October 7, 2016 / 8:06 PM / a year ago

Fitch Affirms Switzerland at 'AAA'; Outlook Stable

(The following statement was released by the rating agency) LONDON, October 07 (Fitch) Fitch Ratings has affirmed Switzerland's Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) 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 Outlooks on the Long-Term IDRs are Stable. The Country Ceiling has been affirmed at 'AAA' and the Short-Term Foreign Currency 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 33.3% of GDP as per the Maastricht definition at end-2016 (compared with a peer median of 42.4%) 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. The projected net external creditor position of 145% of GDP at end-2016 is well in excess of the 'AAA' median of 9.8% of GDP and is underpinned by a history of current account surpluses and the Swiss franc's status as a global reserve currency. We expect the current account to remain in surplus at 10.7% of GDP on average over 2016-2018 on the back of strong performance of Swiss exports. Growth picked up in 2Q2016 to 0.6% q-o-q, due to a recovery in exports and moderate contribution from government consumption. Private consumption remained subdued, while investment in construction and equipment declined. Growth is expected to be broad-based in 2016-2018 at an average of 1.6%, supported by private and public consumption and an uptick in exports spurring investment in export-oriented sectors. Investment in the housing and construction sectors will slow as property prices fall. Uncertainties remain around the implementation of the constitutional amendments "against mass immigration" voted for in a referendum in 2014, that call for caps on immigration by 2017. A draft bill, currently sitting with the parliament, could enable a soft resolution of the issue as the draft tries to avoid any breach of Switzerland's Free Movement of Persons Agreement (FMPA) with the EU. This would prevent a suspension of the other bilateral treaties with the EU, many of which are mutually dependent. Another referendum on the matter is likely to occur in the coming months and could add further uncertainty. Annual change in the consumer price index (CPI) remains negative. However, we do not expect the Swiss National Bank (SNB) to further reduce interest rates, despite the appreciation of the Swiss franc after the Brexit vote. We believe the SNB will instead keep intervening on the FX market to alleviate any upward pressure on the currency and maintain the interest rate on sight deposits at -0.75% until 2017 before inflation starts to take off at a forecast 0.9% in 2018. Swiss banks have improved their capitalisation despite ongoing pressure on profitability and subdued credit growth. The strengthened regulatory regime, improved lending standards and profit retention have supported an improvement in leverage and risk-weighted capital ratios. However, domestically-focused banks have increased their exposure to the mortgage segment and lengthened the maturity of their lending to offset ongoing downward pressure on margins due to prolonged low interest rates. Lower migration inflows, improved self-regulation and more prudent lending practices by the banks have led to a gradual slowdown in real estate prices and mortgage growth. Prices declined in the first six months of the year after a sustained increase throughout 2015. Interest rate risk and affordability risk remains with the share of new mortgages bearing a high loan-to income ratio reaching its highest value since 2011 for domestically-oriented banks. A prolonged low interest environment is also supporting investments in the property market, where returns remain high. 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 that the EU and Switzerland will not permit a costly rupture of economic relations even if they cannot agree on amending the FMPA. 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 Douglas Winslow Director +44 20 3530 1721 Committee Chairperson Shelly Shetty Senior Director +1 212 908 0324 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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