IMF Concludes 2009 Article IV Consultation With Switzerland

by Ulrika Lomas, Tax-News.com, Brussels

05 June 2009

The IMF has concluded its Article IV consultation with Switzerland. The IMF expects that, given Switzerland’s openness and the size of its financial sector, the economy will experience a significant contraction in the near-term, with sizable downside risks to the outlook. The key policy priority according to the IMF is to maintain domestic financial stability, which contributes also to international financial stability through Switzerland’s strong international linkages. Measures taken towards this key priority include a relaxation of macroeconomic policies, creation of the bank stabilization fund, enhancements to deposit insurance, and introduction of innovative capital requirements, including a minimum leverage ratio. The creation of a new integrated supervisor (FINMA) provides a good opportunity to strengthen financial supervision.

Switzerland enjoyed above average economic performance from 2004 to 2007. However the IMF expects economic growth to decline from 1.6% in 2008 to -3.0% in 2009. CPI inflation declined sharply in late 2008 due to fuel and food price decreases and is expected to remain negative in the near-term, given base effects and a weak global environment. For 2009, inflation is projected to average -0.6%, with negative inflation continuing into 2010. Flat real wage growth helped to support competitiveness, but export market shares have fallen.

With inflationary expectations declining rapidly, and the currency appreciating due to safe haven effects, the Swiss National Bank (SNB) aggressively relaxed the monetary stance. The SNB’s target range for the 3-month Libor has been decreased by 250 basis points since October and now stands at 0 to 0.75%. To counter an unwanted tightening of monetary and financial conditions, the SNB implemented quantitative easing measures in March, including foreign exchange intervention to limit upward pressure on the Swiss franc.

After budgetary surpluses in 2006–07 of some 2% of GDP, the fiscal stance was neutral in 2008. The general government recorded a surplus of about 1%, as continued surpluses at lower levels of government offset a small federal deficit. Debt to GDP ratios have fallen below 42% but aging-related expenditures are expected to reverse this trend in the medium-term. A fiscal impulse and full use of automatic stabilizers are expected to push the general government balance into deficit in 2009.

The IMF Directors' assessment included the following:

They praised the authorities for their active cooperation with other central banks, including in Eastern Europe, to ensure liquidity to the international interbank market. They expected FINMA to integrate sectoral regulatory approaches and strengthen forward-looking systemic surveillance. The authorities’ commitment to a timely and orderly exit from quantitative easing once recovery commences was welcomed, as was their intention to reverse the build-up in the monetary base to protect price stability. In the view of the IMF, careful communication of policy intentions by the authorities will remain important. The IMF commended Switzerland’s strong fiscal performance in recent years, which has provided room for the welcome fiscal stimulus in the 2009 budget and the full use of automatic stabilizers. A further stimulus package in 2010 could be appropriate but the IMF understood the authorities’ wish to preserve fiscal space for possible additional financial sector support given the significant uncertainty surrounding global financial developments. In any case the IMF believes that long-term fiscal sustainability requires that any new stimulus be temporary and targeted, and that long-term reforms of entitlement programs remain firmly on the authorities’ agenda.

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