STOCKHOLM, Aug 7 (Reuters) - Sweden's economy is set to contract 6 percent this year and stay flat in 2010, the International Monetary Fund (IMF) said on Friday, suggesting the country still faced risks to demand for its exports.
In an annual review of the Swedish economy, the IMF said a modest recovery would not begin until the middle of 2010. The lender's view contrasts with a growing conviction in markets that Sweden's economy may have already turned a corner.
The Fund noted Swedish authorities had taken wide-ranging measures to stabilise the financial system and bolster demand. These included increased lending by the central bank, credit guarantees, a bank recapitalisation scheme and policy stimulus.
"These steps have supported the economy and helped address downside tail risks, but prospects for recovery are very much dependent on developments abroad," the IMF said.
The IMF said securing confidence in the financial sector stability was a "key immediate task", given Swedish banks' exposure to the Baltic economies.
"While recent stress tests indicated that regulatory capital requirements would continue to be met by all major institutions, market doubts persist," the Fund said. "Thus, steps to strengthen banks further -- including raising private capital where necessary -- should be undertaken as soon as possible."
The IMF also said the Swedish crown "is probably modestly undervalued". The crown fell sharply late last year and earlier this year.
The IMF added that recent steps to raise international reserves, combined with swap arrangements with other central banks, will boost the Riksbank's capacity to respond to financial sector liquidity stresses.
(Reporting by Veronica Ek; editing by David Stamp)