(The following statement was released by the rating agency)
Dec 21 -
Summary analysis -- Geneva (Republic and Canton of) --------------- 21-Dec-2012
CREDIT RATING: AA-/Stable/-- Country: Switzerland
Primary SIC: Legislative
Credit Rating History:
Local currency Foreign currency
20-Sep-2010 AA-/-- AA-/--
11-Dec-2008 A+/-- A+/--
The rating on the Swiss Republic and Canton of Geneva reflects Standard &
Poor's Ratings Services' view of the "predictable and supportive"
institutional framework for Swiss cantons, as well as Geneva's wealthy and
resilient economy and its "positive" financial management. The rating is
constrained, however, by the canton's heavy debt burden, its sizable unfunded
pension liabilities, and the sensitivity of its budget to economic cycles.
Swiss cantons benefit from an extremely stable and predictable political and
institutional system, which we assess as "predictable and supportive" under
our methodology for rating international local and regional governments.
We view Geneva's financial management as "positive" to its credit standing,
given its high transparency and prudent debt and liquidity management.
The rating also benefits from Geneva's wealthy and resilient economy owing to
its status as an important financial and international center, evidenced by
GDP per capita exceeding Swiss Francs (CHF) 98,000 at year-end 2011. This
fuels the canton's tax revenue, which make up the bulk of its operating
revenue (75% in 2011). We note, however, that Geneva's economic prospects are
more uncertain. The size of its financial sector and international scrutiny of
the tax advantages granted to holding companies in Switzerland could become
risks in the medium term.
In 2011, the canton posted a low 4% operating margin (before amortization), up
from 3% in 2010, but well short of the 10% average over 2006-2009. Geneva
posted high revenue growth of 7% in 2011, primarily driven by tax revenue,
notably corporate profit tax. Despite this increase, though, the operating
margin remains tight, reflecting high operating expenditure, up 5% in 2011,
especially due to increased social charges.
After historically high net investments in 2010 of CHF0.65 billion, net
capital expenditure decreased to CHF0.58 billion in 2011 and deficit after
capital accounts to 3% from 6% in 2010. Still, Geneva's debt increased in 2011
beyond its investment funding requirements, owing to high working capital
needs, contrary to trends until 2010. This is primarilybecause the canton made
quicker payments to the Swiss Confederation and to operators and also had to
refund some taxpayers for tax advances. The canton's direct debt therefore
increased by CHF0.74 billion to CHF11.2 billion (or 146% of operating
revenue). We view Geneva's tax-supported debt (including its direct debt and
that of its non-self supporting dependent entities) at year-end 2011 as very
high, at 138% of consolidated revenue.
Under our base-case scenario, we project some deterioration in Geneva's
operating margin until 2014. In light of less favorable economic prospects, we
now estimate that operating revenue will grow at an average annual 1.4% over
2012-2014 (including 2% average annual growth in tax revenue), while operating
expenditure will grow by 2.3% on average annually. Therefore, under our
base-case scenario, the operating margin will decrease to 1.5% in 2014. While
partly reflecting some internal decisions (tax cuts and allowances for
families), this deterioration largely results from the impact of less
favorable economic conditions on tax revenue growth and social expenditure. It
also stems from some external factors, such as new charges reflecting changes
in national legislation on unemployment benefits and hospital funding, growing
transfers under the cantonal equalization system, and a diminishing share in
net profits from the Swiss National Bank.
We anticipate that the decrease in operating margin will result in increasing
debt, despite the canton's recent decision to adjust its ambitious capital
investment program in 2012-2014. Our base-case scenario anticipates an average
CHF725 million of net capital investments from 2012 to 2014, including a
sizable cash injection in the canton's public pension funds in 2013. As a
result, we expect the deficit after capital investment will reach about 6% in
2012-2014. We project that tax-supported debt will increase to a high 156% of
operating revenue at year-end 2014.
Geneva posted unfunded pension liabilities of CHF6.56 billion at year-end
2011, accounting for more than 85% of its operating revenue. These liabilities
are very high by international standards, and we expect them to increase from
2012 given the lower technical interest rate of 3.5% compared with 4.5%
previously. Under our base-case scenario, we expect the comprehensive reform
of the canton's public pension funds--which will be subject to a popular
referendum in March 2013-- will be carried out with limited cash injections by
the canton. In the absence of such a reform, we note that the Swiss Public
Pension Funds Surveillance Authority may force the canton to fully
recapitalize its public pension funds and create a reserve fund. This
recapitalization would require the canton to take on significant new debt,
which would increase its debt burden and weigh on its future budgetary
performance, and consequently place pressure on the rating.
We assess Geneva's liquidity as "neutral." The canton aims to limit its
average level of debt and actively uses short-term debt and its contracted and
non-contracted liquidity lines to manage its daily cash flows. We estimate
that Geneva's average available amounts on its contracted bank lines will
represent around 70% of its total debt service over the next 12 months.
In our view, the canton has a strong access to external liquidity as reflected
by its regular access to capital markets (with frequent issuance of public and
private bonds) and sizable treasury facilities. Geneva currently benefits from
extensive short-term facilities, comprising CHF1.1 billion of contracted bank
lines (with five counterparties) and CHF2.8 billion of non-contracted
liquidity lines with 10 public sector entities and Swiss and international
The stable outlook reflects our base-case scenario expectations that Geneva
will contain the deterioration of its operating margin and limit its deficit
after capital accounts below 10% of total revenue in 2012-2014.
Under our upside scenario, we would consider raising the rating if Geneva
enhances its operating balance and structurally trims its deficit after
capital accounts below 5% and reduces its unfunded pension liabilities.
Conversely, in our downside scenario, we would consider lowering the rating if
the canton records a structurally growing deficit after capital accounts
exceeding 10% on average in 2012-2014, which could lead us to revise downward
our assessment of its financial management. The rating could also come under
downward pressure if the canton fails to structurally reform its public
pension funds before year-end 2013 and limit the related cash injection.
However, we view both our upside and downside scenarios as very unlikely at
Related Criteria And Research
-- Methodology For Rating International Local And Regional Governments,
Sept. 20, 2010
-- Institutional Framework Assessments For International Local And
Regional Governments, Dec. 19, 2011
-- 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