ACRA has affirmed the following ratings to 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 currency credit rating is Stable and local currency credit rating is Stable. This reflects the resilience of most of the macroeconomic metrics of Switzerland even under the pessimistic macroeconomic scenario.
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. The country’s shock absorbing capacity is very high, as reflected by the stability of major rating factors, despite the negative impact of the COVID-19 pandemic. In ACRA’s opinion, the risks related to an overheated real estate market and the large size of the banking sector, which may potentially become contingent liabilities for the government, 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, is expected to contract by 4.2% in 2020 after meagre growth of 0.9% in 2019. This fall was due to the contraction in domestic consumption, which was depressed by the quarantine measures, and external demand dampened by the pandemic and global travel restrictions. ACRA expects a recovery at 3.6% in 2021, supported by a global recovery with risks for this scenario being the slow pace of vaccination and mutations of the COVID-19 virus. Due to increased demand for Swiss franc-denominated assets and relatively weak domestic demand, ACRA expects marginal deflation in 2021. Therefore, the inflation rate is likely to be outside the lower end of the 0–2% target corridor set by the Swiss National Bank (SNB).
Unlike many developed countries, Switzerland has room to maneuver when pursuing countercyclical budget policies. This was made possible by the country’s moderate level of public debt at the onset of the pandemic. It amounted to a moderate 39.3% of GDP at the end of 2019, whereas the general government had recorded budget surpluses since 2015. This made the country’s fiscal position resilient to this crisis.
A relatively large anti-crisis fiscal package, which according the IMF, amounted to about 10.4% of 2019 GDP (including guarantees) in spring 2020, and was supplemented by additional measures in autumn, is likely to result in a budget deficit of around 3–4% of GDP in 2020. A budget deficit will push up the country’s public debt to about 40–46% of GDP by the end of 2020. However, in the baseline scenario, we assume that the strong fiscal rule and historically good compliance with it will trigger fiscal consolidation in the near term. The federal government’s fiscal 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, while also making exceptions for extraordinary circumstances.
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, which has been partially mitigated by the increased contributions to pension funds in 2020. The Federal Council also proposes to increase the retirement age for women from 64 to 65, raise value-added tax rates, and increase incentives to work after the age of 65 as additional measures to alleviate the pension related burden.
ACRA assumes Switzerland’s export structure will allow the country to maintain a current account surplus in 2020 and beyond. The diversified export structure and big share of pharmaceutical exports are likely to support Switzerland’s external position amid contracted external demand. The country’s competitive export-oriented goods and services sector, which allowed a high positive current account balance of 9.6% of GDP on average to be maintained over the last five years (2015–2019), led to a very high positive net international investment position of around 116% of GDP as of the end of 2019.
At the same time, ACRA notes that investors turn to franc-denominated assets during periods of global economic slowdown and heightened international uncertainty. This triggers appreciation of the franc, which in turn negatively affects Swiss exports due to their increased cost. To prevent this in 2020, the SNB 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 international reserves increasing from 118% of GDP at the beginning of 2020 to about 129% of GDP as of the end of the third quarter. This improved the external debt coverage ratio from 43% at the beginning of the year to 46.7% at the end of the third quarter of the year. ACRA expects the heightened risk of franc appreciation to cause the SNB to keep its policy rate in negative territory for an extended period.
Unlike the public sector, the debt load of Switzerland’s private sector is very high, which is associated with an extensive period of low interest rates. At the end of the third quarter of 2020, household debt amounted to 138%. This is high even when compared to European countries with similar economic structures. The lion’s share (about 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 if and when it happens. However, this risk is hedged by the high level of household wealth, which stood at 427% at the end of the third quarter of 2020.
It is also worth noting that at the end of 2019, the total volume of banking sector assets amounted to about 456% of nominal GDP. The sheer size of the banking sector poses a contingent liability risk and places Switzerland in the group of countries whose economies are highly dependent on the banking sector. The mitigating factors are high capital buffers maintained by the biggest banks and high asset quality — according to the latest Financial Stability Report compiled by SNB, the tier 1 capital ratio of the two major national banks, UBS and Credit Suisse, are 18.1 and 16.9 respectively as of the first quarter of 2020.
In ACRA’s view, Switzerland can be considered a “safe haven” due to the highest level of trust in public institutions and the authorities and high quality of public governance. Over the past ten years, Switzerland has had some of the highest and most stable World Governance Indicators (WGIs) as measured by the World Bank. This is a reflection of the high quality of institutional governance and the very favorable environment for allocating resources within the economy. The high quality of the country’s institutions supports its credit rating.
Sovereign model application results
Switzerland has been assigned an AAA Indicative credit rating in accordance with the core part of ACRA’s sovereign model. One of the modifiers in the modifiers part of the model allows the Indicative credit rating to be decreased. This includes the following, which is determined by the Methodology for Credit Rating Assignment to Sovereign Entities under the International Scale:
- Contingent liabilities and the risk of them materializing.
Positive modifiers are the following:
- Sustainability of 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 one notch. 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 sovereign credit ratings of Switzerland were published by ACRA for the first time 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 ratings are unsolicited. The Swiss government 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.
