Home Ratings and Research Currently valid ACRA Europe affirms unsolicited credit ratings of AAA to Switzerland, outlook Stable
ACRA Europe affirms unsolicited credit ratings of AAA to Switzerland, outlook Stable
Friday, 04 October 2019

The Swiss Confederation (hereinafter, Switzerland, or the country) has been assigned the following ratings:

  • Long-term foreign currency credit rating at AAA and local currency credit rating at AAA;
  • Short-term foreign currency credit rating at S1+ and local currency credit rating at S1+.

The outlook on the long-term foreign currency credit rating is Stable and local currency credit rating is Stable.

The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.


Credit rating rationale


Positive rating assessment factors

· Highly developed an innovative economy.

· Strong public finances supported by a stringent debt rule.

· Deep domestic debt market.

· Persistent strong current account surplus and net international investment position.

· Stable and developed public institutions.

Negative rating assessment factors

· Contingent liability risks resulting from a large banking sector and high private sector leverage.

· High external debt by global standards, mostly denominated in foreign currencies.

Stable outlook

· High diversification of the economy will mitigate the impact of global slowdown.

· No materialization of the contingent liabilities stemming from the financial system.

Potential rating downgrade factors

· Severe financial shock resulting in costly bailout of the too big to fail banks.


Sovereign model results

Block

Indicative credit rating for the block

Modifier

Score

Modifier corrections to the indicative credit rating

Final credit rating for the block

Macroeconomic position

AAA

Potential economic growth

+1

+1

AAA

Sustainability of economic growth

0

Efficacy of structural, economic and monetary policies

+1

Public finance

AAA

Contingent liabilities and risk of them materializing on the sovereign balance sheet

0

+2

AAA

Fiscal policy framework and fiscal flexibility

+2

Market access and sources of funding

+2

Debt sustainability

+1

External position

AA-

Balance of payments vulnerabilities

0

-1

A+

External debt sustainability

-1

Stability of currency regime

n/a

Institutional framework

AAA

Willingness to pay

0

0

AAA

Default history

0

Political instability and recent political decisions

0

Involvement in geopolitical conflicts, exposure to geopolitical risks

0


Assigned credit rating

Indicative credit rating

AAA

Modifier corrections to the indicative credit rating

+1

Final credit rating

AAA

Assigned credit rating

AAA


MACROECONOMIC SITUATION AND ECONOMIC POTENTIAL


The Swiss economy has demonstrated high resilience to global challenges.

Switzerland is a very high-income country with GDP per capita (in purchasing power standards) at 64.6 thousand international dollars. Compared to most of the top 10 economies in terms of per capita GDP, the Swiss economy is highly diversified and does not rely on one or a small number of sectors. Its main exports are pharmaceuticals, high value-added manufacturing, finance, and IT services. Despite being a highly open economy (exports account for almost two-thirds of GDP), Switzerland has shown high resilience to global challenges and enjoys relatively stable growth rates and low volatility. This is thanks to a diversified, highly innovative, and competitive economy.

The Swiss economy expanded strongly in 2018. Real GDP grew by 2.8%, the most since 2010, with notable support from net exports and the cyclical factor associated with significant sporting events. Economic growth has slowed down significantly in 2019 because of a weakening external environment, reflecting negative contribution from net exports and a high base effect from previous year. ACRA Europe expects the growth to slow to around 1% before picking up to around 1.5% next year. Private consumption is expected to remain solid given strong labor market conditions, while exports and investments are expected to recover.


Figure 1. GDP growth in Switzerland compared to EU


1

Source: Eurostat


Safe-haven capital inflows might hurt economic growth.

Risks to the outlook are tilted to the downside and are mainly related to international trade tensions. As an open economy, Switzerland’s output is sensitive to fluctuations in its major export markets. However, Switzerland’s high level of export diversification in terms of both products and partners should mitigate the potential impact of an external demand shock.

Should global trade tensions lead to a strong risk-off sentiment in the financial markets, “safe-haven” capital inflows are likely to resume (the Swiss franc is considered to be a safe haven and sought by investors in times of uncertainty). Such a development would create upward pressure on the CHF exchange rate and might lead to the overvaluation of the real effective exchange rate, slowing output and employment growth. Similar developments have been observed in past financial and debt crisis; the Swiss franc appreciated against the euro by roughly one-third between 2008 and 2011 and after lifting the exchange rate floor in 2015, when it appreciated by more than 20% within a couple of minutes. Therefore, ACRA considers the safe-haven status of the CHF as a moderate risk factor for Swiss competitiveness.

Switzerland is among the global leaders in innovations.

Yet, the Swiss economy is very competitive. Switzerland scores among the best countries in almost all reports of competitiveness due to high regulatory quality and efficiency and strong economic innovation capacity. Switzerland leads in global innovation with very high R&D spending (3.4% of GDP in 2017, the third highest among OECD countries) and superior quality of research; according to the EU Adjusted Research Excellence Index, Switzerland has the highest score by far.


Figure 2. Top 10 countries according to the EU Adjusted Research Excellence Index

2

Source: European Commission


In the long-term, Switzerland should be able to sustain growth rates close to current levels (the real GDP growth rate has averaged 1.5% over the last 10 years). High economic innovation capacity is the key driver behind positive long-term growth expectations and it is likely to offset a large part of the negative contribution to GDP growth related to the aging population. Despite low fertility rates (just over 1.5% in this decade), the population has been increasing by more than 1% on average since 2010 as a result of immigration, which is mitigating the negative effects of aging.

Inflation is easing and getting closer to the lower end of the corridor established by the SNB.

Inflation is consistently low. After several years of negative mild deflation, CPI turned positive in 2017. After reaching 0.9% in 2018, it eased to 0.7% in January-August 2019. This reflects slower growth in food and energy prices. CPI is getting closer to the lower end of the corridor established by the Swiss National Bank (SNB) at 0–2%. Monetary policy is extremely loose in nominal terms; the SNB policy rate has been at 0.75% since 2015 and it is very likely to remain at that level in the near future.

Figure 3. Average annual inflation rate and its components (%)

3

Source: Eurostat


In ACRA Europe’s view, the efficiency of the monetary policy is moderate. One reason is the lack of ability to avert longer periods of low inflation or deflation (annual inflation has averaged 0% over the last 10 years). In addition, it is very unlikely that the Swiss National Bank will revert to this policy tool in the foreseeable future given the mismanaged exit from the exchange-rate floor in 2015, which resulted in the Swiss franc appreciating against the euro by more than 20% within a couple of minutes, causing severe stress in the currency market.


PUBLIC FINANCE  

Swiss public finances are strong. The debt to GDP ratio fell to 40.9% in 2018 (27.6% according to the Maastricht definition), its lowest level since 1991. This ratio is far below the average for advanced economies, which is estimated at 71%. An important factor behind Switzerland’s declining debt is the country’s debt rule. It was introduced in 2003 as a reaction to higher deficits and rising debt in the 1990’s.


The Swiss budget recorded a high surplus in 2018.

According to this rule, the budget must be in balance over the business cycle. It allows certain adjustments by either allowing for deficits during recessions or forcing lawmakers to have surpluses during economic booms. The Swiss government follows this rule strictly. The highest deficit recorded during the last decade was only -0.4% GDP. In 2018, Switzerland recorded a fiscal surplus of 1.4% GDP.


Figure 4. General government budget balance and debt (% of GDP)

4

Sources: IMF, Federal Department of Finance


The entire yield curve is negative.

Interest costs are extremely low. In 2017, they accounted only for 0.4% of GDP due to negative central bank rates, low debt, and high demand for government debt. The entire Swiss yield curve is currently negative and 10-year benchmark bonds are trading at a yield close to the three-month LIBOR rate. This implies further reduction in the cost of interest. The domestic debt market is deep, also as a result of a well-developed banking system. Only 10% of Swiss debt, which is all denominated in domestic currency, is held by non-residents according to the World Bank.


The contingent liability risk is related mainly to the financial sector.
The risk stems from two sources – domestic leverage and high levels of financial system assets. The former is related to the SNB’s low-interest rate policy, which supports credit growth. After a period of moderation in 2015-2017, which can be attributed to a series of macroprudential measures, credit growth has picked up in recent quarters. In 2019, domestic credit growth averaged 3.5%, the highest since 2014.


Swiss households are highly leveraged.

The credit to GDP gap and high private non-financial sector leverage were 10.2% and 248% in Q1 2019, respectively, according to BIS data. This indicates increased vulnerability to tighter financial conditions. This is especially true for the household sector with debt at almost 130% of GDP and more than 200% of disposable income (both figures are among the highest in the world).


Figure 5. Household debt compared to peers

5

Sources: BIS, OECD


Switzerland has a very large banking sector with two “too big to fail” banks. At the end of 2018, the total volume of banking sector assets in Switzerland amounted to around 470% of GDP (with two big banks accounting for around half), according to the IMF. Yet, the Swiss banking system is adequately capitalized and has plenty of liquidity. According to the latest IMF data, Tier 1 capital to risk-weighted assets stood at 18.2%, (the short-term liabilities coverage by liquid assets exceeds 150%) and has a strong supervisory framework. Thus, in ACRA Europe’s view, contingent liability is limited and is likely to occur only in the case of a severe global financial shock.


Recent measures have partially addressed issues with the pension system.


In the long-term, costs associated with the country’s aging population are expected to weigh on public finances.
The government expects an increase in age-related healthcare and pension costs by more than 3% of GDP by 2045. Nevertheless, given the constitutional debt rule and sufficient time to address the issue, ACRA Europe does not believe that such costs constrain Switzerland’s creditworthiness. Issues with the pension system have already been addressed to some extent in a recent referendum; Swiss citizens have approved an increase in the salary contribution rate paid by employers and employees by 0.15% each and other measures to mitigate the impact of aging.


EXTERNAL RISKS

Switzerland has a consistently high current account surplus, which is mainly attributed to positive trade balance supported by very high competitiveness. In 2018, the current account recorded a surplus of 10.5% GDP. With strong innovative capacity, economic competitiveness, and demographic related saving, it is reasonable to assume that strong surpluses will continue in the medium-term. Switzerland is a net creditor to the rest of the world. The country’s net international investment position stood at 128% of GDP at the end of 2018.


External debt is mostly denominated in foreign currencies.

Switzerland’s external debt is high by global standards and reflects the country’s status as a financial center. In 2018, its share on GDP accounted for more than 260%. Almost two-thirds of the external debt are owed by sectors more susceptible to liquidity risks (38% banking sector, 27% private non-banking sector). In addition, 70% of the external debt is denominated in foreign currencies. Nevertheless, liquidity risks are mitigated by the country’s sizable foreign assets and are viewed as low by ACRA Europe.


Figure 6. External debt compared to peers

6

Source: World Bank


Foreign exchange reserves are very high for an advanced economy.
Switzerland has built-up massive foreign reserves over the past decade, as the SNB was fighting deflationary risks by selling large quantities of Swiss francs on foreign-exchange markets in exchange for foreign assets. Foreign-exchange reserves currently exceed 100% of GDP, covering 25 months of imports and more than 60% of foreign currency external debt.


Governance indicators are among the best on the global scale.

Switzerland is a global leader in terms of World Governance Indicators released by the World Bank. This indicates the high quality of government institutions and a very supportive environment for the allocation of resources in the economy, and therefore for future potential growth. Similarly, Switzerland scored ninth on the global scale in ACRA Europe’s Human Capital Index, which is composed of life expectancy, years of schooling, and adult mortality.


Figure 7. World Governance Indicators compared to Western Europe average (global average = 0)

7

Source: World Bank

Appendix 1. Comparative analysis of Switzerland and the sample group

Comparison of macroeconomic and institutional indicators for 2018

   

Switzerland

Denmark

Germany

Netherlands

Sweden

UK

Macroeconomics

GDP per capita (1000 EUR, PPS)

48.2

39.1

37.6

39.9

37.7

32.2

Real GDP growth (%)

2.8

1.5

1.5

2.6

2.3

1.4

CPI (% y-o-y)

0.9

0.7

1.9

1.6

2.0

2.5

Openness of economy (% of GDP)

120.0

104.0

88.7

157.6

89.0

61.3

Unemployment (ILO assessment)

4.9

5.0

3.4

3.9

6.4

4.0

Public finance

Consolidated government debt (% of GDP)

40.5

34.1

60.9

52.4

38.8

86.8

External consolidated government debt (% of GDP)

4.4

9.3

29.4

20.9

8.7

29.1

Consolidated government budget balance (% of GDP)

1.3

0.5

1.7

1.5

0.9

-1.5

Private non-financial sector debt (% of GDP) *

278.6

265.5

177.9

328.1

284.4

279.3

External position

Current account (% of GDP)

10.5

5.7

7.3

10.9

1.7

-3.9

Real effective exchange rate (base: 2010)

103.1

97.2

97.0

99.4

89.2

98.8

External debt position (% of GDP)

265

142

145

485

170

297

Short-term external debt to total external debt (%)

55.0

34.9

37.4

22.1

34.0

64.9

Export diversification index **

0.6

0.4

0.3

0.3

0.4

0.3

Institutional framework *

Political stability and absence of violence

1.34

0.96

0.60

0.87

0.91

0.05

Government effectiveness

2.04

1.87

1.62

1.85

1.83

1.34

Rule of law *

1.93

1.83

1.63

1.1.82

1.90

1.64


* Assessment of effectiveness ranges from -2.5 (weak) to 2.5 (strong).

** Indicates the extent of differences between the country’s trade structure and the average world indicator and ranges from 0 (weak differences)
to 1 (strong differences).

Sources: IMF, World Bank, UNCTAD, ILO, Eurostat, BIS, ECB


Appendix 2. List of material data sources

International Monetary Fund

World Bank

Eurostat

The Bank for International Settlements

European Commission

Organisation for Economic Co-operation and Development

Swiss National Bank

Swiss Department of Finance


Appendix 3. Key indicators

Balance of payments, CHF mln


2015

2016

2017

2018

Balance of trade

51,704

49,760

49,158

56,619

Exports

292,023

312,223

310,958

324,606

Imports

-240,319

-262,463

-261,799

-267,987

Balance of services

18,754

20,077

18,079

20,380

Exports

109,571

117,172

119,889

121,513

Imports

-90,817

- 97,095

-101,810

-101,133

Balance of income

3,064

-7,527

-22,578

-6,426

Income receivable

181,129

188,654

201,221

187,331

Income payable

-178,065

-196,181

-223,799

-193,756

including interest payments

-104,528

-118,945

-137,011

-115,529

Current account

73,522

62,309

44,659

70,573

Current account, % of GDP 

11.2

9.4

6.7

10.2

International reserves at the end of the period

601,349

690,501

792,134

776

Source: SNB

 

External position (assets and liabilities), CHF bln

2013

2014

2015

2016

2017

2018

External debt

1,483

1,629

1,678

1,781

1,873

1,827

long-term

37%

42%

40%

40%

43%

45%

short-term (up to 1 year)

63%

58%

60%

60%

57%

55%

External liabilities

1,483

1,629

1,678

1,781

1,873

1,827

Sovereign issuer, including

89

119

142

155

181

149

monetary authorities

58

79

104

120

148

119

consolidated government

31

39

38

36

33

30

Banks

763

745

774

768

726

699

Other sectors

632

765

762

858

966

980

including intra-corporate loans

 

197

194

217

281

272

External assets, excluding shares *

2,292

2,558

2,599

2,831

2,960

2,888

Sovereign issuer, including

498

571

649

756

852

825

international reserves

477

541

601

691

792

777

other external assets

21

30

48

66

60

48

Banks

636

632

594

539

543

519

Other sectors **

1,157

1,355

1,356

1,536

1 565

1,544

Net debt

-808

-929

-921

-1,050

-1,087

-1,060

Sovereign issuer

-409

-453

-507

-601

-671

-676

Banks

127

113

180

229

183

179

Other sectors

-526

-590

-594

-678

-599

-564

International investment position (net),% of GDP

102

99

91

112

118

128

External debt, % of GDP

232

251

256

270

280

265

* Includes other investments consisting of currencies and deposits, loans, insurance, pension and standard guarantee schemes, trade loans
and advances, and special drawing rights and other receivables (payables).

** Includes debt instruments that are part of direct investments.

Sources: IMF, SNB


Budget indicators, % of GDP

Consolidated government

2015

2016

2017

2018

2019F

2020F

Income

33.5

33.3

34.2

33.7

no data

no data

Expenses

32.8

33.0

33.0

32.5

no data

no data

including debt servicing expenses

0.6

0.5

0.4

no data

no data

no data

Primary budget balance

1.2

0.9

1.6

no data

no data

no data

Overall budget balance

0.6

0.4

1.2

1.3

1.0

0.4

Consolidated government debt

43.0

41.8

42.7

40.5

39.3

38.0

% of income

128.4

125.5

124.9

120.2

116.7

114.7

Central government

Income

11.0

10.8

11.5

11.2

11.0

11.0

Expenses

10.6

10.7

10.8

10.4

10.6

10.8

including debt servicing expenses

0.3

0.3

0.2

no data

no data

no data

Primary budget balance

0.7

0.4

1.0

no data

no data

no data

Overall budget balance

0.4

0.1

0.8

0.9

0.4

0.2

Central government debt

20.9

19.8

20.8

19.3

18.4

17.6

% of income

190.3

182.5

180.6

172.4

166.6

159.4

Note: nominal GDP, CHF mln

654,258

660,393

668,572

689,898

701,626

717,764

Source: Swiss Department of Finance

Rating history

The rating was first released for distribution on October 3, 2018, with last review on April 5, 2019.


Regulatory disclosure

The sovereign credit ratings have been assigned to Switzerland under the Methodology to assess Sovereign entities. An explanation of the importance of each rating category and a default definition is included in the ACRA Europe website. Information on the rate of historical failure is available at www.cerep.esma.europa.eu. The default rate means a percentage of ratings that were changed to default from the overall number of ratings, for each rating category and given period. The disclosure of the unsolicited rating and outlook was preceded by the approval of the Rating Committee. Since July 30, 2012, ACRA Europe has been a registered credit rating agency according to Regulation (EC) No 1060/2009 of the European Parliament and of the Council of September 16, 2009, on credit rating agencies.

The sovereign credit ratings and their outlook are expected to be revised within 6 months following the publication date of this press release as per the Calendar of planned sovereign credit rating revisions and publications.

The credit rating was issued as unsolicited. The rated entity did not participate in the credit rating assignment. ACRA Europe did not have access to the rated entity’s internal documents or Management. ACRA Europe, in the context of routine care, verified all sources entering the rating process and considers the scope and quality of the information entering the analytical process to be sufficient to assign a credit rating. The rated entity was notified on October 3, 2019, and after the notification there were no changes or amendments in the rating.

ACRA Europe provided no additional services to the Swiss government. No conflicts of interest were discovered in the course of the sovereign credit rating assignment.

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