Fitch: Swiss Immigration Vote Increases Economic Uncertainty

Wed Feb 12, 2014 11:34am EST

LONDON, February 12 (Fitch) Switzerland's referendum on reintroducing quotas for immigration from EU countries increases uncertainty about the path of the country's economy and its property market, Fitch Ratings says. The full implications of the 50.3% vote in favour of the quota proposal will not be known for some time. The referendum did not specify what level quota should be set, and the government has three years to legislate for and implement any system. This process could be influenced by Swiss domestic politics and the EU's reaction. The European Commission has said that a quota would be "against the principle of free movement of persons between the EU and Switzerland." Tuesday's suspension of talks on integrating Swiss utilities into its energy market suggests that the EU will retaliate, but the full scope of its response and whether this would discourage full implementation of a quota remain unknown. If EU retaliation resulted in a material adverse change to its current agreements with Switzerland, the latter's sovereign credit profile, and those of its banks and corporates, could be affected. The most damaging macroeconomic outcome would be if Swiss banks and corporations' access to EU markets were restricted, although this is not our baseline assumption. Switzerland's highly open, trade-oriented economy has been sensitive to weakness in global trade. Fifty-five percent of exports went to the EU last year, so restricted access to the single market would affect growth prospects (we forecast Swiss real GDP growth to accelerate to 2.1% this year, partly due to the nascent economic recovery in the EU). Uncertainty about EU relations may delay longer-term investment plans. Investment in fixed assets rose quarter on quarter in 2Q13 for the first time in more than a year, and picked up further in 3Q13, signalling a strengthening economic outlook. An immigration quota would also be likely to dampen private consumption, which has supported Swiss domestic demand through the global financial and eurozone crises. It could also be negative for Swiss corporates reliant on highly skilled foreign labour, such as pharmaceutical companies. This could reduce Switzerland's potential GDP growth over the medium to long term. Any implications will depend on the nature of a quota, how it is implemented (including whether particular industries could secure preferential treatment), and how affected companies respond, for example by relocating certain operations. The potential impact of a quota on banks would probably be a function of the impact on Swiss exporters and therefore on asset quality in corporate loan books, and on Swiss property prices and asset quality in residential mortgage books. The uncertainty a possible immigration cap could bring to the residential property market reinforces our view that prices are likely to stabilise after a period of strong growth. Net immigration has contributed to housing demand, alongside low and stable unemployment, robust income growth, and low interest rates. Lower immigration would reduce demand and assist price stabilisation, but supply constraints and continuing economic growth make severe price falls unlikely. Property prices rose on average by 4% in 2013, but the rate of increase slowed in regions that had particularly strong growth in recent years, suggesting affordability is becoming stretched. The authorities have also taken measures to help cool the property market. Our expectation that prices will stabilise in the medium term is factored in to the house price decline assumptions we use in rating Swiss covered bond programmes. Contact: Douglas Renwick Senior Director Sovereigns +44 20 3530 1045 Fitch Ratings Limited 30 North Colonnade London E14 5GN Eugene Chiam Analyst Sovereigns +44 20 3530 1512 Eberhard Hackel Senior Director Structured Finance +49 69 768076 117 Dr Georgy Kharlamov Associate Director Structured Finance +49 69 768076 263 Kai-Uwe Richter Associate Director Covered Bonds +40 69 768076 131 Mark Brown Senior Director Fitch Wire +44 203 530 1588 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com; Christian Giesen, Frankfurt am Main, Tel: +49 69 768076 232, Email: christian.giesen@fitchratings.com; Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com; Athos Larkou, London, Tel: +44 203 530 1549, Email: athos.larkou@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. 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