Fitch Affirms Switzerland at 'AAA'; Outlook Stable

Fri May 9, 2014 12:03am EDT

(The following statement was released by the rating agency) LONDON, May 09 (Fitch) Fitch Ratings has affirmed Switzerland's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'AAA'. The Outlooks are Stable. The issue ratings on Switzerland's senior unsecured foreign and local currency bonds have also been affirmed at 'AAA'. The Country Ceiling has been 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, well diversified and wealthy economy with strong governance and a track record of sound economic policy. GDP per capita was 1.5x the 'AAA' median in 2013. Its resilient economy has performed well through the global financial and eurozone crises in 2009-2013, with five-year average real GDP growth of 1.2%. Its domestic economy has been robust, leading to a quick bounce back from the 2009 recession, while its strong industrial and export-oriented sectors are expected to support growth as recovery in Switzerland's main trading partners takes hold. Swiss public finances are strong compared with the 'AAA' median. In 2013, general government surplus improved to 0.5% (2012: 0.1%), and the EU-definition of gross debt resumed its downward trend to 35.2% of GDP, with net debt at 22.1%. Strong credibility and prudency in the fiscal framework is entrenched in medium-term debt brakes at the federal level and across most cantons. Swiss external finances are very strong. Its net external creditor position of 141% of GDP is the second largest of Fitch's 'AAA' rated sovereigns. This mainly reflects the net external positions of the sovereign and non-bank private sector, and results from over two decades of current account surpluses. Large capital inflows into Swiss franc assets characterised 2009-2012 as investors sought less risky assets during the global financial and eurozone crises. The export base is well diversified and consists of high value-added goods e.g. chemicals, pharmaceuticals, heavy machinery and luxury goods. The Swiss franc enjoys a mid-level reserve currency status in global financial markets, which along with deep local capital markets, enhances financing flexibility for the Swiss sovereign. Borrowing costs fell throughout 2009-2013, allowing the Swiss federal government to extend the maturity of its debt portfolio to 7.8 years in 2013, from 6.8 years in 2009. The country has also accumulated large official reserves, which were 12.2 months of current account receipts in 2013, up from 4.4 months in 2009. 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 4.9x Swiss GDP, representing a significant, albeit declining, contingent liability on public finances. Household indebtedness in Switzerland is high due to the mortgage interest tax-relief which incentivises against paying down mortgages. However, this is mitigated by a high net worth position dominated by relatively liquid assets. 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 negative rating action: - A material negative shock from the banking sector, for example from overheating in Swiss residential mortgages and real estate markets, or large losses on trading and international lending portfolios would be negative for the ratings. KEY ASSUMPTIONS The ratings and Outlooks are sensitive to the following assumptions: The EU is Switzerland's main trading partner, representing 55% of Swiss exports in 2013. With an immigrant population of 23%, growth in many Swiss industries and private consumption has been boosted by net immigration. Following a February referendum, Switzerland voted to impose a quota on immigration, which would be in violation of the bilateral agreement with the EU on free movement of persons. The outcome and impact of the potential immigration quota is still uncertain, but would likely have a negative impact on economic growth if passed. Fitch assumes that even if implemented, the potential immigration quota would not lead to a rupture in relations with the EU or to a severe negative impact on the economy. 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, recent signs of cooling off in certain segments of the housing market support Fitch's view that house prices are unlikely to rise rapidly or face a sharp correction. Fitch also does not expect the sector to pose a threat to bank asset quality or financial stability. The costs of the Swiss ageing population to public finances will gradually begin to be felt. Fitch assumes that some reforms will be passed through legislation to address this problem. Failure to address the adverse impact of ageing on the public finances could lead to negative rating action over the long term. Contact: Primary Analyst Eugene Chiam Associate Director +44 20 3530 1512 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Enam Ahmed Director +44 20 3530 1624 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 and Related Research: Sovereign Rating Criteria here Country Ceilings here Additional Disclosure Solicitation Status here ALL 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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