September 29, 2017 / 8:11 PM / 2 years ago

Fitch Affirms Switzerland at 'AAA'; Outlook Stable

(The following statement was released by the rating agency) LONDON, September 29 (Fitch) Fitch Ratings has affirmed Switzerland's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'AAA' with a Stable Outlook. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS Switzerland's 'AAA' rating reflects its track record of prudent economic and fiscal policies, a diversified and wealthy economy, and high levels of human development. Switzerland surpasses its 'AAA' peers on most key indicators. GDP per capita is 1.5x the 'AAA' median. Fitch has revised down its growth forecast for the Swiss economy for 2017 to 0.8% from 1.3% in June, following the disappointing real output growth for the first two quarters of the year. We expect the economy to gain momentum in 2018 and 2019, growing by 1.6% and 1.7% respectively. A positive labour market outlook and subdued price growth will support household purchasing power while recovering external demand will foster investment in export-oriented industries. Inflation is set to rise to 0.4% in 2017 and 2018 before reaching 1.1% in 2019. We believe subdued inflation will lead the Swiss National Bank (SNB) to maintain an expansionary monetary policy while any rate hikes will closely follow those of the European Central Bank. On 14 September, the SNB maintained its interest rate on sight deposits at -0.75% in light of low expected price growth and still "highly valued" currency. We expect the SNB will intervene on the FX market if capital inflows resume sharply on the backdrop of any resurgence of geopolitical risks. Normalisation of political risk after the French election in May has lifted pressure on the exchange rate, with the CHF depreciating by 6% against the euro over the past three months. We forecast the general government debt ratio to increase slightly to 29.8% of GDP in 2017 before decreasing to 29.1% in 2018. Public finances are underpinned by strong fiscal rules, including a binding debt brake rule, which has led to a near-balanced fiscal position in recent years. Fitch forecasts the government to post a small yearly surplus of 0.3% of GDP over 2017-2019. The Pensions 2020 reform package, which entailed an increase in VAT to fund rising age-related public spending, was approved by the parliament in May 2017 but rejected in a referendum in September. We expect Switzerland to post an average current account surplus of 10.6% of GDP over 2017-2019, supported by strong performances of the pharmaceutical industry and luxury consumer goods and recovery of the manufacturing and service sectors on the back of a depreciating currency. The net external creditor position of 149% of GDP at end-2016 is well in excess of the 'AAA' median of 7.5% of GDP and is underpinned by a history of current account surpluses and the Swiss franc's status as a global reserve currency. We believe Switzerland will maintain a strong relationship with the EU. A new corporate tax reform addresses EU concerns over unfair tax competition applied by local governments to multinational companies. The reform should allow the country to comply with the mutual understanding signed in 2014 with the EU on business taxation and align Swiss corporate taxation with OECD standards. Following the rejection of the corporate tax reform (CTR III) in a referendum in February 2017, the Swiss government swiftly launched a new reform plan, the Tax Proposal 17, and initiated a public consultation in September. The consultation will run until December 2017 and the proposal will be submitted to parliament in spring 2018. The proposal provides for additional financing measures to compensate for the cantons' revenue shortfall implied by the decrease of the tax rate. The banking sector remains large and concentrated, with the sector total assets accounting for 486% of GDP at-end 1H17. The two systematically-important global banks, UBS and Credit Suisse, account for half of the total sector's assets. They have both also improved their loss-absorbing capacity and leverage following the implementation of the Swiss "Too-big-to-fail" regulation (TBTF2), reducing the potential contingent liability to the sovereign. They remain exposed to a potential downward swing in the real estate market, but are less reliant on the Swiss mortgage market for their earnings than the domestically-focused banks. Domestically focused banks, with Raiffeisen, Zuercher Kantonalbank and Postfinance being systematically important, further increased their exposure to the real estate market in 2016, with mortgage growth rising by 4.1%, compared with 2.7% for the market as a whole. Pressure on profitability stemming from the low rate environment has led to higher risk taking and exposure to interest rate risk. The share of new loans with loan-to-value ratios of 75% or more remains elevated and a rate rise would push up mortgage costs quickly given the short repricing maturities typical in the Swiss market, although we do not expect any rapid increase in rates. SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns Switzerland a score equivalent to a rating of AAA on the Long-Term FC IDR scale. Fitch's sovereign rating committee did not adjust the output from the SRM to arrive at the final LT FC IDR. Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM. RATING SENSITIVITIES The Stable Outlook reflects Fitch's assessment that the downside risks to the 'AAA' rating are currently not material. Nonetheless, negative rating action could result from a material shock to the financial sector, for example due to a sharp correction in the Swiss residential real estate market, or large losses on trading and international lending portfolios. KEY ASSUMPTIONS We assume Switzerland will not breach the Free Movement of Persons Agreement with the EU. The adoption, in December 2016, by the Swiss parliament of a law giving Swiss citizens priority access to new job offers enabled a soft implementation of the constitutional amendments "against mass immigration". However, a new popular vote is likely to be held on the bilateral treaty with the EU on free movement of people, following the initiative of the Swiss People Party. The vote is unlikely to take place before 2019 and we do not expect it will strain the relationship with the EU. Lengthening life expectancy and extremely low interest rates weigh on the sustainability of the Swiss pension system and public finances over the longer term. We assume that the reforms necessary to ensure sustainability will be passed before demographic pressures significantly erode the fiscal position. The full list of rating actions is as follows: Long-Term Foreign-Currency IDR affirmed at 'AAA'; Outlook Stable Long-Term Local-Currency IDR affirmed at 'AAA'; Outlook Stable Short-Term Foreign-Currency IDR affirmed at 'F1+' Short-Term Local-Currency IDR affirmed at 'F1+' Country Ceiling affirmed at 'AAA' Issue ratings on long-term senior-unsecured local-currency bonds affirmed at 'AAA' Issue ratings on short-term senior-unsecured local-currency bonds affirmed at 'F1+' Contact: Primary Analyst Marina Stefani Associate Director +44 20 3530 1809 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Gergely Kiss Director +44 20 3530 1425 Committee Chairperson Charles Seville Senior Director +1 212 908 0277 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on Applicable Criteria Country Ceilings Criteria (pub. 21 Jul 2017) here Sovereign Rating Criteria (pub. 21 Jul 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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