High Swiss current account surplus: consequences for SNB monetary policy?
Thomas Jordan, Chairman of the Governing Board of the Swiss National Bank
University of Basel, Faculty of Business and Economics, Basel, 23.11.2017
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Switzerland has had a surplus on its current account ever since the 1980s. In 2016, it stood at around 10% of GDP. Textbook economic theory suggests that a current account surplus is a function of an undervalued currency.
The persistently high current account surplus in Switzerland is not a reflection of an overly weak Swiss franc. Rather, the Swiss franc remains highly valued. Furthermore, inflation is still low and production capacity is not yet fully utilised. In the prevailing economic climate, the negative interest rate and the SNB's willingness to intervene on the foreign exchange market as necessary therefore continue to be required. Switzerland's current account surplus can be explained by three factors.
First, statistical distortions mean that Switzerland's current account surplus tends to be overstated. A substantial percentage of multinational companies in Switzerland is held in free float by foreign investors. If these companies reinvest their earnings, they are allocated entirely to Switzerland even though a large proportion essentially belongs to foreign investors. Furthermore, Switzerland traditionally has lower inflation and interest rates than other countries. The higher nominal rates in other countries inflate the Swiss current account balance because the nominal appreciation of the franc is not taken into account. Overall, these statistical distortions have the effect that Switzerland's net international investment position does not steadily increase despite persistent current account surpluses.
Second, there are structural reasons for the current account or savings surplus in Switzerland, in particular the rapidly ageing population. When the Swiss current account balance is corrected for the statistical distortions, it reflects a savings surplus, which in light of demographic developments and a well-financed pension system is entirely justified.
Third, the size and development of the Swiss current account balance are driven by two industries. Net exports from pharmaceuticals and merchanting are relatively insensitive to exchange rate fluctuations and their importance for the current account is considerably larger than it is for the economy as a whole.
As a result of all these factors, the current account reported for Switzerland 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. The Swiss current account cannot be used either to assess the fair external value of the Swiss franc or to adequately reflect the risks in relation to price stability and economic development. Therefore, the SNB does not base its monetary policy on the current account.