ACRA has affirmed the following ratings of The Swiss Confederation (hereinafter, Switzerland, or the country) under the international scale:
- Long-term foreign and local currency credit ratings at AAA;
- Short-term foreign and local currency credit ratings at S1+.
The outlook on the long-term foreign and local currency credit ratings is Stable.
The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.
Credit rating rationale
Switzerland’s AAA sovereign credit rating is based on a developed, diversified, and competitive economic structure, a moderate level of public debt, and a stable external position. ACRA is of the opinion that the risks related to an overheated real estate market are balanced by the high level of household assets, as well as the high quality of assets and capital adequacy of Swiss banks.
According to ACRA, the economy of Switzerland, one of the ten richest countries in the world in terms of GDP per capita, grew by 0.8% in 2019, lower than in the previous year. Based on the IMF’s forecast, the growth rate should recover to 1.3% in 2020 due to increased consumption by the private sector and the positive impact of international sporting events. Thanks to negative key interest rate policies, the Swiss monetary authorities have managed to overcome a period of deflation that lasted for several years. As evidenced by year-on-year negative inflation in October-November 2019, the risk of deflation had re-emerged, which was triggered partially by heightened inflow in franc-denominated assets amid uncertainty concerning global economic prospects. Despite this, ACRA expects that 2019 inflation is likely to remain at 0.4%. In ACRA’s opinion, the short episode of deflation will likely require the continuation of extra accommodative monetary policy by the Swiss authorities going forward. Therefore, ACRA expects a slight uptick in inflation to 0.6% in 2020 as forecasted by the IMF. In other words, inflation will remain within the parameters set by the Swiss National Bank (SNB), namely within a 0-2% target corridor.
Unlike many developed countries, Switzerland has room to maneuver when countercyclical budget policies are needed. This is made possible by the country’s moderate level of public debt, which amounted to 40% of GDP at the end of 2019 based on projected figures from Swiss authorities. ACRA expects further reduction in Switzerland’s public debt through 2024, which will be supported by a balanced budget. A small budget surplus is maintained thanks to the budget rule. The rule mandates balancing the budget throughout the business cycle by allowing for a certain level of deficit during times of recession and surplus during times of economic growth. ACRA notes that due to corporate taxation reform, certain losses are expected at the consolidated budget level (estimated at 0.3% of GDP). In the medium-term, maintaining public debt at a moderate level may be challenged by the need to increase spending due to the country’s population aging. Increased contributions to pension funds will offset the increase in some expenditures, in particular pensions.
The country’s competitive export-focused goods and services sector has allowed it to maintain a high positive current account balance over the past several decades. In particular, the country’s current account stood at 10.3% of GDP from October 2018 to September 2019. This led to a very high positive net international investment position of 135% of GDP at the end of 2018. The country maintained this indicator at 131% at the end of September 2019, which is still high. ACRA assumes Switzerland’s exports will allow the country to maintain a current account surplus in the future. At the same time, ACRA notes that investors often turn to Swiss franc-denominated assets during periods of global economic slowdown and heightened international uncertainty. This may trigger sharp appreciation of the franc, which in turn would negatively affect Swiss exports due to their increased cost. In the past, the SNB has resorted to monetary policy measures aimed at preventing appreciation of the franc, including injecting francs into the market and accumulating foreign currency liquidity. These measures resulted in the government’s external debt coverage ratio reaching 112% at the end of 2018, which is typical for a country that issues a reserve currency. Such a strong coverage ratio is the basis for the sovereign issuer’s very strong external positon.
Unlike the public sector, the debt load of Switzerland’s private sector is very high due to an extensive period of low interest rates. Household debt amounted to 131% of GDP at the end of H1 2019. This is high even when compared to European countries with similar economic structures. The lion’s share (90%) of household debt is made up of mortgage loans granted by Swiss banks. The fact that mortgage lending is a significant part of portfolios held by some large banks may be problematic for the country’s banking sector in the event of a sudden deep real estate price correction caused by an increase in the SNB’s key rate. The steady rate at which real estate price growth outpaces household income points to potential problems that households may face when paying off debt. It is also worth noting that at the end of Q3 2019, the total volume of banking sector assets amounted to 515% of nominal GDP in 2018. This places Switzerland in the group of countries whose economies are highly dependent on the banking sector. These two factors may lead to the materialization of contingent liabilities.
Sovereign model application results
Switzerland has been assigned an AAA Indicative credit rating in accordance with the core part of ACRA’s sovereign model. A number of modifiers in the modifiers part of the model allow the Indicative credit rating to be changed. These include the following, which are determined by the Methodology for Credit Rating Assignment to Sovereign Entities under the International Scale:
- Sustainability of economic growth;
- Potential economic growth;
- Efficacy of structural, economic, and monetary policy;
- Fiscal policy framework and budget flexibility;
- Market access and sources of funding;
- Debt sustainability;
- Balance of payments vulnerabilities.
In view of the abovementioned modifiers, Switzerland’s credit rating has been raised by two notches. However, as the Indicative credit rating of the country is at the top of the rating scale, a Final credit rating of AAA has been assigned. There are no extraordinary factors that could result in an adjustment of the Final rating. In connection with this, the Assigned credit rating remains at AAA.
Potential rating downgrade factors
Potentially serious financial shock for Switzerland’s banking sector associated with a sudden deep price correction in the real estate market.
Issue ratings
No outstanding issues have been rated.
Regulatory disclosure
The sovereign credit ratings were assigned to Switzerland under the international scale based on the Methodology for Credit Rating Assignment to Sovereign Entities under the International Scale and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities.
The credit ratings assigned to Switzerland were first published by ACRA on September 10, 2019. The sovereign credit ratings and their outlook are expected to be revised within 182 days following the publication date of this press release as per the Calendar of planned sovereign credit rating revisions and publications.
The sovereign credit ratings are based on information from publicly available sources, as well as ACRA’s own databases. The sovereign credit rating is unsolicited. The sovereign Issuer did not participate in the credit rating assignment.
ACRA provided no additional services to the Swiss government. No conflicts of interest were discovered in the course of the sovereign credit rating assignment.
