Rating Action Commentary
ֳ Affirms Switzerland at 'AAA'; Outlook Stable
Fri 18 Oct, 2024 - 5:01 PM ET
ֳ - London - 18 Oct 2024: ֳ Ratings has affirmed Switzerland's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'AAA' with a Stable Outlook.
A full list of rating actions is at the end of this rating action commentary.
Key Rating Drivers
Strong Credit Fundamentals: Switzerland's 'AAA' ratings reflect a high value-added economy, with income and governance indicators above the rating median, a very strong net external creditor position, and the reserve currency status of the Swiss franc. A record of prudent economic and fiscal policymaking supports macroeconomic stability, and government debt levels are among the lowest of 'AAA' rated sovereigns. The large banking sector is a long-standing contingent liability for the sovereign, but ֳ believes that integration of UBS and Credit Suisse (CS) is proceeding without material risks to the broader sector or sovereign balance sheet.
Low Debt Levels: Public finances are a rating strength for Switzerland, with general government debt projected at 25.3% of GDP by end-2024 (current 'AAA' median: 39%). ֳ expects public debt levels to decline over the medium term, to 22% of GDP by 2028, given nominal economic growth and largely stable primary surpluses. All of Switzerland's public debt is local-currency-denominated, with an average time to maturity of 10.5 years.
Stable Public Finances: The general government balance is projected to improve to 0.8% of GDP in 2024 (2023: 0.2%; current 'AAA' median: -1.4%), owing mainly due to strong performance of social security funds, which are benefiting from the stable economic situation. The surplus will slightly decline to 0.7% of GDP in 2025 due to increased defence spending and a deferred capital injection for the state rail operator, and further to 0.4% in 2026, as costs from the 13th month pension (approved by public initiative in March 2024) become apparent.
Public finance management is firmly anchored by the federal debt brake rule, which requires cyclically adjusted fiscal balances at the federal level each year. ֳ expects the Swiss National Bank (SNB) to resume profit transfers to the general government budget from 2025 (after no transfers in 2023 and 2024).
Stable Growth Prospects: Real GDP growth accelerated in 2Q24 to 0.7% qoq, aided by sporting events (Switzerland hosts the headquarters of FIFA, UEFA, and the International Olympic Committee, and the events are estimated to have contributed 0.2pp to Swiss quarterly growth). Export growth was solid, aided by very strong recoveries in the chemical and pharmaceutical sectors. We expect growth of 1.4% in both 2024 and 2025; while investment is set to recover, the contribution of net trade will moderate given weakness in some key export markets like Germany.
Monetary Policy Loosening: The SNB cut rates by 25bp to 1% in September, which we expect to be the terminal rate. Headline inflation fell to 0.8% yoy in September 2024 (January-August average: 1.2%) but domestic inflationary pressures persist. The Swiss franc has been broadly flat against the dollar and euro since the start of the year, but the SNB faces the risk of sharp appreciation of the franc (which could result in deflationary risks) should it reduce its very large FX investment assets (which amounted to 87.5% of 2024F GDP as of August 2024) at pace.
Strong External Finances: Switzerland's external balance sheet is a solid rating strength, with a net external creditor position of 110% of GDP projected by end-2024, 2.8x the current 'AAA' median. This is supported by persistent and large current account surpluses (averaging 6.1% of GDP in the decade to 2023), reflecting the country's high value-added sectors in pharmaceuticals, commodities (gold), and financial services. The sovereign's net foreign asset position is also large at a projected 90.4% of GDP in 2024, the third-highest among its rating peers.
Large Banking Sector: The Swiss banking sector's assets stood at 407% of projected 2024 GDP at end-July 2024, with UBS (the largest bank) alone amounting to 1.7x GDP. The sector's capitalisation is robust (end-1H24: regulatory Tier 1 capital ratio of 19.2%). Asset quality is very strong, with a non-performing loan ratio of just 0.8% at end-1H24.
Swiss authorities are seeking to reform various elements of banking regulation, including tightening the 'Too Big to Fail' framework, alongside implementing a 'senior manager' regime, based on lessons learnt from CS's failure. While some changes can be adopted through ordinances, others will require legislation to be passed in federal parliament. A parliamentary inquiry into CS's failure is due by end-2024. ֳ expects any additional capital requirements for banks to be phased in over several years.
UBS-CS Merger: The merger of the main operating companies of UBS and CS took place in May 2024. The restructuring and integration of CS's operations is proceeding at pace. UBS's profitability improved more than expected in 1H24 due to fast progress in winding down CS's 'non-core and legacy' operations and efficiency gains from the integration. However, we expect integration costs to impact earnings more in 2H24. UBS's stable business model and conservative risk approach help mitigate significant execution risks during the intensive integration work through to 2026.
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. These scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model. Switzerland has a high WBGI ranking at the 97th percentile, reflecting its long track record of stable and peaceful political transitions, well-established rights for participation in the political process, strong institutional capacity, effective rule of law, and a low level of corruption.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Macro/Structural: Materialisation of macro-financial stability risks, stemming from, for example, evidence that the integration of UBS and CS will require continued and significant policy intervention and/or loss of market confidence in the Swiss authorities' ability to manage the merger.
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 Long-Term Foreign-Currency (LT FC) IDR scale.
ֳ's sovereign rating committee did not adjust the output from the SRM to arrive at the final LT FC 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 LT FC IDR. ֳ'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.
Country Ceiling
The Country Ceiling for Switzerland is 'AAA', in line with the LT FC IDR at the upper limit of the rating scale. We view the risk of exchange and capital controls as de minimis. ֳ's Country Ceiling Model produced a starting point uplift of +3 notches and ֳ's rating committee did not apply a qualitative adjustment to the model result.
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 World Bank Governance Indicators 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 respective 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 World Bank Governance Indicators 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 World Bank Governance Indicators is relevant to the rating and a rating driver. As Switzerland has a percentile rank above 50 for the respective 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.
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. ֳ's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. 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, v2.0.2 (1)
- Debt Dynamics Model, v1.3.2 (1)
- Macro-Prudential Indicator Model, v1.5.0 (1)
- Sovereign Rating Model, v3.14.1 (1)
ADDITIONAL DISCLOSURES
ENDORSEMENT STATUS
| Switzerland | UK Issued, EU Endorsed |
Unsolicited Issuers
Switzerland (Unsolicited)
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