructuring, and lowering costs.

24. Efforts to enhance the understanding of money-laundering/terrorist financing risks and strengthen the AML/CFT framework should continue. FATF recognized Sweden’s progress to broaden the scope and content of measures for fit and proper requirements. Further developing (and increasing resources) AML/CFT supervisory risk assessment tools should be prioritized in order to deepen the understanding (for example, the collection and analysis of more granular data on transactions) of cross-border non-resident ML/TF risks and ensure that risk-based supervisory activities target the highest ML/TF risk areas. The FI should step up AML/CFT supervision targeted towards correspondent banking activities and Virtual Asset Service Providers. The ongoing regional IMF Nordic-Baltic Technical Assistance Project that focuses on analysis of cross-border ML/TF threat and related aspects of banking sector supervision, potential financial integrity implications on financial stability, and virtual assets is due to be finalized in 2023.

Gaps in Household Data Statistics

No legal entity in Sweden has a mandate to collect household-level (HH) data on finances. Statistics Sweden (STA) is responsible for this type of statistics but is not able to show HHs’ assets and liabilities on a disaggregated level, partly because the individual expenditure is no longer available as the tax returns no longer contain data on wealth due to the 2007 tax reform. The STA has been publishing information since 2016 on HHs’ total real and financial wealth, broken down into a few different asset and liability types. While Swedish HH, in aggregate, are net asset holders, detailed data on the distribution of wealth and debt would be more helpful in identifying pockets of vulnerabilities.

Since 2011, the Riksbank has made several proposals to start collecting data. A government inquiry into HHs’ over-indebtedness during 2000s also pointed to the same need. In 2016, the FSAP recommended to act quickly to gather data on households’ balance sheets. The government-commissioned 2021 inquiry investigating how individual-based statistics on households’ assets and liabilities could be produced, is currently undergoing a public consultation.

Some headway has been made in collecting data, but there are limits. Since the last FSAP, the FI has been able to collect HH data to get a better picture of finances, but it is only able to do it at the household-bank level. With better data, the FI would be able to calibrate and target macroprudential policies leading to better cost-benefit trade-offs. It will also mean that it is easier for anyone to assess the effect of macroprudential measures and therefore improve accountability.

In many European countries, the HH data collection is more advanced than in Sweden. Under the European System of Central Banks’ initiative, the micro-level structural data on HHs’ finances and consumption is collected through the Household Finance and Consumption Network in a harmonized survey. The Austrian central bank is responsible for maintaining the dashboard presenting comparable data across participating countries (the Euro Area, Poland, Slovakia, Hungary). While the Riksbank is a member, there is no Swedish data available.

uA001fig03

Stylized Diagram of the Authorities’ Ability to Observe Household Balance Sheets

Citation: IMF Staff Country Reports 2023, 111; 10.5089/9798400237478.002.A001

Sources: Finansinspektionen and IMF staff estimates.
uA001fig04

Total Assets and Liabilities of Households

(Percent of GDP, 2021)

Citation: IMF Staff Country Reports 2023, 111; 10.5089/9798400237478.002.A001

Source: Eurostat.

Authorities’ Views

25. The FSA did not see a current need to revisit the CCyB level. According to the FSA, banks have already internalized the need to raise additional capital, and the interest rate hikes are generating enough deleveraging in the economy to reduce risks. The authorities agreed that RWAs are low but contended that this is related to structural issues of the Swedish banks and pointed out to the relatively high capital ratios. They noted the ongoing review of IRB models, which is expected to result in risk weights being harmonized and on an overall level more conservative. They did not see a need to increase the residential mortgages’ amortization requirement as they considered the current household borrower-based measures as sufficient given ongoing adjustments in mortgage markets. They agreed on the need to address data gaps and hoped to build on the progress made in aggregating total loan portfolios of borrowers and to possibly make similar progress for savings, despite the lack of a register of household assets and debts. The Riksbank and the FSA emphasized that the lack of such statistics in Sweden imposes constraints on the analysis of important questions linked to financial stability and monetary policy. The authorities noted that even if the number of onsite inspections has been assessed as few, the supervisory outcome of the onsite inspections conducted are sufficiently intrusive, and they stressed that to increase the number of onsite inspections more personnel is required. The authorities saw merit in further strengthening the crisis management framework. They noted that resources for AML/CFT work have increased substantially in the past years and that they are continuously improving risk assessment tools.

D. Structural Policies

26. The structural reform agenda will be guided by the Recovery and Resilience Plan (RRP). Most of the commitments under the RRP are to be completed by end-2023. These include reforms and investments to increase the resilience of the economy through tackling demographic and educational challenges and addressing the disfunctions of the housing market. The “Tidö” Agreement compliments the RRP and sets out the reform agenda for the next four years. It focuses on health, climate and energy, crime, migration and integration, education, growth, households, and economy.

Key Deliverables Under the Recovery and Resilience Plan for 2022–23

  • Entry into force of a law abolishing the reduction of energy tax on fuel in certain sectors.

  • At least 7,900 new study places created in vocational training and adult education.

  • Entry into force of changes in the employment protection framework and new regulations providing greater transition possibilities.

  • At least 18,400 buildings newly connected to broadband access.

  • Implementation of a new bank account and safe deposit box system that can be checked directly by the competent authorities.

  • Entry into force of a law setting better standards for housing construction.

27. Efforts should persist to tackle education and skills gaps, especially for the foreign-born. The unemployment rate is one of the highest in the region due to the slow progress in integrating low-skilled workers (Figure 7). Policy actions should include active labor market and retraining policies, especially for the youth and women (WEO, 2020). Both the "job-matching” program and Intensive Year program, which aim at newly arrived refugees, are commendable. At the same time, there is a needed to enhance the effectiveness of the Public Employment Service, vocational training, and science and engineering education (EC, 2022).

Figure 7.
Figure 7.

Unemployment Rates: Young and Foreign-born, 2022Q3

(Percent, seasonally adjusted)

Citation: IMF Staff Country Reports 2023, 111; 10.5089/9798400237478.002.A001

Sources: Eurostat; Haver Analytics; and IMF staff calculations.

28. Limited reforms are taking place to address housing market distortions. Recent actions focused mainly on the supply side of the market through providing investment subsidies for rental and student housing, shortening planning processes, and simplifying permits application. These reforms should be supplemented with lowering taxes on deferred capital gains, a gradual removal of interest rate deductibility, and increasing the extremely low property taxes (Annex VII; Box 4). In lieu of the tax breaks, social protection could be provided in a more efficient way, including through expanding the housing allowance. Easing rental controls and simplifying building codes is also vital to bringing more dynamism to the market.

29. Significant investments are being made in improving digitalization which should help further improve productivity. High-speed and reliable broadband connectivity is being expanded, especially in less populated areas, which will benefit inter-regional equity. The expansion of e-government services will also help improve the provision of services.

Stakeholder’s Views

30. The authorities shared staff’s views on the need to improve the functionality of the housing market. They also agreed on the importance of supporting the youth and foreign born through improving the effectiveness of the education and training programs to facilitate their entry into the labor force. They were confident that the October 2022 reforms to the employment protection framework will be implemented in a way that will be beneficial for the labor market. They also conveyed that the government remains committed to Sweden’s climate targets and plan to raise additional investments if necessary, including to help upgrade the energy grid. They also intend to alleviate planning and difficulties related to permits for large investment projects.

Mortgage Tax Relief in the European Union

A market distortion is created if a tax benefit favors one investment over another. Mortgage interest tax relief contributes to the favorable tax treatment of owner-occupied housing but may not necessarily fulfill its intended goal of increasing home ownership. Therefore, EC country-specific recommendations have long included advice to gradually abolish this benefit, also considering macroeconomic stability risks.

A recent EC study analyzed the effects of removing mortgage interest tax relief on public revenue and expenditure, household disposable income and income inequality in 14 EU Member States (MSs) using the microsimulation model EUROMOD.1 It finds that the tax relief largely benefits households at medium to high income levels. Consequently, its removal could help decrease income inequality in almost all MSs. The impact of mortgage interest tax relief on government revenues is sizable in some MSs, with exceptionally large for the Netherlands (1.8 percent of GDP), followed by Belgium and Sweden (0.4 and 0.25 percent of GDP, respectively). The tax expenditures associated with interest deductibility alone amounts to around ½ percent of GDP (EC, 2022). Alongside low amortization rates and the low rate of recurrent property taxation, mortgage interest deductibility has been an important factor driving up house price growth and household debt in Sweden.

1/ MSs, which still had mortgage interest relief in 2018 for all mortgages and for which simulations were performed, were Belgium, Czechia, Estonia, Italy, Luxembourg, the Netherlands, Finland, and Sweden.

Staff Appraisal

31. Following a strong post-pandemic recovery, Sweden is faced with substantial economic uncertainty. A mild recession is expected in 2023 while inflationary pressures are proving difficult to abate despite numerous policy actions. Strong employment so far is a positive sign and should partly attenuate the burdens placed on households from higher debt servicing, inflation and house price declines. The latter, together with lower CRE yields, highlight the well-known vulnerabilities in these two sectors, such as their high exposure to variable interest rates and high leverage.

32. Fiscal policy will need to strike a fine balance between supporting the vulnerable and containing demand pressures. The slightly contractionary stance in 2023 will help support monetary policy’s efforts. The fiscal stance should adapt to developments, including by allowing the automatic stabilizers to fully operate. Energy support measures were swift, and small compared to other European countries. However, they could have been more targeted to the vulnerable segments of the population. In this regard, the discontinuation of the climate bonus for electric cars and lowering taxes on fuels risks reversing progress towards reducing carbon emissions and meeting Sweden’s climate goals. As inflation subsides, investments should be increased to support green transition and inclusive growth. A gradual rise in the extremely low property taxes would help finance the above expenditures and make the housing market more dynamic. While the pension reform that links retirement age to life-expectancy is welcome, additional reforms that reduce the high labor tax wedge would further increase labor supply and lower debt in the long-run. Given the available fiscal space and favorable debt dynamics, a small deviation from the surplus target over the medium-term would allow for additional growth-enhancing infrastructure and social spending.

33. Monetary policy should continue to forcefully tackle inflation if it persists. The increases in the policy interest rate have been appropriate and a more aggressive tightening path may be needed in the short run to avoid the risk of entrenched inflation. The ongoing tapering of the asset purchase program will contribute to the needed overall tightening but could be recalibrated in line with market and inflation conditions. Avoiding policy surprises is essential to help anchor inflation expectations.

34. Tighter financial conditions are testing the resilience of the banking sector. The IMF Financial Sector Assessment Program confirmed banks’ strong capital position and resilience to severe macroeconomic shocks, while revealing pockets of vulnerabilities in the face of higher interest rates. Special attention needs to be given to residential and commercial real estate developments. The frequency and intrusiveness of onsite inspections should increase given the looming uncertainties. Furthermore, CCyB level and other buffers may need to be recalibrated to better reflect risks, and possibly tightened for CRE, and enhancements to the macroprudential toolkit on mortgages would help attenuate risks, such as gradually increasing the mortgage amortization requirement. Greater disclosure by CRE firms and collecting better data on household assets and liabilities would help calibrate macroprudential policy. The crisis management framework would benefit from greater clarity. In addition, while good progress has been made in anti-money laundering efforts, further developing supervisory risk assessment tools would help deepen the analysis of cross-border risks.

35. Implementation of structural reforms is essential to support growth, productivity and improve social outcomes. Tackling education and skills gaps, especially for the foreign-born, is a priority, and it is important to increase efficiency of programs and regional services. Education enhancements should particularly focus on science, engineering, and vocational training. More reforms are also needed to address housing market distortions. In this regard, it would be important to gradually ease rent controls and simplify building codes, while substituting rent-controls with more efficient social protection. There is also a need to implement reforms that raise incentives to work to further increase labor market participation. To achieve Sweden’s ambitious climate goals, its high carbon tax should be complemented with increased investments in energy supply and transmission, including renewables and the electricity grid. All the above will help boost Sweden’s productivity and inclusive and green growth over the medium-term.

36. It is proposed that the next Article IV consultation with Sweden take place on the standard 12-month cycle.

Table 1.

Sweden: Selected Economic Indicators, 2020–28

article image
Sources: IMF World Economic Outlook; Swedish Ministry of Finance; Statistics Sweden; and IMF staff calculations.

OECD based Unit Labor Cost (ULC) real effective exchange rate indicator.

The unemployment rate and inflation represent actual figures, not predictions.

Table 2.

Sweden: General Government Statement of Operations, 2020–28

article image
Sources: The 2023 Budget Bill; and IMF staff calculations.

Structural balance takes into account output gaps.

Table 3.

Sweden: Balance of Payments, 2020–28

article image
Sources: Statistics Sweden; and IMF staff calculations.

Positive number indicates an accumulation of foreign assets.

Percent changes of exports of G&S and imports of G&S are calculated using numbers in UDS terms.

Table 4.

Sweden: Financial Soundness Indicators, 2016–22

article image
Sources: ECB; IMF Financial Soundness Indicators; Statistics Sweden; and OECD.

2022 shows 2022Q3.

Annex I. Summary of the Sovereign Risk and Debt Sustainability Assessment

Annex I. Figure 1.
Annex I. Figure 1.

Public DSA—Composition of Public Debt and Alternative Scenarios

(In percent of GDP unless otherwise indicated)

Citation: IMF Staff Country Reports 2023, 111; 10.5089/9798400237478.002.A001

Source: IMF staff calculations.Note: The risk of sovereign stress is a broader concept than debt sustainability. Unsustainable debt can only be resolved through exceptional measures (such as debt restructuring). In contrast, a sovereign can face stress without its debt necessarily being unsustainable, and there can be various measures—that do not involve a debt restructuring—to remedy such a situation, such as fiscal adjustment and new financing.1/ The near-term assessment is not applicable in cases where there is a disbursing IMF arrangement. In surveillance-only cases or in cases with precautionary IMF arrangements, the near-term assessment is performed but not published.2/ A debt sustainability assessment is optional for surveillance-only cases and mandatory in cases where there is a Fund arrangement. The mechanical signal of the debt sustainability assessment is deleted before publication. In surveillance-only cases or cases with IMF arrangements with normal access, the qualifier indicating probability of sustainable debt (“with high probability” or “but not with high probability”) is deleted before publication.

Annex I. Figure 2.
Annex I. Figure 2.

Debt Coverage and Disclosures

(In percent of GDP unless otherwise indicated)

Citation: IMF Staff Country Reports 2023, 111; 10.5089/9798400237478.002.A001

Sources: IMF staff calculations; Swedish Authorities: OEDC; and Bloomberg1/ CG=Central government; GG=General government; NFPS=Nonfinancial public sector; PS=Public sector.2/ Stock of arrears could be used as a proxy in the absence of accrual data on other accounts payable.3/ Insurance, Pension, and Standardized Guarantee Schemes, typically including government employee pension liabilities.4/ Includes accrual recording, commitment basis, due for payment, etc.5/ Nominal value at any moment in time is the amount the debtor owes to the creditor. It reflects the value of the instrument at creation and subsequent economic flows (such as transactions, exchange rate, and other valuation changes other than market price changes, and other volume changes).6/ The face value of a debt instrument is the undiscounted amount of principal to be paid at (or before) maturity.7/ Market value of debt instruments is the value as if they were acquired in market transactions on the balance sheet reporting date (reference date). Only traded debt securities have observed market values.

Annex I. Figure 3.
Annex I. Figure 3.

Public Debt Structure Indicators

Citation: IMF Staff Country Reports 2023, 111; 10.5089/9798400237478.002.A001

Commentary: The share of FX debt in overall debt will steadily decline. This is due to the change how the Riksbank is financing its foreign reserves. Starting in 2021, the Riksbank is gradually replacing reserves that are borrowed through the National Debt Office (which is in charge of central government debt issuances and planning) with direct purchases. With this change, the government announced to reduces its FX debt gradually to zero as debt matures. This will also change the maturity profile of pubic debt. This is also one of the reasons debt declined more than usual in 2021 as Riksbank took over the responsibility for FX reserves management.Sources: IMF staff calculations; Swedish Authorities; OECD; and Bloomberg.

Annex I. Figure 4.
Annex I. Figure 4.

Public DSA—Baseline Scenario

(In percent of GDP unless indicated otherwise)

Citation: IMF Staff Country Reports 2023, 111; 10.5089/9798400237478.002.A001

Staff commentary: Public debt is expected to decrease gradually due to a favorable growth dynamics and the assumption of continuing small primary surpluses till 2028 which is in line with the fiscal surplus target. After 2028 it is assumed that the authorities will adjust the surplus target to zero. Note that in 2023 we assume that the government will re-finance the Riksbank to the tune of SEK 60 bn under contingent liabilities. This still does not lead to an increase in debt to GDP.Sources: IMF staff calculations; Swedish Authorities; OECD; and Bloomberg.

Annex I. Figure 5.
Annex I. Figure 5.

Realism of Baseline Assumption

Citation: IMF Staff Country Reports 2023, 111; 10.5089/9798400237478.002.A001

Sources: IMF staff calculations; Swedish Authorities; OECD; and Bloomberg.1/ Projections made in the October and April WEO vintage.2/Data cpver ammia; pbersavtopms frp, 1990 to 2019 fro MAC advanced and emerging economies. Percent of sa.3/ Starting point reflects the team’s assessment of the initail overvaluation from EBA (or EBA-Lite).4/ The Lubach (2009) rule is a linear rule assuming bond spreads increase by about 4bps in response to a 1 ppt increase in the projected debt-to-GDP ratio.

Annex I. Figure 6.
Annex I. Figure 6.

Medium-term Risk Analysis

Citation: IMF Staff Country Reports 2023, 111; 10.5089/9798400237478.002.A001

Commentary: Both medium-term tools point to low level of risk; the Debt Fanchart Module and the GFN Financeability Module show that debt is on a declining path. The banking sector stress test was manually triggered by staff to assess risk from a extremely sever bank stress scenario. The size of Sweden’s banking sector (about 300 percent of GDP) exposes the government to significant contingent liability risks, however, banks have thus far weathered well the tightening of financial conditions, reflecting the strength of banking supervision and macroprudential policies. Also due to well functioning resolution system, it is very unlikely for the government to assume 10 percent of banking sector assets as a liability.Sources: Bloomberg; IMF staff calculations; Swedish Authorities; and OECD.

Annex I. Figure 7.
Annex I. Figure 7.
Annex I. Figure 7.

Long-term Risk Analysis

Citation: IMF Staff Country Reports 2023, 111; 10.5089/9798400237478.002.A001

Sources: Bloomberg; IMF staff calculations; Swedish Authorities; and OECD.

Annex II. External Sector Assessment

article image
article image

The upper and lower range are derived by subtracting the standard deviation of the ULC-based REER index (which is 5.9 percent) from the average outcome which is the midpoint. The range is used to reflect uncertainty around the EBA estimated norm.

Annex III. Risk Assessment Matrix1

article image

Annex IV. Climate Policy Advances and Challenges

1. Sweden has adopted some of the most ambitious carbon reduction targets in the world but meeting these goals will require additional investment and reforms. While Sweden performs well on many targets—it is among the top in the Climate Change Performance Index—it might not meet its EU 2030 climate goal and its own ambitious goal of having net-zero emissions by 2045 (Figure). The Swedish Environmental Protection Agency (2022) finds that reforms as of March 2022 will support meeting Sweden’s 2030 goals without supplementary measures. However, it finds that its 2045 target “will not be reached with current policy instruments, but that the distance to the target is significantly smaller than the previous year.” More effort is needed to reduce emissions from the largest polluters (transportation, industrial and agricultural sectors). While Sweden has one of the highest carbon tax rates in the world, it lacks a clear strategy/roadmap on lowering emissions in those sectors in a cost-efficient way (OECD, 2021). In addition, the new governments’ objective of achieving fossil-free electricity by 2040 (which needs to be enacted) will require more investment in nuclear plants, wind turbines, biofuel production, hydrogen power plants, electric vehicle charging stations, and not least the power grid. A report by SWECO finds that infrastructure investments for the national electricity grid could amount to 10.3 percent of GDP until 2045. The Fiscal Policy Council (2022) finds that public financing is not the main impediment to reducing emission rather the need to streamline approval processes, stable and clear rules, and better national coordination. It suggests that climate investment needs could range between 0.4–0.8 percent of 2022 GDP per year over the coming decades, which is in addition to the planned climate related public investment, which is already part of the 12-year investment plan. In addition, Fund staff finds that investment needs for climate adaptation could be large as well (up to 0.4 percent of GDP annually).1

2. Welcome steps are being taken to promote green transition while further improvements in the process are recommended. Emissions have fallen by about a third since 1990 and the remaining two-thirds need to be eliminated between now and 2045. Broadly, four key areas are expected to be pivotal for the transition to net-zero emissions, a) more efficient use of energy and resources, b) zero-emissions electrifications, c) biomass from forestry and agriculture, and c) carbon capture and storage. With only six action plans remaining for Sweden to reach net-zero greenhouse gas emissions, the new government is expected to present a climate policy action plan which will need to focus on the way the climate transition will accelerate. According to the Climate Policy Council recommendations indicate that there is room for improvement regarding governance, coordination and upskilling, goals and policy instruments should be strengthen, while conditions for investments should improve.

3. Advancing technological progress of increasingly complex electricity systems is imperative. The current systems are comprised, to a large extend, of renewable, weather-dependent, and partly distributed electricity generation, which need to further develop in terms of control, storage, and transmission, designing new solutions, and rapidly commercializing those that have only been tested on a smaller scale. This applies to smart grid technologies with improved capacity to control electricity production, storage, and consumption. In February 2022, the Government approved an electrification strategy which includes an action plan for charging infrastructure and tank infrastructure as well as an upcoming district heating and cogeneration strategy. A new mandate was given to Svenska Kraftnät to expand the national transmission grid to areas within Sweden’s maritime territory.

Annex IV. Figure 1.
Annex IV. Figure 1.

Climate Targets and Investment for Climate Change Adaptation

Citation: IMF Staff Country Reports 2023, 111; 10.5089/9798400237478.002.A001

Annex V. 2022 FSAP: Key Recommendations

article image
article image
* Immediate (within 1 year), ST—Short term (within 1–2 years), MT—Medium term (within 3–5 years) ** Priority for CBDC recommendations not inserted as time horizon will depend on whether the e-krona project continues.

Annex VI. Sweden’s Corporate Vulnerabilities: Focus on Commercial Real Estate

Commercial Real Estate (CRE) debt constitute a large portion of the total corporate, making the sector a substantial risk to the financial system due to funding risks as well as broader spillover effects to the real economy. Stress tests, conducted to assess the resilience of CRE, reveal that in 2020 the median interest rate coverage was above a commonly used threshold of 1.5 percent, but drops below one in a severe scenario, resulting in a 3/4 of firms with debt-at-risk.1 CRE’s concentration, interconnectedness and limited disclosure calls for close monitoring of liabilities structure and adjusting banks’ capital levels to better reflect current risks.

1. CRE sector borrowing accounts for a large part of corporate borrowing and has become increasingly market financed.2 In the past few years, CRE prices have risen fast, and yields have fallen. Banks’ exposure to the sector and the sector’s overall debt level is high.3 CRE loans represent between 10 and 25 percent of banks’ private sector lending. The share of CRE companies’ non-bank debt has increased recently (about 40 percent of total debt). While this helps diversify risks, stress tests show that this also elevates refinancing risks, which together with short interest rate fixation, could have an impact on macro-financial stability. CRE bonds account for about half of corporate bond market value. Foreign holdings of CRE bonds stand at 53 percent, exposing the sector to rapid selloffs, particularly during times of heightened global risk aversion. Among domestic investors, investment funds hold the largest share of CRE bonds, at around 21 percent. Ownership concentration has recently increased with some CRE firms buying into other CRE firms.

2. At the same time, 3the sustainability of CREs’ revenues is increasingly becoming subject to risks. Owing to the pandemic-induced hybrid working model, renting—a key source of CRE earnings—is coming under stress as office vacancy rates are rising, for example, from about 3 percent in 2019 to close to 8 percent in 2021 in Stockholm, with similar trends in other major cities such as Gothenburg and Malmö. This, combined with the office yield trend, which has also been declining, is affecting CRE firms’ credit rating and ability to roll over their existing debt securities in the local bond market.

3. Staff’s assessment of financial health and vulnerabilities of CRE firms is based on publicly available company financial data. Orbis database compiles balance sheet and income statements for over 20 thousand Swedish CRE firms. However, not all the necessary data series was available for this group of firms, therefore stress tests were conducted on a sample of firms, where the largest 100 companies in the sample hold aggregate assets of around 70 percent of GDP and debt of around 50 percent. The analysis focused on a set of customary financial ratios under current and stressed conditions.

4. A firm’s capacity to service debt hinges on its interest coverage ratio (ICR). It is computed as EBIT/Interest Expense. The lower the ratio, the more the company is burdened by debt expense relative to earnings. An ICR of less than 1 implies that the firm is not generating sufficient revenues to service its debt without adjusting, such as reducing operating costs, drawing down its cash reserves, or borrowing more. In this analysis, an ICR threshold of 1.5 times is applied to account for potential vulnerabilities to funding risks, in addition to earnings risks. This is a widely used benchmark to gauge an early warning signal as firms with ICR below 1 may have already been in distress. Debt is then categorized into different risk buckets based on the level of ICRs. Debt in the bucket with lower ICR has higher probability of becoming non-performing. Firm profile is calculated as the proportion of firms with median ICR categorized within each bucket.

5. Stress tests indicate that CREs face debt servicing pressures even under a mild scenario. Stress tests were conducted on a sample of CRE firms (Figure 1). The analysis focused on a set of customary financial ratios under current and stressed conditions. In particular, shocks reflecting the adverse stress scenario were applied to gauge the response of firms’ interest coverage ratio (ICR) to interest rate change, GDP change impact on revenues, and FX.4 The joint occurrence of shocks significantly weakened the ICR, with the median ICRs falling below 1.5, and under a more severe shock below 1 (Figure 2). Debt-at-risk was found to fluctuate between 20–35 percent.5 Medium and large-size firms were affected similarly.

6. Given the current tightening of financial conditions, there could be broader spillover effects to the real economy. Thus far, vulnerabilities have been mitigated by the sector’s healthy pre-crisis balance sheets, pre-crisis regulatory measures, and the crisis response. In the case of market funding squeeze, some CREs might be able to draw down credit lines from banks, or even benefit from bank lending beyond that, albeit at higher cost. However, some may have to shed assets or declare insolvency. Several amplification mechanisms could worsen the outlook for CREs (Figure 3). Concentration among CRE companies could lead to contagion effects among CREs.

Annex VI. Figure 1.
Annex VI. Figure 1.

Selected CRE Financial Ratios

Citation: IMF Staff Country Reports 2023, 111; 10.5089/9798400237478.002.A001

Sources: Orbis; and IMF staff estimates.

Annex VI. Figure 2.
Annex VI. Figure 2.

CRE Stress Test Results

Citation: IMF Staff Country Reports 2023, 111; 10.5089/9798400237478.002.A001

Sources: IMF staff estimates.

7. Similarly, investors may pull back from all CREs with little discrimination for quality of underlying assets due to asymmetric and opaque information. Liquidity premia on funding costs will undermine CRE profits and lead to further increase in credit risk premia. And redemptions from investment funds would further withdraw liquidity and in turn boost funding costs. In addition to amplification mechanisms, broader spillover effects could turn a CRE shock macro-critical. Redemption requests could impact prices of securities more broadly. Liquidations of assets could lower property values across commercial real estate and possibly residential real estate, weighing on consumption and investment, and bank capital. And hits on bank capital due to provisioning charges and/or outright losses could crowd out credit to the economy. It would be advisable to consider increase capital requirements for banks with large exposures to CRE given the negative macro-outlook, which is unfolding, rising bankruptcies, high uncertainty about the future path for policy rates, and the potential spillovers which are not captured by the FSAP stress test framework.

8. Strengthening monitoring of corporate liabilities and ownership structure, especially in CRE sector, is thus imperative. CRE firms should be made to improve their disclosures, including on contingency plans when market funding dries up. The authorities could request better disclosure of firms’ liabilities, especially those in foreign currency, including in the bond issuance template. Having better disclosure will also ensure investors can distinguish between more solvent and less solvent firms reducing contagion across the sector. It is advisable to further enhance the comprehensiveness and periodicity of CRE data (e.g., on rents, vacancies, and transaction prices) and to integrate multisource data into a single database. Knowing the ownership structure will help identify interlinkages across firms as well as the associated vulnerabilities. The authorities should evaluate the need to raise capital requirements for banks for CRE exposures. The authorities should plan now for what a potential crisis intervention might be; the intervention should be designed to limit moral hazard. Ideally, interventions would be targeted to where the negative links to the real economy might be strongest.

Annex VI. Figure 3.
Annex VI. Figure 3.

Contagion in the CRE Market

Citation: IMF Staff Country Reports 2023, 111; 10.5089/9798400237478.002.A001

Sources: Finansinspektionen and IMF staff estimates.

Annex VII. Authorities’ Response to Past IMF Policy Recommendations

article image
1

Energy support measures to households in the South are financed by congestion revenue surpluses from the state-owned power distribution enterprise “Svenska Kraftnät” and are thus considered off budget, which complicates the accounting and assessment of the fiscal stance.

2

Banks exited Russian and Ukrainian markets well before the start of the Russia-Ukraine war.

3

See 2023 Financial Sector Stability Assessment (FSSA), including on banks’ vulnerabilities to corporate exposures.

4

FSAP tested banks’ stability at house prices falling 38 percent in two years and interest rate at 4 percent. The FI recently conducted tests on new mortgages with rates going out to 7 percent assessing the repayment capacity of various households’ based on income levels and recourse to unemployment insurance.

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 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).

1

Adaptation cost include estimates for investments in building new coastal protection infrastructure as well as in upgrading investment projects and retrofitting existing assets exposed to rising sea levels. For further details please see Annex 3 of the Fiscal Monitor 2020 (October).

1

Not being able to service debt without additional borrowing, raising revenue, or restructuring.

2

Average loan duration is about 3.4 years, and bond maturity is about 5 years. About 55 percent of bonds are in foreign currency against about 6 percent of bank lending.

3

FI’s stress tests (2020) show that this may put pressure on banks to cover the shortfall in financing. According to FI’s analysis (2021), the vulnerability of CRE increased under certain stress test scenarios of firms with bank loans. FI stress tests included 15000 CREs, including small CREs, which stand for around 40 percent of the loan amount and around 90 percent of the number of CREs.

4

The impact was most pronounced from the changes in the first two variables (increase in advanced country policy rates (up to 400 basis points for the Swedish repo rate) and 38 percent decline in both residential and commercial real estate prices after two years).

5

The firm is not generating sufficient revenues to service its debt without making adjustments, such as reducing operating costs, drawing down its cash reserves, or borrowing more.

Other IMF Content

Other Publishers

  • Collapse
  • Expand
Cover IMF Staff Country Reports
Sweden: 2023 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Sweden
Author:
International Monetary Fund. European Dept.
Volume/Issue:
Volume 2023: Issue 111
Publisher:
International Monetary Fund
ISBN:
9798400237478
ISSN:
1934-7685
Pages:
59
DOI:
https://doi.org/10.5089/9798400237478.002

Total Energy Supply by Source, 1990–2021

(Percent of total energy supply)

Fiscal Costs of Household Support Measures in 2022–23

(Percent of GDP)
Figure 1.

Selected Real Sector Indicators
Figure 2.

Selected Indicators
Figure 3.

Selected Monetary and Financial Indicators
Figure 4.

Selected Banking Indicators
Figure 5.

Risk Weighted Assets

(Percent)
Figure 6.

Maximum Implied Mortgage Length

Stylized Diagram of the Authorities’ Ability to Observe Household Balance Sheets

Total Assets and Liabilities of Households

(Percent of GDP, 2021)
Figure 7.

Unemployment Rates: Young and Foreign-born, 2022Q3

(Percent, seasonally adjusted)
Annex I. Figure 1.

Public DSA—Composition of Public Debt and Alternative Scenarios

(In percent of GDP unless otherwise indicated)
Annex I. Figure 2.

Debt Coverage and Disclosures

(In percent of GDP unless otherwise indicated)
Annex I. Figure 3.

Public Debt Structure Indicators
Annex I. Figure 4.

Public DSA—Baseline Scenario

(In percent of GDP unless indicated otherwise)
Annex I. Figure 5.

Realism of Baseline Assumption
Annex I. Figure 6.

Medium-term Risk Analysis
Annex I. Figure 7.

Long-term Risk Analysis
Annex I. Figure 7.

Long-term Risk Analysis
Annex IV. Figure 1.

Climate Targets and Investment for Climate Change Adaptation
Annex VI. Figure 1.

Selected CRE Financial Ratios
Annex VI. Figure 2.

CRE Stress Test Results
Annex VI. Figure 3.

Contagion in the CRE Market