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Fitch Affirms Swiss Canton of Zurich at 'AAA'; Outlook Stable
February 10, 2017 / 5:06 PM / 9 months ago

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

(The following statement was released by the rating agency) FRANKFURT/LONDON, February 10 (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 Zurich's high degree of autonomy and corresponding capability to adjust personal and corporate income tax rates, in line with all Switzerland's cantons, its wealthy and dynamic economy, its prudent budgetary and debt management as well as its sound debt ratios. The Stable Outlooks reflect Fitch's expectation that the canton's budgetary performance is likely to improve over the next years and debt will decline in 2017 and 2018. KEY RATING DRIVERS Zurich's operating margin improved to 2.3% in 2015 and was supposed to decline to 1.2% in 2016 according to the canton's budget. Following the canton's last published interim report of October 2016, the fiscal performance of the canton was above budget, mainly driven by higher tax proceeds (CHF52m), higher revenues (CHF39m) from health care and dividends (CHF35m) paid to the canton by the airport. October results were CHF44m above budget due to higher expenditure actually made. FYE16 results may improve as net investments are estimated to be lower than budget. Compared with the 2016 budget, final net investments may have been CHF740m at end-2016 (budget 2016: CHF958m). The CHF218m savings were driven by early redemption of loans the canton granted to its hospitals and lower investments following project delays. We expect the FYE16 operating margin to be above budget, close to 2015 results but that the canton will still report an overall deficit before debt variation. According to the canton's medium-term 2017-2020 plan, the operating margin could consistently improve to 4.7% in 2019 from a low 0.7% in 2017 and the deficit before debt decline from 2.5% in 2017 to a minor surplus of 0.2% in 2019. Zurich put an increase of CHF575m for Zuercher Kantonalbank's (ZKB, AAA/Stable/F1+) equity capital in its budget for 2020. It would be challenging for the canton, if this increase materialises. Zurich's direct risk declined to CHF5,274m at end-2016 from CHF5,524m at end-2015. The canton faced a maturity of CHF500m in 2016 and recourse to borrowings was CHF50m. The reminder was funded by an increase of its short-term debt to CHF600m from CHF400m and the use of cash. The canton may use short-term debt over the medium-term planning period to close funding gaps coming from the movement of medium- to long-term debt. We expect this will remain stable in 2017 at CHF4,674m, increase by CHF93m in 2018 and stabilise in 2019. Fitch expects debt ratios to improve, with the direct debt to current revenue declining to 33% in 2019 from 37% in 2015 and its payback (direct debt to current balance) to decline from 10 years in 2015 to 6.2 years in 2019 (considering CHF500m of short-term debt in 2017-2019), a level commensurate with the canton's rating. Cash and cash equivalents declined to CHF452m at end-2016 from CHF1.54bn in 2014 following the repayment of maturing debt during 2015 and 2016. Zurich's cash reserves and committed credit line in place ensure good access to short-term liquidity in case of need, further mitigating the canton's refinancing risk. Zurich has contingent liabilities, and net overall risk was about CHF23bn at end-2015. Most of this relates to guaranteed obligations of ZKB and the unfunded portion of Zurich's pension fund. Fitch views risk stemming from ZKB as limited and the pension fund as prudently managed following capital measures and a high coverage ratio of 99.4% at end-2016. With GDP per capita of CHF96,778 in 2013 and a population of more than 1.4 million inhabitants, Zurich is considered one of the wealthiest cantons in Switzerland, contributing about 22% of the national economy. Fitch expects real GDP growth for Switzerland of 1.6% in 2017 and in 2018. Due to the canton's well-diversified and dynamic economy, Zurich should continue to mirror the national performance and could even outperform it. However, the abolition of the EUR-CHF peg is still pressuring the canton's industry, trade and tourism and the effects of the Brexit vote leave the canton's economic growth with some uncertainties. 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 a direct debt to current revenue consistently exceeding 50% (2015: 38%), or its contingent risk requiring ongoing capital injections, would lead us to review Zurich's ratings. Significant changes in the canton's financial leeway or additional financial obligations, in either the intra- or inter-cantonal context, could also be rating negative. Any negative rating action on Switzerland would trigger 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 Guilhem Costes Senior Director +34 93 323 8410 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on Applicable Criteria International Local and Regional Governments Rating Criteria - Outside the United States (pub. 18 Apr 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1018856 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 WWW.FITCHRATINGS.COM. 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