Fitch Affirms Switzerland at 'AAA'; Outlook Stable

Fri Nov 15, 2013 11:39am EST

LONDON, November 15 (Fitch) Fitch Ratings has affirmed Switzerland's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'AAA'. The issue ratings on Switzerland's senior unsecured foreign and local currency bonds are also affirmed at 'AAA'. The Outlooks on the Long-term IDRs are Stable. The Country Ceiling is affirmed at 'AAA' and the Short-term foreign currency IDR at 'F1+'. KEY RATING DRIVERS Switzerland's 'AAA' IDRs reflect the following key rating drivers: - Switzerland is a highly advanced diversified economy with a high per capita income, strong institutions and a track record of strong governance. It is characterised by a track record of low and stable inflation and economic stability. Recent economic performance has improved, leading Fitch to revise up its forecasts for 2013 GDP growth to 1.8% (from 1.5% in June 2013). - Public finances are significantly stronger than the 'AAA' median indicators with the EU-definition of gross general government debt estimated at 34.5% of GDP, and net debt at 21% of GDP at end-2013. Central government debt is estimated to fall to 18.5% of GDP at end-2013, from 27.5% in 2003, underpinned by the Swiss federal debt brake. The general government balance has been recording consistent surpluses since 2006, and its surplus is estimated to be 0.3% of GDP in 2013. - The Swiss economy is a large net external creditor to the tune of an estimated 157% of GDP in 2013. The current account has also sustained a surplus for over two decades, with a five-year average of 9.4% of GDP, reflecting Switzerland's strong export-oriented economy and net international asset position. - The economy benefits from a mid-level reserve currency status and deep local capital markets which enhance financing flexibility and have resulted in declining government borrowing costs in recent years. The country also has a large amount of FX reserves, estimated at 11.2 months of current account payments in 2013. - Households indebtedness in Switzerland is high due to the tax-deductibility of mortgage interest payments. However, this is mitigated by a high net worth position held by the household sector. RATING SENSITIVITIES The Stable Outlook reflects Fitch's assessment that the downside risks to the 'AAA' rating are currently not material. Nonetheless, the following risk factor may result in a negative rating action: - A material negative shock emanating from the banking sector, for example, related to overheating in the Swiss residential mortgage and real estate markets, or large losses on trading and international lending portfolios. KEY ASSUMPTIONS The ratings and Outlooks are sensitive to a number of assumptions as follows: - Overall, Fitch believes the Swiss banking system is strong, consistent with its Bank System Indicator and average Viability Rating of 'a'. The large Swiss banks have undergone significant deleveraging, undertaken major cost-cutting and progressed towards higher capital requirements under Basel III and additional domestic regulatory requirements for banks. Swiss legislation also addresses the resolution of banks considered 'too big to fail'. Nevertheless, the system remains large at 4.8x Swiss GDP, representing a significant, albeit declining, contingent liability on the public finances. - Fitch assumes that the impact of the Swiss and international authorities' on-going efforts to combat tax fraud and evasion on the Swiss banking model will be manageable, as it is a longstanding trend and banks will be able to continue to compete on the basis of the country's stability and high quality services. Nonetheless, there are considerable uncertainties regarding the specific impact of the size of fines payable to the US and other regulators, any reputational damage, the impact on bank profitability and the potential effect on non-resident assets under management. - The Swiss residential real estate sector has been showing signs of overheating in recent years, although Fitch's macro prudential indicator is currently only indicating a low level of risk of a systemic financial crisis related to credit growth and asset prices. However, Fitch does not expect house prices to rise rapidly or face a sharp correction nor does it expect the sector to pose a threat to bank asset quality or financial stability. - The economy will benefit from significant reforms over the medium term to mitigate the impact of an ageing population on Swiss public finances and to ensure their long-term sustainability. Several reforms have been proposed in parliament but their passage through legislation is uncertain. Failure to address the adverse impact of ageing on the public finances could lead to negative rating action over the long-term. - The EU is Switzerland's main trading partner. Fitch assumes that the relationship between Switzerland and the EU will not change materially in a way that has an adverse impact on the economy or financial sector. - Switzerland's extensive trade and financial linkages with the eurozone imply its economic performance is sensitive to shocks in the eurozone. Fitch assumes that the risk of fragmentation of the eurozone remains low. Contact: Primary Analyst Eugene Chiam Research Analyst +44 20 3530 1512 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Michele Napolitano Director +44 20 3530 1536 Committee Chairperson Ed Parker Managing Director +44 20 3530 1176 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, 'Sovereign Rating Criteria' dated 13 August 2012 and 'Country Ceilings' dated 09 August 2013, are available at www.fitchratings.com. Applicable Criteria andALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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