St. Gallen's debt is very low compared with peers at the same rating level. Standard &
Poor's Ratings Services estimates tax-supported debt to be about 18% of operating revenues in
2012, which is fairly constant compared with previous years. Under our base-case scenario we
assume that the government will resume gross borrowings in 2013 to refinance maturing debt and
we expect debt to remain at about the current level over the next two years until 2014.
The ratings are further supported by the cantonal management's very positive track record of
financial policies, which has demonstrated an ongoing commitment to fiscal consolidation,
besides the very prudent debt management. We expect budgetary consolidation over the next two
years to be challenging as a consequence of pressures arising from higher health and social
costs and low growth in tax revenues. In the short term, the canton will also face challenges
from lower revenues from the intercantonal equalization system. In 2011, the operating cash
balance was negative 2.8% of adjusted operating revenues (a further decrease from negative 0.9%
the previous year) and the cash balance after capital accounts fell to negative 6.8% of total
adjusted revenues from negative 3.5% in 2010. Under our current base-case scenario, we expect
the government will be able to implement cost cuts and increase revenues as proposed in its
savings package II and budgetary proposal for 2013. Despite these consolidation measures, it may
prove difficult for the canton to improve its performance beyond our current base-case scenario
over the forecast horizon.
Unlike our former expectation that the budgetary deficits could recover faster than
projected under our former base-case scenario, the past year has shown that St. Gallen's path to
structurally balanced accounts is more difficult than we previously anticipated. While our
base-case scenario already includes the savings measure proposed by management, in our view
further savings or revenue-generating measures might be needed to finally return to fully
balanced budgets. As a result, in our new base-case we expect the canton's operating balance as
a percentage of operating revenues to average a weak negative 1.6% over our forecast horizon
2010-2014, compared with negative 0.7% for 2009-2013. We nevertheless predict a positive trend
toward a balanced operating budget in 2014. Similarly, the deficit after capital accounts
remains negative at over 5% on a five-year average, albeit also on a positive trend. However, we
do not think that a consistently negative balance after capital accounts in this scenario will
trigger a debt accumulation because the canton will likely use its large cash reserves to cover
the budgetary deficits in 2012-2014.
In addition, the ratings take into account St. Gallen's guarantee for its cantonal bank,
which is the canton's largest contingent liability. The canton is the major shareholder and
carries most of the bank's liabilities. In the event of the bank's financial distress, the
canton's creditworthiness could be considerably burdened. However, we view the likelihood of
this risk materializing as very low over the forecast period, owing to our estimate of a strong
underlying credit profile for SGKB.
We assess St. Gallen's liquidity position as very positive for the rating. Although we
anticipate a gradual weakening of the canton's liquidity position to cover budget deficits, in
our base-case scenario we expect the canton's cash to exceed 8x its debt service falling due in
over the next 12 months. As of year-end 2011, the canton had over Swiss franc (CHF) 950 million
in unrestricted cash and short-term assets (over 26% of 2011 operating expenditures), which we
expect to decrease to about 8% of operating expenditures by 2014.
Furthermore, the canton has one committed bank line of CHF150 million available. St.
Gallen's liquidity position is also based on excellent market access and expected further
availability of cash due to its ownership of the cantonal bank. The next financial debt
maturities are in 2013, and are thereafter concentrated in 2018 and 2020. We expect debt service
to remain below 2.0% of operating revenues over the next three years.
The stable outlook reflects our view that St. Gallen's currently affluent liquidity position
will help cover its temporarily wider deficits without debt accumulation before cost-containing
measures gradually improve budgetary performance.
We could take negative rating action on St. Gallen within the next two years if, in line
with our downside-case scenario, the canton's budgetary performance were to deteriorate beyond
currently forecast levels, for example as a result of discontinuation of savings measures or not
implementing tax increases. A situation in which SGKB were to face financial distress, thereby
triggering support measures by its owner, could contribute to negative pressure on the rating on
the canton. However, we view these events as highly unlikely given the canton's prudent
management and SGKB's strong credit profile.
We currently do not see a realistic upside-case scenario that would lead to a positive
rating action on St. Gallen within the next two years.
Related Criteria And Research
-- Methodology For Rating International Local And Regional Governments, Sept. 20, 2010
-- Methodology and Assumptions For Analyzing The Liquidity Of Non-U.S. Local And Regional
Governments And Related Entities And For Rating Their Commercial Paper Programs, Oct. 15, 2009
-- Public Finance System Overview: Swiss Cantons, July 30, 2009
-- Institutional Framework Assessments For International Local And Regional Governments, Dec