Home Ratings and Research Archive 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, 27 March 2020
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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.

Credit rating rationale

Positive rating assessment factors

· Highly developed and innovative economy.

· Strong public finances supported by a stringent debt rule.

· Deep domestic debt market.

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

· Stable and developed public institutions.

Negative rating assessment factors

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

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

Stable outlook

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

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

0

+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 66.2 thousand international dollars (2019 IMF estimate). Compared to most 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 enjoyed relatively stable growth rates and low volatility with low inflation and unemployment rates. This is thanks to a diversified, highly innovative, and competitive economy. In 2019, the economy grew by 0.9%, supported predominately by domestic consumption.


The country’s economy is very likely to enter a recession in 2020.

Switzerland’s short-term economic outlook is grim due to the spread of COVID-19. At the time of publishing this report, Switzerland has suffered more than most countries in terms of total cases per capita. In order to contain the accelerated spread of the virus, the government has declared a state of emergency (at least until April 19th) and closed all shops, restaurants, bars, and entertainment and leisure facilities except for grocery stores, pharmacies, and health facilities. Such strict measures will hurt domestic consumption. In addition, external demand will be very weak as other countries are imposing similar restrictions. The Federal Government’s Expert Group expects the economy to contract by 1.5% (adjusted for sporting events) this year and return to 3.3% growth in 2021. However, given the uncertainty of the situation regarding the domestic and external impact of the pandemic, these figures are subject to change.

Figure 1. Dynamics of the GDP growth in Switzerland (including forecast)

f1

Sources: Eurostat, Federal Expert Group on Business Cycles

Another source of potential risk is related to “safe-haven” capital inflows. This would create upward pressure on the CHF exchange rate and could lead to the overvaluation of the real effective exchange rate, thereby potentially slowing recovery. During the current market turmoil, the Swiss franc is not appreciating against the euro, suggesting, along with the increase in sight deposits, FX interventions by the Swiss National Bank (SNB).


Switzerland is among the biggest global R
&D spenders.

From the long-term perspective, the country’s growth potential is supported by strong competitiveness and innovative capacity. Switzerland scores among the best countries in almost all rankings of competitiveness and leads in global innovation with very high R&D spending (3.4% of GDP in 2017, the third highest among OECD countries). Demographic trends are positive as net migration makes up for low fertility rates (approximately 1.5% in the previous decade), while the working-age population grew on average by 0.8% in the previous decade.

PUBLIC FINANCE  

Switzerland enters the COVID-19 crisis with very low debt levels.

The country’s public finances are strong. According to the Federal Department of Finance, gross debt to GDP stood at 41% in 2019, or 26.9% according to the Maastricht definition, its lowest level in decades. This ratio is far below the average for advanced economies, which is estimated at 103% by the IMF. 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.

According to this rule, the budget must be in balance throughout the course of 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 over the last decade was only -0.4% GDP. In 2019, Switzerland recorded a general government surplus of 1.5% GDP.

The government has announced a massive stimulus package to counter the negative impact of the COVID-19 outbreak.

ACRA Europe expects the country’s public finances to flip into a strong deficit in 2020 due to the COVID-19 outbreak. The government has already announced a CHF 42 bln stimulus package (6.0% of 2019 GDP) to fund, inter alia, the short-time working scheme and financially support the companies most affected. Given the extent of the potential economic damage, the stimulus package might be increased even more in the foreseeable future.

Nevertheless, the expected increase in debt should not have an impact on the sustainability of public debt, which has a very healthy profile. Debt servicing costs are very low thanks to the SNB’s deeply negative policy rate (-0.75%). In 2018, they stood at 0.4% GDP. Public debt is held predominately by residents (public sector external debt accounted for only 4% of GDP in Q3 2019) and issued exclusively in domestic currency.

Switzerland’s banking systems is one of the largest among the Western European countries.

Contingent liability risks are related mainly to the financial sector. The risks stems from two sources: high levels of financial system assets and household leverage. Commercial banks’ financial assets stood at 367% of GDP in 2018 (over 900% for the whole financial sector excluding the SNB) while credit to households amounted to 131.6% of GDP in Q3 2019, both very high even by the standards of advanced economies. Although the banking system is well capitalized (CET 1 ratio stood at 18.4% in Q4 2019) and operates in a strong supervisory framework, a severe global financial shock could lead to the banking system needing considerable support. ACRA Europe will closely monitor the impact of the COVID-19 crisis on the country’s financial sector and may take negative credit action if the banking sector needs substantial government support.

Figure 2. Monetary financial institutions financial assets (% of GDP) compared to Western European peers (excluding central banks)

f2

Sources: Eurostat, ACRA Europe, 2018

EXTERNAL RISKS

Switzerland has a consistently high current account surplus. This is mainly attributed to a positive trade balance, which is supported by very high competitiveness. In 2019, the current account recorded a surplus of 12.3% GDP. As a result, Switzerland has been a strong net creditor to the rest of the world. The country’s net international investment position stood at 116% of GDP in 2019.

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 Q3 2019, external debt accounted for approximately 270% of GDP. Almost two-thirds of the country’s external debt is owed by sectors more susceptible to liquidity risks (banking sector: 37%, private non-banking sector excluding direct investment: 28%). In addition, almost 70% of external debt is denominated in foreign currencies. Nevertheless, liquidity risks are mitigated by the country’s sizable foreign assets and swap lines with major central banks, which have already been tapped by the swiss banks during the current market turmoil. At the same time, the SNB has accumulated sizable FX reserves following its FX interventions, which can cover almost two-thirds of the FX external debt.


INSTITUTIONAL FACTORS

Switzerland is a global leader in terms of the World Bank’s World Governance Indicators. 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 analyzes of life expectancy, years of schooling, and adult mortality.

Access for Swiss companies to the EU and US markets might become more constrained if some specific risks were to materialize

On the international front, Switzerland is exposed to some risks related to trade tensions. These risks concern trade with both the EU and US, which together accounted for approximately 70% of the country’s exports in 2019. The materialization of these risks would have a negative impact on the country’s open economy.

With respect to the Swiss-EU trade relationship, the main risk is related to the referendum on suspending the Agreement on the Free Movement of Persons with the EU. It was initially scheduled for May, but has been postponed due to the COVID-19 outbreak. A successful vote might jeopardize the country’s preferential access to the EU single market due to the “guillotine clause,“ which stipulates that if one bilateral treaty is terminated, the others will be terminated as well.

As for the Swiss-US trade relationship, the US put Switzerland on the currency manipulators watch list in January as the country fulfills two of the three criteria (current account surplus and bilateral goods trade surplus). The third condition, net FX purchases of more than 2% of GDP in at least 6 of the last 12 months, might be fulfilled in the foreseeable future given the SNB’s recent interventions to stop the CHF from appreciating. Should Switzerland fulfill all three criteria, the US might label the country as currency manipulator and take retaliatory actions. 

For a more detailed assessment of the creditworthiness of the Swiss Confederation, see our autumn report.


Appendix 1. Comparative analysis of Switzerland and the sample group

Comparison of macroeconomic and institutional indicators

 

Switzerland

Austria

Germany

Netherlands

Denmark

Period

Macroeconomics

GDP per capita (1,000 USD, PPP)

66.2

53.6

53.6

58.3

53.9

2019 E

Real GDP growth (% y-o-y)

0.9

1.6

0.6

1.7

2.2

2019

HICP inflation (% y-o-y average)

0.4

1.5

1.4

2.7

0.7

2019

Openness of economy (% of GDP)

119

108

88

155

105

2019

Unemployment

2.3

4.3

3.2

3.4

5.0

2019 Q4

Public finance

Consolidated government debt (% of GDP)

27.5

74.0

61.9

52.4

34.2

2018

External consolidated government debt (% of GDP)

4.4

49.1

29.4

20.9

9.2

2018

Consolidated government budget balance (% of GDP)

1.4

0.2

1.9

1.5

0.5

2018

Interest payments (% of GDP)

0.4

1.6

0.9

0.9

1.1

2018

External position

Current account (% of GDP)

10.7

1.9

7.5

9.7

8.3

2019 Q3

Net international investment position (% of GDP)

120.5

7.8

68.6

91.4

80.4

2019 Q3

External debt position (% of GDP)

271

158

151

478

149

2019 Q3

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

73.4

28.6

45.2

37.5

37.2

2019 Q3

Export diversification index **

0.64

0.34

0.31

0.31

0.43

2018

Institutional framework ***

Political stability and absence of violence

1.34

0.92

0.60

0.87

0.96

2018

Government effectiveness

2.04

1.45

1.62

1.85

1.87

2018

Rule of law

1.93

1.88

1.63

1.82

1.83

2018

* At original maturity, excluding direct investments.

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

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

Sources: IMF, World Bank, UNCTAD, SNB, Eurostat, ECB

Appendix 2. List of material data sources

International Monetary Fund

World Bank

Eurostat

The Bank for International Settlements

European Commission

Organization for Economic Co-operation and Development

Swiss National Bank

Swiss Department of Finance

Appendix 2. Key indicators

Balance of payments, CHF bln

 

2015

2016

2017

2018

2019

Balance of goods

51.8

49.9

50.0

59.0

65.6

Exports

292.1

312.4

311.8

328.0

335.1

Imports

240.3

262.5

261.8

269.0

269.5

Balance of services

18.8

20.0

16.1

20.3

17.5

Exports

109.5

117.1

120.1

124.0

120.9

Imports

90.7

97.1

104.1

103.7

103.4

Balance of income

3.1

-4.8

-23.1

-22.6

2.5

Income receivable

180.9

190.9

214.2

216.4

203.6

Income payable

177.8

195.7

237.3

239.0

201.1

Current account 

73.7

65.2

43.0

56.7

85.6

Current account, % of GDP 

11.3

9.9

6.4

8.2

12.3

International reserves at the end of the period

601.3

690.5

792.1

776.5

826.4

Sources: SNB, Eurostat

 

External position (assets and liabilities), CHF bln

 

2015

2016

2017

2018

2019

External debt

1676.1

1781.5

1887.0

1832.4

1883.9

long-term

667.1

716.4

817.9

831.6

889.0

short-term (up to 1 year) *

1009.0

1065.1

1069.1

1000.8

994.9

Sovereign issuer, including

142.1

155.1

181.0

149.3

121.8

monetary authorities

104.3

119.5

148.3

118.9

91.3

consolidated government

37.7

35.6

32.7

30.4

30.5

Banks

776.1

771.6

728.5

701.7

704.8

Other sectors

757.9

854.8

977.4

981.5

1057.3

including intra-corporate loans

397.7

435.7

519.2

499.2

522.4

External liabilities

3662.6

3939.8

4261.0

4128.8

4452.9

External assets

4307.8

4766.1

5106.5

5004.6

5265.0

Sovereign issuer, including

658.5

768.1

865.7

837.2

876.0

international reserves

601.3

690.5

792.1

776.5

826.4

Banks

736.6

690.2

678.0

659.4

672.4

Other sectors

2912.7

3307.8

3562.8

3508.0

3716.6

International investment position (net)

645.3

826.3

845.5

875.8

812.1

International investment position (net), % of GDP

98.6

124.9

126.3

127.0

116.2

External debt, % of GDP

256.2

269.3

281.8

265.7

269.6

* At original maturity, including direct investments

Sources: SNB, Eurostat

Budget indicators, % of GDP

Consolidated government

2015

2016

2017

2018

Income

34.7

34.5

35.4

35.1

Expenses

34.0

34.2

34.2

33.7

including debt servicing expenses

0.6

0.5

0.4

0.4

Primary budget balance

1.2

0.8

1.6

1.7

Overall budget balance

0.6

0.3

1.2

1.4

Consolidated government debt

30.0

28.9

29.3

27.5

% of income

87

84

83

78

Central government

 

 

 

 

Income

11.0

10.8

11.5

11.2

Expenses

10.6

10.7

10.7

10.4

including debt servicing expenses

0.3

0.3

0.2

0.2

Primary budget balance

0.7

0.4

1.0

0.9

Overall budget balance

0.4

0.1

0.8

0.8

Central government debt

15.0

14.0

14.5

13.2

% of income

137

130

126

118

Note: nominal GDP, CHF bln

654.3

661.5

669.5

689.5

Sources: Eurostat, SNB

Rating history

The rating was first released for distribution on October 3, 2018, with the latest review on October 4, 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 March 25, 2020, 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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