Country Reports
2014
September 3, 2014
Switzerland: Technical Note-Macroprudential Institutional Arrangements and Policies
Description: This Technical Note on Macroprudential Institutional Arrangements and Policies on Switzerland highlights that macroprudential prudential powers and responsibilities are split across agencies. There is one dedicated macroprudential tool, the Counter Cyclical Buffer, which has a specified framework for decision making and consultation. Developments in real estate and mortgage lending are important systemic concerns. Very loose monetary policy has driven interest rates down to historically low levels, accelerating mortgage lending and bringing total mortgage debt to more than 140 percent of gross domestic product. The authorities have taken measures to address these risks. It is recommended that transparency and accountability could be strengthened by highlighting cross agency activity and policy analysis related to financial stability and macroprudential policies to the public. In a medium-term perspective macroprudential arrangements should be reviewed while considering placing responsibility and powers for macroprudential policies with one institution or committee. Additional measures may be needed. Mortgages to businesses and for commercial purposes deserve further attention and measures.
September 3, 2014
Switzerland: Technical Note-Oversight, Supervision, and Risk Management of Financial Market Infrastructures
Description: This Technical Note on Oversight, Supervision, and Risk Management of Financial Market Infrastructures explains that financial market infrastructures (FMIs) in Switzerland are well-developed and stable. The FMIs operate smoothly for many years without any substantial outage or other technical or financial problem. Payment in Swiss francs, both large value and retail payments, are settled in the Swiss Interbank Clearing, which is a real time gross settlements system. Important progress has been realized regarding the adoption of the new principles for FMIs. FMIs should continue their efforts to achieve full compliance. The new Swiss Financial Market Infrastructure Act should be passed by Parliament to complete the process. Although the risk management framework of SIX Group AG is comprehensive it has certain gaps that need to be addressed to fully observe the new international standards. The Swiss National Bank (SNB) and Financial Market Supervisory Authority (FINMA) are encouraged to hold a firm stance on the full implementation of the new principles in Switzerland. The SNB and FINMA should upgrade their domestic and foreign cooperation arrangements to be able to handle crisis events effectively and in a timely manner. The domestic cooperation arrangements work well in normal circumstances but may prove insufficient during crisis events in the absence of a lead supervisor or overseer of the FMIs.
September 3, 2014
Iceland: Report on Observance of Standards and Codes (ROSC)
Description: This Report on Observance of Standards and Codes on Iceland summarizes the findings and recommendations of the assessment. This assessment of the current state of the implementation of the Basel Core Principles for Effective Banking Supervision in Iceland has been completed as a stand-alone Report on the Observance of Standards and Codes undertaken by the IMF during March of 2014 at the request of the Icelandic authorities. It is advised to ensure planned legislative amendments clarify the roles regarding banking supervision of liquidity risk, including corrective action. Ensure planned legislative amendments clarify Financial Supervisory Authority in Iceland (FME) actions in the enforcement of buffers. It is also recommended to amend processes, systems and practices in order to use the full definition of qualified holder, beyond the mere quantitative thresholds. The assessment also recommends developing rules and guidelines for banks on the benchmarks, standards, and procedures that the FME will follow in determining the adequacy of bank’s risk management and governance systems.
September 3, 2014
Switzerland: Detailed Assessment of Observance-Insurance Core Principles
Description: This Detailed Assessment of Observance on the Insurance Core Principles on Switzerland analyzes that the insurance industry in Switzerland is well developed having among the highest insurance penetration and expenditure per capita in the world. The sector is dominated by a few players writing significant international business. The life sector is dominated by two players, responsible for 54 percent of the business and the top 10 life insurers account for 97 percent of the market. The industry has weathered the 2008 crisis well; however, the current low interest rate environment is affecting the sector. The lack of availability of Swiss government bonds to match long term liabilities of life insurers and pension funds could be a source of vulnerability. The long-term nature of the liabilities of life insurers and pension funds could in principle be matched by investment in Swiss government securities. Supervision focuses on ensuring sufficiency of liquid assets to meet policy liabilities. Policyholders have priority claims over the tied assets. In addition, robust solvency requirements ensure there is enough capital to safeguard the insurers’ financial soundness under adverse conditions.
September 3, 2014
Trinidad and Tobago: Staff Report for the 2014 Article IV Consultation
Description: KEY ISSUES The economy is embarking on sustainable growth, but the main challenge will be to boost long-run growth by structural reforms and reorienting fiscal policy. Supply-side slowdowns in the energy sector are ending, while available evidence suggests non-energy growth is robust and economic slack is being used up. Non-energy growth should settle around a long-term 2–2½ percent per annum rate, while new energy sector investment may begin to bear significant fruit over the medium term. Headline inflation is trending down (in part for statistical reasons), while core inflation remains moderate. Domestic risks are to the upside. The main medium-term external risk would be a sustained decline in energy prices. With excess capacity in the labor market significantly diminished, the time is drawing near for policy tightening. Although ad hoc measures will reduce the budget deficit this fiscal year, the underlying baseline suggests a growing overall imbalance and unsustainable debt accumulation on unchanged policies, although the authorities have announced their intention to pursue fiscal consolidation. The CBTT will have to carefully consider how to tighten the monetary stance given high excess bank liquidity. Sustainable growth requires re-configuring fiscal policy, although achieving this will be challenging for the time being in view of national elections due in 2015. Ad hoc measures should be replaced with policies that durably improve non energy-based revenues and spending. The proceeds from extracting non-renewable resources should be saved and invested as a stepping stone to lasting prosperity. Fuel subsidies need to be curtailed and social programs rationalized. Non-energy sector tax bases should be broadened and tax expenditures limited. Greater flexibility is needed in the foreign exchange market. Despite sizable reserves, foreign exchange shortages, which impose unnecessary economic costs, have recurred. There is no concrete evidence of either a parallel market or arrears on foreign exchange, and the CBTT has recently sold foreign exchange with the objective to clear the market, but a recurrence of the situation could indicate the existence of an exchange restriction. The CBTT can address the problem through increased flexibility in the foreign exchange system. Structural reforms are underway, but more are needed to foster a diversified economic base. Financial sector reform is advancing, including expanding the CBTT’s regulatory perimeter to systemically important non-bank financial institutions. Recent streamlining of regulations that have hampered business activity is welcomed, but needs to be further advanced. Government operations are increasingly hamstrung by a poorly functioning civil service. Perceptions of corruption can be reduced by adopting a transparent procurement process. Programs that mask underemployment should be replaced with more effective training. Growing statistical shortcomings have rendered the conduct of surveillance ever harder, and must be addressed.
September 3, 2014
Switzerland: Technical Note-Stress Testing the Banking System
Description: This Technical Note on Stress Testing the Banking System on Switzerland summarizes the stress tests undertaken for the Swiss banking system as part of the 2013 Financial Sector Assessment Program (FSAP) Update. The objective of this exercise has been to assess the resilience of the banking system to major macroeconomic shocks and sources of risk. The stress tests focused on the banking system and covered almost the entire banking system. Systemic banks should continue the front-loaded build-up in capital buffers, which has contributed to their resilience to shocks. The results suggest that the two large banks should continue the front-loaded build-up in capital buffers, which has contributed to their resilience to shocks. Stress tests results for the two large systemic banks are sensitive to the definition of capital. Stress tests results suggest that banks in other banking categories are well capitalized. Notwithstanding important data limitations and relying on broad assumptions based on aggregate and partial information, stress tests show that capital ratios remain broadly adequate for most banks under all scenarios.
September 2, 2014
Ukraine: First Review Under the Stand-By Arrangement, Requests for Waivers of Nonobservance and Applicability of Performance Criteria, and A Request for Rephasing of the Arrangement
Description: EXECUTIVE SUMMARY The first review discussions took place in a context of heightened geopolitical tensions and deepening economic crisis. Intensification of the conflict in the East and escalation of the gas dispute with Gazprom, two of the key risks identified at the time of the program request, have materialized. These developments have affected confidence, balance of payment flows, economic activity, and budget execution. The banking sector has had to cope with larger-than-anticipated deposit outflows, and the exchange rate has depreciated more than expected at the time of the program request. The authorities have implemented policies broadly as agreed, but significant pressures have emerged. All but one performance criteria for end-May were met and all structural benchmarks have been implemented, albeit some with a delay. However, the deterioration in the economic outlook, fiscal and quasi-fiscal pressures, and heightened balance of payment difficulties are putting the initial program targets in jeopardy. Two end-July PCs are estimated to have been missed; and the end-2014 targets are out of reach. All continuous PCs were met. Discussions focused on the appropriate policy response to these short-term pressures and on reforms to support sustained growth. There was agreement that the policy effort should focus on compensatory measures to meet key program objectives, while allowing some temporary deviations from the initial targets. In particular, the NBU will limit the decline in reserves through market purchases; the government will take additional fiscal measures to keep public finances sustainable; and Naftogaz will strengthen current and past gas bills collection. Discussions also focused on reforms aimed at modernizing the monetary policy framework, preserving financial stability, addressing governance issues and improving the business climate. Nonetheless, risks loom large. The program hinges crucially on the assumption that the conflict will begin to subside in the coming months. Should active fighting continue well beyond that, the small buffers under the revised baseline would be quickly exhausted, requiring a new strategy, including additional external financing. A further heightening of geopolitical tensions could also have significant economic consequences. Domestically, policymaking may become more difficult in case of early elections. Strong policy performance and adherence to the planned reforms is therefore critical. Staff supports the authorities’ request for completion of the first review and the waivers for nonobservance and applicability of performance criteria. The purchase released upon completion of the review would be in the amount of SDR 0.914 billion, of which SDR 0.650 billion will be used to finance the budget deficit.
September 2, 2014
Slovak Republic: Staff Report for the 2014 Article IV Consultation
Description: After slowing in 2013, the Slovak economy is gathering momentum as the euro area and domestic demand recover, the latter complementing the strong export sector that has made Slovakia one of Europe’s more dynamic economies. Reducing still very high unemployment remains a key challenge, as does sustaining fiscal adjustment. Manageable public and private debt as well as a sound banking system limit vulnerabilities, but Slovakia’s fortunes remain closely tied to external developments, especially in the euro area, and there are risks from regional tensions since Russia provides much of Slovakia’s energy and is a reasonably important export market, including for Slovakia’s trading partners.
September 2, 2014
Czech Republic: Staff Report for the 2014 Article IV Consultation
Description: Growth is gaining momentum, led by strong external demand while domestic demand is also picking up. The central bank’s foreign exchange intervention policy has helped stem deflationary pressures but inflation is still well below target. Following substantial fiscal adjustment over the past three years, an easing of the fiscal stance is underway and the new government’s medium-term fiscal plans have not yet been fully elaborated. The financial system is sound and resilient to shocks, and improvements in the regulatory and supervisory architecture are ongoing. The challenge for the authorities is to create the conditions for strong and sustainable growth while maintaining macroeconomic stability.
September 2, 2014
Slovak Republic: Selected Issues
Description: This Selected Issues paper provides a brief overview of Slovakia’s transformation over this period. The note is divided into three parts. The first section offers some historical background on the run-up to EU accession. The paper also discusses the economic impact of EU accession and highlights the main challenges that Slovakia still faces. Although the first decade in the EU has seen successes, Slovakia faces important challenges to consolidate its position and close the gap with more advanced economies. A first long-term challenge is to shift from efficiency to an innovation-driven growth model. Actions to improve the business environment and domestic infrastructure could lay the foundations for stronger and more job-rich growth. In Slovakia, the high unemployment rate reflects the faulty working of three key mechanisms: the transition from school to work; the transition from unemployment back to employment; and mobility across regions. In order to address this situation, wide-ranging policies need to be implemented. The quality of education and training needs to be improved in order to better correspond to labor market needs. The ongoing reform of vocational education and training is a step in the right direction.