Rating Action Commentary
ֳ Affirms Switzerland at 'AAA'; Outlook Stable
Fri 05 May, 2023 - 5:05 PM ET
ֳ - Frankfurt am Main - 05 May 2023: ֳ Ratings has affirmed Switzerland's Long-Term Foreign-Currency (LTFC) Issuer Default Rating (IDR) at 'AAA' with a Stable Outlook.
A full list of rating actions is detailed below.
Key Rating Drivers
Strong Credit Fundamentals: Switzerland's 'AAA' ratings reflect a high value-added economy, with income and governance indicators above the median level of its rated peers. A record of prudent economic and fiscal policymaking lends support to macroeconomic stability and low government debt levels. The large banking sector (assets 5x GDP) is a long-standing contingent liability for the sovereign and challenges to the sector have increased.
The Stable Outlook reflects ֳ's view that risk of sector-wide spillovers from the UBS-Credit Suisse (CS) takeover will be limited, with no material deterioration in the sovereign's balance sheet.
UBS-Credit Suisse: The government-facilitated acquisition of CS by UBS helped prevent a disorderly default of a globally systemically important bank and a crisis in the Swiss banking sector, but it has highlighted how the sector represents a large contingent liability for the sovereign despite the too-big-to-fail regulation in place. Federal guarantees supporting the merger total CHF109 billion (14% of GDP), but an immediate fiscal impact is not expected.
For the federal default guarantee on the Swiss National Bank's (SNB) secured liquidity assistance of CHF100 billion for CS, we understand there to be preferential rights in the case of bankruptcy proceedings. In addition, before the federal second-loss guarantee of CHF9 billion provided to UBS to cover losses from the winding down of "difficult-to-assess" CS assets generates a fiscal cost to the government, UBS would bear a first-loss piece of CHF5 billion. We believe the government could adapt the scope of the guarantees, if necessary, depending on how effectively the merger is executed and how rapidly UBS runs down assets in CS's investment bank in a potentially challenging operating environment.
Reputational Damage Risks: The UBS-CS merger illustrated that regulatory intervention can be swift, and that authorities' crisis management toolkits can broaden if a bank is deemed systemic. However, there are elements that have hit the confidence of some stakeholders. There is uncertainty what defines as "difficult-to-assess" assets under the federal guarantee for UBS, with negotiations between the bank and government ongoing. It is also uncertain what implications fully bailing-in CS's AT1 bondholders will have on the future ability of Swiss' banks to issue capital instruments with a write-down feature. Meanwhile, should potential litigation materialise it could pose an additional contingent liability risk for the sovereign. Combined, the two banks account for around 30% of the local banking sector, so while the merger may raise competitiveness concerns in some areas, these should not be broad-based.
Prudent Fiscal Stance: Public finances remain a standout strength of the sovereign. General government debt at 27.6% of GDP at end-2022 (Maastricht definition) is below the median ratio (36.1%) of 'AAA' rated peers. The general government budget was also in surplus last year (1.0% of GDP). With a slowing economy hitting revenues and higher expenditures due to inflation, a lower fiscal surplus of 0.3% of GDP is forecast for 2023. A record of prudent fiscal policy is underpinned by a broad political consensus on Switzerland's long-standing constitutional "debt-brake" rule. ֳ believes that in spite of rising expenditures pressures over the medium term from commitments in national security, energy transition, and ageing costs, fiscal policy will continue to support low debt ratios and modest fiscal surpluses.
Growth Slowdown: We forecast the Swiss economy to expand 0.8% in 2023, after 2.1% in 2022. Effects from tighter monetary policy and weaker external demand will keep the economic outlook subdued. Although labour market activity has been robust, with the unemployment rate (2.1%, February, SECO definition) at a long-term low, higher interest rates and inflation will weigh on households' purchasing power. Indicators of business sentiment have also been mixed, with the outlook for the services sector more positive than for the export-orientated manufacturing sector. A modest and gradual reduction in the banking sector contribution to GDP size (5.6% of gross value added, 2021) is probable with the integration of UBS and CS.
More Monetary Tightening Ahead: We expect the Swiss National Bank (SNB) to raise its key policy rate by a further 25bp this year to 1.75%, after a 50bp hike in March. Inflation in Switzerland is among the lowest in the world (2.8% vs 9.2% in the eurozone in 2022), reflecting its independent electricity generation, small share of energy in the HICP basket (5% vs. 10% for the EU) and high share of administrated prices (20% of the basket). We forecast inflation to average 3% in 2023 and 2.2% in 2024, with risks to the upside.
Real-Estate Vulnerabilities: Imbalances in the Swiss residential real estate market remain large. Average residential real estate prices continue to increase. As of end-2022, prices of owner-occupied housing were 20% higher than in 2019, partly reflecting low supply and high net immigration. With the large exposure of the mortgage market in bank's lending portfolios (household mortgages 66% of total loans and roughly half of banks' assets), vulnerabilities have increased against the backdrop of higher interest rates and financial market uncertainty.
Strong External Finances: Switzerland is a large net external creditor (112.4% of GDP and 5x the median creditor position of AAA peers), supported by persistent current account surpluses ( averaging 5.7% of GDP in the five years to 2022) reflecting the country's high valued-added sectors in pharmaceuticals, commodities (gold) and financial services. The sovereign's net foreign asset position (SNFA) is also large (94.2% of GDP vs. AAA median 17.7%), albeit down from 127% in 2021. As the SNB looks to strengthen its balance sheet, a further moderation in the SNFA position is forecast.
ESG - Governance: Switzerland has an ESG Relevance Score of '5[+]' for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption, as is the case for all sovereigns. Theses scores reflect the high weight that the Worldwide Governance Indicators (WGI) have in our proprietary Sovereign Rating Model (SRM). Switzerland has a WBGI ranking at the 97 percentile, reflecting strong institutional capacity and effective rule of law.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
-Public Finances/Structural: Materialisation of macro-financial stability risks, stemming from for example, evidence that the integration of UBS and Credit Suisse will require financial support far beyond ֳ's expectations and/or loss of market confidence in the Swiss authorities' ability to manage the merger
- External/Structural: Evidence that changes in the Swiss banking sector following the Credit Suisse crisis have negatively affected the Swiss Franc's status as a global reserve currency, for example through a tangible reduction in the franc's share of global reserves
- Structural: A significant erosion of economic competitiveness as a result of deterioration of relations with the EU or changes to the global tax regime that would result in structural worsening in economic prospects or public finances
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
The ratings are at the highest level on ֳ's scale and therefore cannot be upgraded.
Sovereign Rating Model (SRM) and Qualitative Overlay (QO)
ֳ's proprietary SRM assigns Switzerland a score equivalent to a rating of 'AAA' on the LTFC IDR scale.
ֳ's sovereign rating committee did not adjust the output from the SRM to arrive at the LTFC IDR.
ֳ'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 LTFC IDR. ֳ's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the LTFC IDR, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.
Best/Worst Case Rating Scenario
International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit /site/re/10111579.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Switzerland has an ESG Relevance Score of '5[+]' for Political Stability and Rights as WBGI have the highest weight in ֳ's SRM and are therefore highly relevant to the rating and a key rating driver with a high weight. As Switzerland has a percentile rank above 50 for the governance indicator, this has a positive impact on the credit profile.
Switzerland has an ESG Relevance Score of '5[+]' for Rule of Law, Institutional & Regulatory Quality and Control of Corruption as WBGI have the highest weight in ֳ's SRM and are therefore highly relevant to the rating and are a key rating driver with a high weight. As Switzerland has a percentile rank above 50 for the respective governance indicators, this has a positive impact on the credit profile.
Switzerland has an ESG Relevance Score of '4[+]' for Human Rights and Political Freedoms as the Voice and Accountability pillar of the WBGI is relevant to the rating and a rating driver. As Switzerland has a percentile rank above 50 for the governance indicator, this has a positive impact on the credit profile.
Switzerland has an ESG Relevance Score of '4[+]' for Creditor Rights as willingness to service and repay debt is relevant to the rating and is a rating driver for Switzerland, as for all sovereigns. As Switzerland has a record of 20+ years without a restructuring of public debt, which is captured in our SRM variable, this has a positive impact on the credit profile.
Except for the matters discussed above, the highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies). For more information on ֳ's ESG Relevance Scores, visit .
Additional information is available on
PARTICIPATION STATUS
The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure.
APPLICABLE CRITERIA
APPLICABLE MODELS
Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).
- Country Ceiling Model, v1.7.3 (1)
- Debt Dynamics Model, v1.3.2 (1)
- Macro-Prudential Indicator Model, v1.5.0 (1)
- Sovereign Rating Model, v3.13.3 (1)
ADDITIONAL DISCLOSURES
ENDORSEMENT STATUS
| Switzerland | EU Issued, UK Endorsed |
Unsolicited Issuers
Switzerland (Unsolicited)
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