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Fitch Affirms Switzerland at 'AAA'; Outlook Stable
March 31, 2017 / 8:09 PM / 8 months ago

Fitch Affirms Switzerland at 'AAA'; Outlook Stable

(The following statement was released by the rating agency) LONDON, March 31 (Fitch) Fitch Ratings has affirmed Switzerland's Long-Term Foreign- and Local-Currency IDRs at 'AAA' with a Stable Outlook. The issue ratings on Switzerland's senior unsecured bonds and notes have also been affirmed at 'AAA' and 'F1+', respectively. The Country Ceiling has been affirmed at 'AAA' and the Short-Term Foreign- and Local-Currency IDRs at 'F1+'. 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. General government gross debt is low, forecast at 33% of GDP as per the Maastricht definition at end-2017 (compared with a peer median of 42%) and the government is expected to run small budget surpluses throughout the forecast period. 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. We believe Switzerland will maintain a strong relationship with the EU. In December 2016, the Swiss parliament adopted a law giving Swiss citizens priority access to new job offers, enabling a soft implementation of the constitutional amendments "against mass immigration" without breaching the Free Movement of Persons Agreement with the EU. We also expect Switzerland will look for alternative solutions to comply with the mutual understanding signed in 2014 with the EU on business taxation, following the rejection of the corporate tax reform in a referendum in February. The reform was aiming at removing the preferential tax rate applied by local governments to multinational companies and at aligning tax rules with OECD standards by 2019. We forecast the economy will grow by 1.4% in 2017 before accelerating slightly in 2018 to 1.6%. Domestic demand will remain the main driver of growth. Ongoing recovery in the labour market, continuous population growth due to strong immigration and a rise in real wage growth on the back of low inflation will spur private consumption. Moderate growth in equipment and machinery investment will be supported by a modest recovery in the eurozone and in the international environment and sustained demand for Swiss goods. We expect the current account to remain in surplus at 10.7% of GDP on average over 2017-2018 on the back of strong performance of Swiss exports, which have been resilient to currency strength. The projected net external creditor position of 147.5% of GDP at end-2016 is well in excess of the 'AAA' median of 9.1% of GDP and is underpinned by a history of current account surpluses and the Swiss franc's status as a global reserve currency. We do not expect the Swiss National Bank (SNB) to further reduce interest rates, despite an overvalued currency, lower than expected inflation and subsequent negative annual change in consumer price index in 2016. SNB will keep intervening on the FX market to alleviate any upward pressure on the currency and maintain interest rate on sight deposits at -0.75% later in 2017 when inflation slightly turns positive. Risk to the financial system arises from the sizeable and largely concentrated banking sector, whose assets represented 424% of GDP as of 3Q16, half of it related to UBS and Credit Suisse. The two banks, although largely exposed to a potential downward swing on the real estate market through mortgage lending, have substantially improved their capital buffers and leverage following the implementation of the Swiss "Too-big-to-fail" (TBTF) regulation and were fully compliant with the TBTF2 phase-in requirements as of year-end 2016. Domestically-focused banks' exposure to mortgage lending and residential real estate has increased substantially to offset the pressures on earnings implied by the low interest rate environment. However, improved capitalisation and leverage have prevented any deterioration in the banks' resilience House prices stabilised in 2Q16 after a continuous increase in 2015, but low interest rates will keep supporting yield-seeking demand for real estate as well as investments in the property market and could revive rebound in house prices. Imbalances have increased slightly with household debt rising to 211% of net disposable income in 2015 from 203% in 2014 despite easing mortgage loan growth. Affordability risk remains high, with two-thirds of new mortgage loans having a loan-to-value ratio of about 75% or more and house price to income ratio at about 10%. 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 Lengthening life expectancies and an environment of 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. Contact: Primary Analyst Marina Stefani Associate Director +44 20 3530 1809 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Michele Napolitano Senior Director +44 20 3530 1882 Committee Chairperson Charles Seville Senior Director +1 212 908 0277 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 Country Ceilings (pub. 16 Aug 2016) here Sovereign Rating Criteria (pub. 18 Jul 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1021501 Solicitation Status here Endorsement Policy 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 WEB SITE AT <a href="https://www.fitchratings.com">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. 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