January 26, 2016 / 12:38 PM / 2 years ago

Year of "Frankenshock" squeezes Swiss export margins

ZURICH, Jan 26 (Reuters) - Record U.S. demand helped Swiss companies compensate for a slump in sales to the euro zone and Asia in 2015, even though exporters had to settle for slimmer margins after Switzerland lifted its exchange rate cap against the euro.

The move to remove the three-year-old cap by the Swiss National Bank in January 2015 has been dubbed “Frankenshock” locally, such was the subsequent surge in the franc and its impact on the economy.

Real exports fell just 0.7 percent in 2015, customs data released on Tuesday showed, suggesting the removal of the cap left only a minor dent on the quantity of goods sold abroad.

However, a nominal 2.6 percent drop in exports suggested a much deeper dent to exporters’ balance sheets.

“Exports have reacted more negatively than expected in nominal terms,” Credit Suisse economist Bettina Rutschi Ostermann said, adding that nominal export development was more important than real in Switzerland.

But the franc’s annual 9.5 percent gain against the euro saw euro zone exports drop a nominal 6.7 percent.

“While exports to North America rose and those to Asia stagnated, Switzerland exported fewer goods to the other continents,” the Federal Customs Office said.

Manufacturers dropped export prices by 1.9 percent in 2015 to maintain foreign demand.

The chemicals and drugs industry -- featuring Novartis , Roche and Syngenta -- is the biggest export motor, followed by the machinery and electronics sector, the watch industry and makers of precision instruments.

Watchmakers such as Richemont and Swatch were hit by a 22.9 percent nominal decline to their main export market, Hong Kong.

The main challenge in 2016 will be making a Swiss cost base work with foreign prices, economists said. They expect exporters to curb investment at home as they seek foreign suppliers and outsource production into the euro zone.

Meanwhile the franc’s depreciation to 1.10 francs per euro from levels around 1.03 in the first half of 2015 took some of the pressure off Switzerland’s most impacted industries.

“Despite the weakening in the second half of 2015, the Swiss franc is likely to retain its high value in 2016, especially vis-a-vis the euro,” UBS chief economist for Switzerland Daniel Kalt said. “We expect a merely hesitant increase in exports and economic growth of 1.4 percent in 2016.”

Credit Suisse expected Swiss exports of goods and services to rise 1.5 percent in real terms for the year. (Editing by Raissa Kasolowsky)

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