August 4, 2017 / 8:12 PM / a year ago

Fitch Affirms Swiss Canton of Zurich at 'AAA'; Outlook Stable

(The following statement was released by the rating agency) FRANKFURT/PARIS/LONDON, August 04 (Fitch) Fitch Ratings has affirmed the Swiss Canton of Zurich's Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at 'AAA' and Short-Term Foreign Currency IDR at 'F1+'. The Outlooks on the Long-Term IDRs are Stable. The affirmation reflects the continuing high autonomy of Zurich, as demonstrated by its power to adjust personal and corporate income tax rates, in line with all Swiss cantons, its wealthy and dynamic economy, and its track record of sound fiscal performance and flexibility. The ratings also factor in a slight decline in budgetary performance and a potential increase in debt. The Stable Outlooks reflect Fitch's expectation that the canton's budgetary performance and debt level will remain in line with the ratings. KEY RATING DRIVERS Zurich's operating margin improved to 2.9% in 2016 from 2.3% in 2015 and, due to higher financial revenue and lower interest expenditure, the current margin was also up at 5.9% from 3.7% in 2015, fully covering capex. The positive development was driven by a 4.8% increase in tax revenues, a small reduction of staff cost and by capex being roughly CHF300 million below budget. This resulted in an overall surplus before debt variation of 3.2% in 2016. The 2017 budget shows a declining trend with an operating margin below 1% and an overall deficit, while the 2018-2020 medium-term plan foresees performance that is at least in line with the 2016 results. We expect the canton to outperform its budget in 2017, due to cost measures introduced in recent years and as actual capex may fall short of the envisaged CHF1 billion. Zurich's direct risk declined to CHF5,274 million at end-2016 (2015: CHF5,524 million). A large part of a CHF500 million bond due in 2016 was replaced by short-term debt, which amounted to CHF600 million at end-2016. Zurich aims to keep its debt stable in 2017 and is likely to keep its medium-to long-term debt below CHF5 billion (2016: CHF4.7 billion) until 2020. We expect Zurich to close funding gaps through short-term borrowing. Debt ratios are sound with direct risk-to-current revenue of 34.6% in 2016 (2015: 37.2%) and debt payback improved to 5.8 years in 2016 from 10.2 years in 2015. Fitch expects these ratios to remain stable until 2020. Cash and cash equivalents remained stable at CHF750 million at end-2016 (2015: CHF784 million), covering large part of the funding needs. Fitch assumes Zurich to have ready access to short-term liquidity in case of need, mitigating refinancing risk. Zurich has contingent liabilities with net overall risk of about CHF25.3 billion at end-2016. Most of this relates to the guaranteed obligations of Zuercher Kantonalbank (ZKB; AAA/F1+/Stable) and the unfunded portion of Zurich's pension fund. Fitch views the risk stemming from ZKB as limited and the pension fund as prudently managed due to capital-raising measures and a high coverage ratio of 95.4% at end-April 2017. With a GDP per capita of CHF96,411 in 2014 and a population of more than 1.4 million inhabitants, Zurich is one of the wealthiest cantons in Switzerland, contributing to 22% of the national economy. Fitch expects real GDP growth for Switzerland of 1.3% in 2017 and 1.6% in 2018. Due to the canton's well-diversified and dynamic economy, Zurich's performance should at least mirror the federation's average trend. The development of the cantonal economy will largely rely on its banking sector, real estate market and private consumption, which we expect to be supported by strong immigration and real wage growth due to low inflation. RATING SENSITIVITIES Given the canton's tax dynamics and tax-raising potential supporting revenue generation, a downgrade is unlikely. However, an operating margin close to zero and a continued increase in debt with direct debt-to-current revenue consistently exceeding 50% (2016: 35%), or its public sector entities requiring ongoing capital injections, would lead us to review Zurich's ratings. Significant adverse changes to the canton's financial leeway or additional financial obligations, in either the intra- or inter-cantonal context, could also be rating-negative. A negative rating action on Switzerland would also trigger a rating action on Zurich. Contact: Primary Analyst Guido Bach Senior Director +49 69 768076 111 Fitch Deutschland GmbH Neue Mainzer Strasse 46-50 D-60311 Frankfurt am Main Secondary Analyst Christophe Parisot Managing Director +33 1 44 29 91 34 Committee Chairperson Raffaele Carnevale Senior Director +39 02 87 90 87 203 Fitch has made an adjustment to the official accounts to make the local and regional government comparable internationally for analytical purposes: -As the Canton of Zurich is applying accrual accounting according to IPSAS standards, which includes depreciations, these were not considered in the canton's expenditure for Fitch's calculation of the financial figures and ratios of the canton. 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