Morningstar DBRS Confirms Swiss Confederation at AAA, Stable Trend

DBRS Ratings Limited (Morningstar DBRS) confirmed the Swiss Confederation's Long-Term Foreign and Local Currency - Issuer Ratings at AAA. At the same time, Morningstar DBRS confirmed the Short-Term Foreign and Local Currency - Issuer Ratings at R-1 (high). The trend on all ratings is Stable.

KEY CREDIT RATING CONSIDERATIONS
The confirmation of the Stable trend reflects Morningstar DBRS' view that the risks to Switzerland's credit ratings remain limited. Following an estimated 0.9% real GDP growth (sports event adjusted) in 2024, economic activity is expected to pick up to 1.5% in 2025 and to 1.7% in 2026, according to the Swiss Federal Expert Group on Business Cycles. Switzerland's solid public finances and strong macroeconomic fundamentals have helped mitigate risks posed by the challenging external environment. Moreover, Switzerland's prudent fiscal policy, underpinned by its debt brake rule and the low public debt level at around 32% of GDP in 2024, according to the IMF, will continue to provide ample room to support the economy against potential severe shocks. The Swiss National Bank (SNB) cut interest rates for the fourth time last year in December, bringing the policy rate to 0.5% as underlying inflationary pressures eased again in the fourth quarter of 2024. Risks to the economic outlook are related to an intensification of global geopolitical tensions that could have knock on effects on inflation and could slow or reverse the easing of monetary policies as well as the higher risk of trade protectionist policies, which could weigh on both export and business confidence.

Switzerland's AAA credit ratings are underpinned by its wealthy and diversified economy, sound public finances, and solid external position. Strong institutions, predictable policies, and historical neutrality have long made Switzerland a safe haven for investors. Switzerland benefits from a highly productive workforce, high levels of educational attainment and labor force participation. These credit strengths counterbalance the challenges associated with Switzerland's high mortgage debt and the contingent liability risks posed by the large banking sector. In December 2024, Switzerland and the European Union (EU) reached a deal on a broad package of agreements aiming to stabilize and deepen their bilateral relations. The package includes new agreements on electricity, food safety, and health and participation in EU programmes. The EU is Switzerland's largest trading partner, and the deal signifies an important step in enhancing Swiss-EU relations with implications for trade, energy, research and migration policies.

CREDIT RATING DRIVERS
Morningstar DBRS could downgrade the credit ratings if severe external shocks or a sustained deterioration in growth prospects materially affect Switzerland's financial stability and fiscal position. Moreover, a materialization of substantial contingent liabilities stemming from the financial sector could put negative pressure on the credit ratings.

CREDIT RATING RATIONALE
Swiss Fundamentals Remain Strong, External Risks to the Outlook Remain

Switzerland's AAA credit ratings are underpinned by its wealthy and diversified economy, and solid economic performance. GDP per capita estimated at USD 106,099 in 2024, one of the highest in the world, and its global competitiveness ranking is consistently one of the highest in Europe. This reflects Switzerland's highly productive workforce, which is characterized by a highly educated labor force and high labor force participation (84% as of Q3 2024) and internationally competitive industries and companies.

Switzerland's economic activity moderated in 2023, with real GDP growth coming in at 1.2% from 2.9% in 2022, mainly reflecting the challenging external environment, primarily weaker external demand and tighter financing conditions. Weak performance was observed in the manufacturing and the construction sectors as well as in financial sector activities. In the first nine months of 2024 the Swiss economy grew by 0.8%, with subdued global demand weighing on Swiss exports, while private consumption made a positive contribution. On the back of easing financing conditions and an improved external environment, the Swiss Federal Expert Group on Business Cycles forecasts real GDP growth of 1.5% in 2025 and of 1.7% in 2026 (GDP is adjusted for sporting events). Annual inflation came in at 1.1% in 2024. The Swiss National Bank (SNB) foresees inflation at 0.3% for 2025 and 0.8% for 2026, within the price stability range. Downside risks to the outlook are related to an intensification of global geopolitical tensions that could have knock on effects on inflation and could delay the easing of restrictive monetary policies. Additionally, the higher risk of trade protectionism policies could have an adverse impact on Switzerland's small and open economy, particularly on its export driven industries such as pharmaceuticals, manufacturing and luxury watches.

Switzerland's Strong External Position Remains a Key Credit Strength

Switzerland's credit ratings are underpinned by its strong external position. Switzerland's current account surpluses, averaging around 6% of GDP over the last ten years reflect its role as a financial center, its high value-added exporting industries, high per-capita income levels, and high savings rate. Switzerland benefits also from a large net international investment asset position (NIIP) amounting to 110.5% of GDP in Q3 2024. This reflects the substantial accumulated net wealth of Swiss residents and official reserves. Switzerland's total reserve assets rose from USD 340 billion in 2011 to USD 1,111 billion in 2021 and are currently over USD 928 billion.

Prudent Fiscal Policy and Low Debt Ratio Support Switzerland's Credit Ratings

Switzerland's prudent fiscal policy, underpinned by its debt brake rule, and its low public debt ratio constitute an important credit strength. Under the debt brake rule, higher expenditures are financed by increased revenues or corresponding expenditure cuts. The debt brake, which was introduced in 2003 at the federal level mandates a balanced budget over the business cycle. In addition to the federal government, most Swiss cantons also have implemented similar regulations. The government's response to the pandemic resulted in deficits of 3% of GDP in 2020 and 0.3% in 2021, before returning to surpluses of 1.2% of GDP in 2022 and 0.2% in 2023, according to IMF. The IMF expects a surplus of 0.6% of GDP in 2024 and 0.3% in 2025, despite the spending pressures stemming from defense expenditures, infrastructure, and demographics. The 2025 budget ensures that the debt brake requirements will be met.

Switzerland's credit ratings are also underpinned by its healthy public sector debt position with the public debt ratio remaining low relative to other AAA-rated peers. According to the IMF, the public debt increased from 39.6% in 2019 to 43.2% in 2020, due to the pandemic related fiscal measures, before resuming its downward trajectory. The economic recovery and the withdrawal of support measures resulted in the debt ratio declining to 37.2% in 2022 and to 33.3% in 2023. The public debt ratio, as defined in the Maastricht Treaty, increased from 25.9% in 2019 to 28.2% in 2020 and has now stabilized at around 26% of GDP. Switzerland's prudent fiscal policy anchored by its debt brake rule has helped maintain low debt levels, supporting the country's resilience to shocks and helps the country to stand out among other highly rated sovereigns. All debt is denominated in local currency, and despite higher government bond yields since 2022, interest expenditures for the general government, as estimated by the IMF, will remain low.

In August 2023, UBS terminated the Public Liquidity Backstop (PLB) with the Swiss National Bank (SNB) of up to CHF 100 billion, guaranteed by the Swiss government and decided to terminate the CHF 9 billion Loss Protection Agreement (LPA) with the Swiss government. As a result, the Confederation will not have to assume any losses, reducing the contingent liability risks associated with the takeover of Credit Suisse by UBS. Morningstar DBRS views Swiss fiscal management and policy to be very strong, aiming consistently to address medium- and long-term fiscal challenges.

SNB Cut Policy Rate to 0.5%; Banking Sector Has Showed Resilience, But Risks Remain

The Swiss National Bank (SNB) cut interest rates for the fourth time last year in December, bringing the policy rate to 0.5%, with the underlying inflationary pressures decreasing again in the fourth quarter of 2024. The inflation rate as measured by the consumer price
index (CPI) fell from 1.1% in August to 0.6% in December, with the annual inflation at 1.1% in 2024. SNB forecasts average annual inflation at 0.3% for 2025 and 0.8% for 2026, based on the assumption that the policy rate is 0.5% over the forecast horizon.

The Swiss banking system has successfully managed to overcome key challenges in recent years and has shown resilience in the weaker macroeconomic environment with banks remaining liquid, improving profitability and with sound capitalisation. Asset quality is very strong with the non-performing loan ratio at 0.8% in Q2 2024. The banking sector is one of the most important pillars of the Swiss economy accounting for around 5% of value added, however its size, which is nearly 430% of GDP, means that shocks to banks, especially if systemically important, can have more pronounced effects on the economy.

On December 20, 2024, the Swiss Parliamentary Investigation Committee (PinC) released its finding on the collapse of Credit Suisse attributing the crisis to years of mismanagement at the bank. The report highlights the lack of effectiveness of its banking supervision, but also acknowledges the effectiveness of the Swiss authorities in facilitating the UBS takeover and safeguarding financial stability. The merger of the parent bank was completed at the end of May 2024 and that of the Swiss entity in July 2024. The full integration is scheduled to be completed by the end of 2026. The large size of the new group, results in a higher concentration in the Swiss banking system, which could ultimately increase contingent liability risks for the sovereign. However, the combined entity will have to comply with capital requirements that reflect the change in its systemic importance. In addition, banks' exposure to the real estate market remains a source of vulnerability for financial stability. Following the interest rate increases in 2022 and 2023, real estate price growth slowed down. The relatively mild past increases in interest rates in Switzerland, the high demand and low supply will most likely keep the housing market tight, with the risk of overheating in the market remaining. Switzerland's household debt-to-GDP ratio remains high at 130% at the end of 2023, nevertheless risks are mitigated by the large and liquid balance sheet of households. All these factors weigh on the negative adjustment in the "Monetary Policy and Financial Stability" building block assessment.

Following an assessment of the `too-big-to-fail' regulation relative to the Credit Suisse crisis, in April 2024 the Federal Council proposed a package of measures with a focus on strengthening the financial sector's regulations and aims to present two packages for implementation and Federal Council's approval in the first half of 2025. The focus of the measures is to strengthen the regime of prevention (including tightening of capital requirements), ensuring liquidity in a crisis, and expand the resolution plans and improve the coordination between authorities. Furthermore, the SNB continues to monitor mortgage and real estate market developments closely and has reactivated the countercyclical capital buffer which aims to enhance the resiliency of the financial system.

Switzerland and the EU Reach an Agreement

On December 20, 2024, Switzerland and the EU reached a significant agreement aimed at enhancing their economic and political ties. Switzerland and the European Union (EU) announced that negotiations on a package approach were completed, aiming to stabilize and deepen their bilateral relations. The broad package includes the update of existing agreements on the free movement of people, air and land transport, trade in agricultural products, and new agreements on food safety, health and electricity and will allow Switzerland's participation in EU programmes. The agreement must be ratified by the European and Swiss parliaments. The EU is Switzerland's largest trading partner and Morningstar DBRS considers that the completion of an agreement will be an important step in maintaining a close relationship with the EU ensuring seamless cross-border trade, while serving as a foundation for long term collaboration.

Switzerland's political environment is characterized by its federal democratic system, high institutional capacity and a low level of corruption as reflected in the World Governance Indicators. The stable political system, combined with neutrality in international conflicts, has long made Switzerland a safe haven for investors. Following the October 2023 elections, the parliament elected the Federal Council in December 2023. Since then, the Council maintained economic policy continuity.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental, Social or Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024)
https://dbrs.morningstar.com/research/437781.

For more information on the Rating Committee decision, please see the Scorecard Indicators and Building Block Assessments: https://dbrs.morningstar.com/research/446026/.

Notes:
All figures are in Swiss franc unless otherwise noted. Public finance statistics reported on a general government basis unless specified.

The principal methodology is the Global Methodology for Rating Sovereign Governments (15 July 2024) https://dbrs.morningstar.com/research/436000. In addition Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings https://dbrs.morningstar.com/research/437781 in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The sources of information used for these credit ratings include Federal Council, State Secretariat of Economic Affairs (Economic Forecasts December 2024), Federal Department of Finance (Federal Finances at a glance, August 2024 ), Swiss National Bank (Quarterly Bulletin 4/2024, Financial Stability Report 2024), Swiss Parliament (Lessons from the Credit Suisse crisis - PInC identifies need for action, December 2024), Federal Department of Foreign Affairs (Switzerland's European Policy, August 2023), European Commission (The Commission and Switzerland complete negotiations to bring the EU-Switzerland bilateral relationship to a new level, December 2024), European Central Bank (ECB), Eurostat, OECD, IMF (WEO October 2024), World Bank, BIS, Our World in Data, the Social Progress Imperative, 2020 Global Competitiveness Reports from the World Economic Forum, UNHRC, and Macrobond. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, these are unsolicited credit ratings. These credit ratings were not initiated at the request of the issuer.

With Rated Entity or Related Third Party Participation: YES
With Access to Internal Documents: NO
With Access to Management: NO

Morningstar DBRS does not audit the information it receives in connection with the credit rating process, and it does not and cannot independently verify that information in every instance.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and credit ratings are under regular surveillance.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://dbrs.morningstar.com/research/446027/.

These credit ratings are endorsed by DBRS Ratings GmbH for use in the European Union.

Lead Analyst: Spyridoula Tzima, Vice President, Global Sovereign Ratings
Rating Committee Chair: Nichola James, Managing Director, Global Sovereign Ratings
Initial Rating Date: 14 July 2011
Last Rating Date: 19 July 2024

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