Speech
Embargo
23 November 2017, 5.30 pm
High Swiss current account surplus: consequences for SNB
monetary policy?
University of Basel, Faculty of Business and Economics
Thomas J. Jordan
Chairman of the Governing Board∗
Swiss National Bank
Basel, 23 November 2017
© Swiss National Bank, Zurich, 2017 (speech given in German)
Introduction
Switzerland has had a surplus on its current account ever since the 1980s. In simple terms this
means that, in our economic exchanges with other countries, we have more receipts than
expenses. In 2016, this surplus stood at around 10% of GDP - and it has even approached
15% in some earlier years.
Textbook economic theory suggests that a current account surplus is a function of an
undervalued currency. In order to restore balance in future years, the currency of a country
running a surplus would need to appreciate, leading to a reduction in net exports.
However, this contrasts with the Swiss National Bank's (SNB) assessment that the Swiss
franc has been highly valued for years, and at times even hugely overvalued. Despite a slight
weakening of the exchange rate, our monetary policy thus continues to be geared towards
easing the pressure on the Swiss franc and making investments in Swiss francs less attractive.
How can the persistent current account surplus, textbook economic theory and the SNB's own
assessment be reconciled? Is the surplus in Switzerland perhaps even the result of a monetary
policy designed to deliberately push down the exchange rate in order to boost exports?1
International debate about certain countries' current account surpluses and unfair exchange
rate policy has intensified in recent years. In this context, Switzerland has been on the US
Treasury's 'monitoring list' since 2016, although it is not designated a 'currency manipulator'
in the associated report as it does not meet all the relevant criteria. However, Switzerland is
being specially monitored. We are maintaining a constructive dialogue on this matter with the
responsible government agencies in the US.
Foreign authorities and international organisations recognise Switzerland's special position,
and appreciate the rationale for the SNB's monetary policy measures. According to the latest
External Sector Report of the International Monetary Fund (IMF) of July 2017, Switzerland's
current account is in line with macroeconomic conditions, and its monetary and fiscal policy
is considered appropriate.
Yet, international debate about current account surpluses and deficits has at times been heated
and not always objective. Some observers have repeatedly denounced Switzerland for its
persistent surplus. As criticism has focused on the SNB's monetary policy, I am naturally
keen to give you my analysis of the situation.
Before we get into the details, let me outline the crux of my argument.
In the specific case of Switzerland, the current account is not a good measure for assessing
trade flows and changes in the international investment position or a suitable metric on which
to base monetary policy. If we had let ourselves be guided by the development of the current
account in recent years, we would have had to allow the Swiss franc to appreciate even
further. This would have caused a recession and falling prices. Furthermore, stronger
appreciation of the Swiss franc would neither have placated the critics of our current account
surplus nor would it have been in the interests of other countries. First, not even a
significantly stronger Swiss franc would have reduced the current account surplus to any great
extent. The reason for this is that Switzerland's current account surplus, as reported according
to international standards, is chiefly attributable to statistical distortions and to structural
factors which are not significantly affected by the exchange rate. Second, with a domestic
recession, Switzerland's contribution to global demand for goods would have declined, which
in turn would have had a negative impact on other countries.
Our monetary policy, with the negative interest rate and our willingness to intervene in the
foreign exchange market as necessary, is not designed to give Switzerland an unfair
advantage in international trade - to support an expansion of the current account surplus in
any mercantilist sense. Rather, it is a necessary response to excessive upward pressure on the
Swiss franc due to its perceived safe-haven status and is intended to ensure price stability.
After all, the Swiss franc remains highly valued - even if, at first glance, the current account
seems to suggest otherwise.
Let me begin by putting the debate on the current account into context. I will then analyse the
key factors for the current account surplus in Switzerland in more detail and draw some
conclusions for our monetary policy.
Basis for the current account
First, I would like to remind you of the definition of the current account.
Definition of the current account
The current account balance corresponds to receipts minus expenses from trade in goods and
services, net labour and investment income, as well as the net current transfers of an
economy.2 Equation 1 describes this relationship.
The trade account has a surplus when a country exports more goods and services than it
imports. And vice versa, a country has a trade account deficit when it imports more goods and
services than it exports.
Net investment income receipts include, in particular, interest on foreign bonds and dividends
on foreign equity held by resident investors. Under net labour income, salary payments to
cross-border commuters who work in Ticino but live in Milan, for example, are included
under expenses. The current transfers item comprises, among other flows, expenses of the
Swiss Confederation for economic development cooperation.
In most countries, the trade balance dominates the current account balance and the other
components often contribute very little.3
By definition, the current account balance also corresponds to the difference between savings
and domestic investment in an economy. This relationship is represented in equation 2.4
If a country has a current account surplus, it is saving more than it is investing domestically.
In this case, the surplus capital is exported abroad. By contrast, a country with a current
account deficit imports capital from the rest of the world because it is investing more than it is
saving. This view - the so-called financial account - is the mirror image of the current
account. A country with a current account surplus - or a financial account surplus -
accumulates claims (or credits) vis-à-vis counterparties abroad, so-called foreign assets. A
country with a current account deficit, on the other hand, accumulates liabilities, i.e. debt
visà-vis counterparties abroad, so-called foreign liabilities. The difference between foreign assets
and foreign liabilities is termed the net international investment position.
Equation 3 illustrates the relationship between the current account balance as a flow and the
net international investment position as a stock. The current account balance in a particular
year corresponds to the change in the net international investment position in that year,
adjusted for other influencing variables. Or, put another way, the net international investment
position consists of the accumulated current account balances over the period.
The other influencing variables, besides the current account balance, which can affect the net
international investment position include exchange rate movements as well as changes in
domestic and foreign asset prices. An appreciation of the local currency usually reduces the
net international investment position, irrespective of the current account balance, as foreign
assets are mainly denominated in foreign currency, and foreign liabilities in local currency.
Since such valuation effects now play a major role, the current account does not offer a
complete picture of developments in the net international investment position.
Switzerland's current account
After this quick refresher of the relevant interrelationships concerning the current account,
let's look at the development of the current account in Switzerland from a slightly more
longterm perspective.
Chart 1 shows the annual balances on the current account in Switzerland during the period
1960-2016 as a share of GDP. The current account has been in surplus since the 1980s. The
surplus increased significantly until the onset of the financial crisis. During the crisis, the
current account balance fluctuated sharply. In recent years, the surplus has stabilised at
8-11% of GDP, and in 2016, as I said earlier, it stood at some 10%.
Since Switzerland consistently generates a current account surplus, one would expect the net
international investment position to rise over time. However, chart 2 shows quite clearly that
this is not the case.
The chart depicts Switzerland's net international investment position during the period
2000-2016, again relative to GDP. We can see large fluctuations from year to year that cannot
be explained by developments in the current account surplus. If these fluctuations are factored
out, it becomes clear that the net international investment position has not increased
significantly over the observation period.
The high fluctuations illustrate how important the other influencing variables already
mentioned are in the development of the net international investment position. I will go into
this in more detail later.
Let me just add something here: Although the net international investment position has not
increased, Switzerland's gross claims and liabilities abroad have continued to rise, particularly
since the 1990s. In 2016, Switzerland's foreign assets were almost seven times its GDP, while
its foreign liabilities were more than five times its GDP. By international standards,
Switzerland continues to rank well above the average in terms of its integration with the
global economy, not only in relation to trade in goods and services but also in relation to
portfolio and direct investment.
As we saw earlier, the current account balance corresponds to the difference between savings
and domestic investment. In the international perspective, it is often argued that countries with
current account surpluses invest too little or save too much. Where does Switzerland fit in
here?
Chart 3 shows average saving and investment rates during the period 2010-2015 in various
groups of countries and in Switzerland. Saving rates are depicted in red, investment rates in
blue.
As the chart shows, while Switzerland invests relatively heavily by international standards, it
also saves far more than other countries. At 24%, Switzerland's investment rate exceeds the
average for both the advanced economies and the OECD countries; and, at 36%, our saving
rate is among the very highest.
Switzerland's high investment rate shows that the current account surplus is far more a
function of a comparatively high saving rate than of low domestic investment.
Global current account balances
Let me now give you an overview of the chronological and geographical development of
global current account surpluses and deficits.
Chart 4 shows the development of these surpluses and deficits as a percentage of global GDP
over the past 20 years. Positive values represent a current account surplus; negative values a
current account deficit. I would like to highlight trends in a few selected economies.
Looking first at the countries which have a current account deficit, we see that the US is
among them. It is represented by the blue section of the bar. The pink section denotes all the
other current account deficits in the world. In 2016, this group comprised 106 countries.
Let's turn now to the countries that have a current account surplus. These are China, shown in
red, Germany in orange, and Japan in green. Switzerland is depicted with a very small, dark
blue bar. All other current account surpluses are aggregated in the light blue bar. This bar
comprised 42 countries in 2016.
The chart illustrates three facts.
First, due to the small size of our country, the Swiss surplus is relatively insignificant in the
global picture of current account balances. Switzerland's contribution to global current
account balances is small and did not play a role in the growth of global current account
balances before the financial crisis.
Second, the size and evolution of global current account balances is defined by four major
economies. China, Germany, Japan and the US today make up almost half of global current
account balances. The remaining 150 or so countries together make up the other half. It is
interesting that, whether positive or negative, the current account balances of individual
countries have had the same sign for prolonged periods. Germany, for example, has registered
a surplus since 2002, while the US has had a deficit since 1992.
Third, total current account surpluses or deficits increased steadily until the onset of the
financial crisis. After the crisis, however, they declined and have remained more or less stable
since then.
To summarise: Although global current account surpluses and deficits have not increased
further since the financial crisis, some countries have persistently high current account
surpluses/deficits. Switzerland is one of them. The question is: is this sustainable?
This leads me to my next point - the question of why it is that many countries have persistent
current account surpluses or deficits.
Drivers of current account balances
In principle, current account surpluses and deficits allow countries to optimally distribute
consumption over time. This desired intertemporal distribution is driven by structural factors
such as demographics and future potential output.
Let me explain this using two examples.
India is an emerging economy with a young population. The country needs to invest a lot
today but does not have enough domestic savings available. In order to finance current
consumption and investment, it imports capital from abroad and has a current account deficit.
The opposite is true in Japan. A rich, advanced economy, it has a shrinking - and, above all, a
rapidly ageing - population. The country is therefore saving today in order to consume in the
future. Moreover, it is more profitable for Japan to invest abroad since there are fewer
domestic investment opportunities and growth prospects are muted. Japan therefore exports
capital abroad and has a current account surplus.
There are thus structural reasons why countries have a current account balance above or
below zero for an extended period. Surpluses or deficits therefore do not necessarily indicate
an overvalued or undervalued currency, or present a risk for the country and the global
economy.5
How can we distinguish between those current account surpluses or deficits that can be
explained by fundamental factors, and those that cannot?
The IMF has developed a model for conducting a thorough analysis of the impact of various
economic drivers on individual countries' current account balances. These drivers include
demographics, the level of development of a country, and fiscal policy - in other words,
factors that influence savings and investment. The results of the model are incorporated into
an annual report, the External Sector Report, which I mentioned in my introduction.
Nevertheless, it is not enough just to apply the model in a mechanistic way. The IMF
therefore also takes country-specific circumstances and features of balance of payments data
into account in its assessments. In Switzerland's case, it concludes that the current account
surplus is in line with macroeconomic conditions and is not the result of an undervalued
currency or inappropriate monetary or fiscal policy.
This brings me to the factors contributing to the persistent current account surplus in
Switzerland.
Factors contributing to the persistent current account surplus
in Switzerland
Switzerland's current account surplus, reported in accordance with international standards, is
driven by special factors. First, our current account surplus or savings surplus is overstated
due to statistical distortions. Second, structural factors are in play that tend to contribute to a
savings surplus. One of these is demographics, which have a decisive impact on the high
levels of household saving in Switzerland.
Then, third, we must consider the industrial structure of the Swiss economy, which means that
the current account and the economy as a whole do not necessarily move in parallel when the
exchange rate changes. In Switzerland, two industries are largely responsible for the trade
surplus, namely pharmaceuticals and merchanting, the net exports of which are only slightly
impacted by exchange rate movements. At the same time, these two industries are much more
important for the development of the current account than for that of the economy as a whole.
Let me now explain these three factors in more detail.
Statistical distortions
Statistical distortions in the current account lead to the surplus in Switzerland being
overstated. These distortions can partially be put down to the ownership structure of listed
multinational companies headquartered in Switzerland, and also to the traditionally lower
rates of inflation in Switzerland compared to other countries.
Chart 5 illustrates the overstatement of the current account surplus based on these two
distortions. The distortions shown here are calculated using internal SNB estimates. These
estimates are valuable pointers to understanding and analysing Switzerland's current account.
The first distortion is attributable to Switzerland being a location for multinational companies.
For the size of the country, an above-average number of multinationals - that is to say, large
companies listed on the stock exchange with extensive activities throughout the world - are
headquartered in Switzerland. A substantial percentage of these companies are held in free
float by foreign investors. This kind of ownership structure can lead to an overstatement of
the current account balance when compiling the balance of payments and international
investment position according to the IMF guidelines. This is particularly the case when such
foreign-controlled companies reinvest substantial portions of their earnings instead of
distributing them as dividends.6 These savings by multinational companies are allocated
entirely to Switzerland although a large proportion actually belongs to foreign investors.
The extent of this distortion can be seen from the red bars in chart 5. While the contribution of
the red bars fluctuates considerably, on average it is firmly in positive territory and explains a
substantial part of the Swiss current account surplus. This is an example of how the increasing
global integration has made the preparation of current accounts in line with international
statistical methods more vulnerable to distortions.
The second distortion is attributable to our low rate of inflation. The estimated extent of the
distortion is depicted by the blue bar in chart 5. Inflation, and thus nominal interest rates, are
traditionally higher in other countries than they are in Switzerland. This means that
Switzerland generates a higher nominal income on its foreign financial assets than foreign
countries do on their financial assets in Switzerland. Switzerland is thus continuously earning
positive net investment income as, first, we have a substantial net international investment
position and, second, interest rates are higher because inflation is higher in other countries.
However - and this is a significant point - this rise in the current account balance because of
the higher inflation or interest rate differential does not lead to an increase in Switzerland's
net international investment position in the long term. Due to higher inflation abroad, the
franc tends to appreciate nominally, which in turn reduces Switzerland's net international
investment position. The relationship between interest rates, inflation rates and exchange rates
is referred to as the theory of interest rate parity. The higher nominal rates in other countries
inflate the Swiss current account balance. The reported balance is too high because nominal
appreciation of the franc is not taken into account. And vice versa, for the same reason, the
figure reported for income from foreign investment in Switzerland is too low.
Our estimates show that inflation differentials play an important role in explaining the Swiss
current account surplus. The blue bars in the chart are striking - and they are consistently
positive; they explain a substantial share of the surplus.
If we were to correct for (i.e. factor out) both of these statistical distortions, the current
account surplus would almost halve. The corrected value is represented by the orange bars in
the chart. It is still positive, but it is considerably smaller than the surplus when the distortions
are factored in. Of course, this perspective implies that Switzerland's savings surplus is also
overstated.
As we have seen, statistical distortions are responsible for a significant part of the Swiss
current account surplus or savings surplus, but how is the remainder of this surplus explained?
Demographics
The bulk of the remaining current account surplus or savings surplus is attributable to
demographic developments.
Chart 6 shows the size of the various age groups of the Swiss population over time. In the last
45 years, the share of the population in the 40-64 age range (yellow line) has steadily grown.
More than 35% of the Swiss population is currently between 40 and 64 years old and it is this
age range that demonstrates the highest propensity to save. Moreover, life expectancy has
grown sharply in the last 45 years, meaning that generally it is now necessary to save for a
longer retirement period.
The relatively well-financed occupational pension plans in Switzerland - one of the few
countries in the world to have a mandatory system - also contribute to the high saving rate.
This system helps to accumulate the savings that will be necessary in future to support the
growing numbers of pensioners and years spent in retirement.7 Many countries with ageing
populations do not have a comparable system in place. Contributions to occupational pension
schemes are currently recorded as savings in the national accounts. This mandatory pension
system with its high contribution rates thus also influences the high saving rate in
Switzerland.
The saving rate in Switzerland is at this high level because the Swiss population is rapidly
ageing and we have a relatively well-financed pension system compared with other countries.
In other words, there is an economically plausible reason why Switzerland has a current
account surplus. Against the backdrop of demographic developments, when corrected for
statistical distortions, the current account surplus or savings surplus is not excessive but
entirely legitimate.
I will now turn to the last factor contributing to the persistently high current account surplus,
and that is the distinctive industrial structure of the Swiss economy.
Pharmaceutical companies and merchanting
For some time now, the Swiss current account surplus has primarily been driven by two
industries: pharmaceuticals and merchanting.8 It is notable that net exports for these two
industries have increased strongly over the last ten years despite the appreciation of the Swiss
franc. This stands in contrast to many industries (e.g. machinery and tourism), which are
exchange rate-sensitive and have suffered noticeably as a result of the strong franc. The
decline in net exports for these industries has been largely offset by the positive developments
in pharmaceuticals and merchanting.
Chart 7 presents the nominal change in net exports in selected manufacturing and services
industries as well as merchanting from 2007 to 2016. The net exports of goods and of services
are represented by the red bars at the bottom of the chart. Net exports of goods went up by
CHF 23 billion from 2007 to 2016. As already stated, this increase can mainly be attributed to
pharmaceuticals and merchanting. Despite the strong appreciation of the Swiss franc, net
exports in both of these industries rose sharply during this period. Why is this?
In recent years, the pharmaceutical industry has profited from a growing demand for
healthcare products from all over the world. The demand for these products is only slightly
impacted by the price and/or exchange rate. At the same time, Switzerland has developed into
a leading hub in the global commodities trade. Merchanting is also much more dependent on
global economic trends than on the exchange rate.
Not only are the pharmaceutical industry and merchanting relatively insensitive to exchange
rate fluctuations; they are also much more important for the development of the current
account than for the economy as a whole. This can be seen, for example, in employment
statistics. The pharmaceutical industry and merchanting companies together employed
approximately 50,000 people here in Switzerland in 2016. By contrast, the exchange rate-
sensitive industries of the other five goods categories pictured here accounted for more than
325,000 employees.9
In sum, three special factors are particularly responsible for Switzerland's persistently high
current account surplus. First, statistical distortions lead to the current account surplus in
Switzerland being overstated. These distortions can be attributed to special ownership
structures of multinational companies in Switzerland as well as lower inflation rates in
Switzerland than abroad. Second, after correcting for these distortions, the current account
surplus can be explained by the ageing population and a well-funded occupational pension
system. Third, the current account is dominated by two industries which are relatively
insensitive to the exchange rate and which are much more important for the development of
the current account than for the economy as a whole.
The current account is not an indicator on which the SNB
should base its monetary policy
So what does this mean for monetary policy?
As I mentioned at the outset, textbook economic theory would hold that Switzerland's
persistent current account surplus is a function of a rather weak Swiss franc.
Such a view stands in direct contradiction to our assessment and, consequently, our current
monetary policy. This is based, first, on the negative interest that banks and other financial
market participants pay on their sight deposits at the SNB, and second, on our willingness to
intervene in the foreign exchange market as necessary. The goal of these measures is to ease
pressure on the Swiss franc and thus ensure price stability, as the exchange rate has a strong
influence on monetary conditions in Switzerland and, hence, on price stability.
Let me illustrate the correlation between exchange rate developments and price stability as
shown in chart 8. The blue line in the chart shows the development of the Swiss franc
exchange rate against all trading partners, adjusted for inflation differentials. Upward
movement of the blue line means that the Swiss franc appreciated in real terms. As you can
see from the chart, the Swiss franc has appreciated substantially since the onset of the
financial crisis, at times reaching approximately 25% more than its long-term average. The
Swiss franc has weakened slightly in recent months, but remains highly valued.
The high value of the Swiss franc is critically important for the direction of monetary policy.
You can see this clearly in chart 8. Both inflation and the output gap show a strong correlation
with the development of the exchange rate. Appreciation of the Swiss franc equates to a
tightening of monetary conditions. It leads via lower import prices to lower inflation. At the
same time, the appreciation of the Swiss franc has a negative impact on utilisation of overall
production capacity and thus also on general price developments.
It is not only the export-oriented companies trading in goods on the global markets that are
affected by exchange rate fluctuations. Geographically, the Swiss economy lies at the centre
of the European Economic Area. Even in the domestic market, Swiss companies are in direct
competition with foreign companies and cannot set their prices as high as they would like
above those of their competitors in neighbouring border regions. An appreciating franc erodes
the competitiveness of these companies, too. In an exceptionally open economy like
Switzerland that is highly integrated internationally, exchange rate fluctuations have a major
impact on price stability and economic activity.
Since 2009, we have repeatedly been confronted with situations in which the appreciation of
the Swiss franc has led to an undesirable tightening of monetary conditions so that production
capacity has not been fully utilised and inflation has temporarily dipped into negative
territory.
If we are to fulfil our legal mandate to ensure price stability while taking due account of the
development of the economy, we have to implement expansionary measures in such
circumstances, in order to counter the strong franc. In the current environment of very low
interest rates worldwide, it is not possible to steer monetary conditions exclusively via the
interest rate channel. In addition to the negative interest rate (-0.75%), the SNB influences
monetary conditions by intervening directly on the foreign exchange market as necessary. The
goal of this policy is to reduce pressure on the currency and to make Swiss franc investments
less attractive.
Our foreign exchange market interventions do not amount to a mercantilist policy at the
expense of Switzerland's trading partners or a beggar-thy-neighbour strategy; rather, this
policy provides the SNB with a necessary instrument for ensuring price stability and for
fulfilling its mandate.
What would happen if we were to interpret the current account surplus as an indicator of the
Swiss franc tending to be too weak, or of the economy growing strongly, without taking these
particularly Swiss circumstances into account? We would misjudge the risks to price stability
and economic development, with which we have repeatedly been confronted in the recent
past. And we would not make any appreciable reduction to the current account surplus, even
if the franc were stronger.
Allow me to illustrate this point with a simple chart. If Switzerland's current account surplus
were the result of the currency being too weak, there would have to be a stable correlation
between exchange rate movements and the current account balance. Appreciation of the Swiss
franc would result in a smaller current account surplus. Chart 9 shows that is not the case. The
chart is based on the last ten years, during which time there were periods of Swiss franc
appreciation that saw a falling current account surplus and other periods that were
accompanied by a rising current account surplus. A conclusive correlation cannot be found.
This assessment comes as no surprise in light of my earlier arguments. Rather, it illustrates
once again the sheer size of the impact of a few industries in the Swiss economy - which are
largely immune to exchange rate movements.
The current account is therefore of no help in determining the direction of Switzerland's
monetary policy. The persistent surplus is neither a good indicator for the strength or
weakness of the franc, nor for price stability and economic developments. The SNB takes a
wide range of exchange rate models into consideration when assessing the currency situation.
Due to the considerable importance of the exchange rate for inflation and economic
development, reliable signals for assessing the value of the Swiss franc can also be directly
deduced from both inflationary developments and the utilisation of production capacity.
Allow me to conclude with a summary of my core messages.
Conclusion
The persistently high current account surplus in Switzerland is not a reflection of an overly
weak Swiss franc. Rather, this surplus can be explained by three factors.
First, statistical distortions mean that Switzerland's current account surplus tends to be
overstated. A considerable percentage of multinational companies in Switzerland are held in
free float by foreign investors. If these companies reinvest their profits, they are entirely
attributed to Switzerland, even though a large proportion actually belongs to the foreign
investors. The higher nominal interest rates abroad inflate the current acc