(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 banks.
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 this stage.
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