DBRS Assigns AAA Rating to Switzerland

DBRS Inc. (DBRS) has today assigned ratings to the Swiss Confederation’s long-term foreign and local currency debt at AAA. The trend on both ratings is Stable. The ratings are underpinned by Switzerland’s highly competitive economy, low public sector debt and very high savings. The Stable trend reflects Switzerland’s strong fiscal balances amid a robust economic recovery.

As an open economy with a large financial sector, Switzerland was particularly exposed to the global economic downturn and financial crisis. In 2009, exports of goods and services contracted sharply and Swiss authorities intervened heavily in the financial sector to stabilise markets. Nevertheless, Switzerland weathered the crisis comparatively well. GDP contracted 3.2% from peak to trough, compared to 5.4% in the Euro area, as expansionary monetary policy, healthy private sector balance sheets and a resilient labour market supported domestic demand. Economic activity quickly recovered in 2010, bolstered by strong export performance. GDP expanded 2.6% in 2010 and is expected to grow 2.1% in 2011.

Unlike most advanced economies, Switzerland’s public finances did not experience a marked deterioration during the downturn. Automatic stabilisers were allowed to function fully and some discretionary spending was provided to support aggregate demand, but the resilience of the domestic economy meant that the utilisation of these measures was limited. As a result, the general government posted a surplus of 0.8% of GDP in 2009 and 0.2% of GDP in 2010. Sustained surpluses and moderate economic growth have put public debt ratios on a downward trajectory. Debt-to-GDP declined from 54.9% in 2003 to 38.3% in 2010, and the government expects it to reach 33.9% by 2014.

The ratings are supported by Switzerland’s open, highly competitive and prosperous economy. Exports of goods and services, which amounted to 54% of GDP in 2010, have become an increasingly important contributor to growth. Notwithstanding recent concerns about real exchange rate appreciation, Switzerland has largely maintained its share of global trade over the last decade. Output per hour worked is on par with other advanced economies, although lower than the top performers, and the labour utilisation rate is one of the highest in the world. As a result, Switzerland’s GDP per capita is only surpassed by Norway and the United States among OECD economies.

Switzerland is also a substantial provider of savings to the rest of the world. This is driven by a very high gross national savings rate, which averaged 32% of GDP from 1990 to 2007. Switzerland’s savings have financed domestic investment, supported the accumulation of household wealth and reduced the economy’s exposure to adverse financing conditions.

The expected increase in public expenditure stemming from an ageing population is a common concern among many advanced economies. Switzerland is in a comparatively good starting position, given its low public debt burden. However, pension, health and long-term care costs in Switzerland are expected to increase by 3% of GDP by 2030 and 5% of GDP by 2050. These projections are subject to considerable uncertainties, but further parametric reforms could be needed, particularly if healthcare costs rise faster than anticipated, in order to temper the rise in age-related expenditures.

Managing systemic risks posed by its two large banks is an important challenge facing Switzerland. While the financial services sector generates substantial benefits for the economy, these institutions are nevertheless very large relative to the economy. In 2010, a Commission of Experts in Switzerland recommended a series of measures to manage the systemic risks posed by financial institutions that are “too big to fail.” The proposal aims to significantly increase the loss-absorption capacity of systemically important banks and reduce the likelihood of a potential failure. The National Council is currently debating the proposed legislation.

The Swiss National Bank conducted extensive foreign exchange interventions in 2010 to dampen currency appreciation and downward price pressures. While deflationary risks appear to be receding, the Swiss franc has continued to strengthen. From May 2010 to May 2011 the real effective exchange rate appreciated 12.6%. The export sector expanded at a strong pace in the first quarter of 2011, but sustained currency pressures could slow export growth going forward.

The European sovereign debt crisis also presents some downside risks for Switzerland. Swiss banks have limited exposure to Greece, Portugal and Ireland, but spillover effects from renewed turbulence in international markets could impact their performance. Nevertheless, Switzerland’s healthy public balance sheet and resilient domestic performance put the country in a relatively strong position to weather future market volatility. The broad-based economic recovery and strong fiscal balances further support Switzerland’s AAA ratings.

Notes:
All figures are in Swiss Francs (CHF) unless otherwise noted.

The principal applicable methodology is Rating Sovereign Governments, which can be found on our website under Methodologies.

The sources of information used for this rating include the Swiss National Bank, FINMA, Federal Department of Finance, Federal Department of Economic Affairs, Swiss Statistics, European Central Bank, Eurostat, AMECO, OECD, BIS and IMF. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This is an unsolicited rating. This rating did not include participation by the rated entity or any related third party, and is based solely on publicly available information.

Lead Analyst: Michael Heydt
Rating Committee Chair: Alan G. Reid
Initial Rating Date: 14 July 2011
Most Recent Rating Update: 14 July 2011

For additional information on this rating please refer to the linking document located under Related Research.