Rating Action: Moody's affirms Switzerland's Aaa rating and maintains a stable outlook Freitag, 07. Dezember 2018 - 23:06

New York, December 07, 2018 -- Moody's Investors Service (Moody's) has today affirmed the Government of Switzerland's Aaa issuer and senior unsecured debt ratings and maintained the stable rating outlook.

Concurrently, Switzerland's Aaa/Prime-1 country ceilings for foreign currency-denominated debt and deposit ratings and its Aaa country ceilings for local currency debt and deposit ratings remain unchanged.

RATINGS RATIONALE

The key drivers for the affirmation of the Aaa rating and maintenance of a stable outlook are the following:

1) Switzerland's economic resilience, reflecting the combination of very high economic and institutional strength and a high degree of economic diversity, wealth and flexibility.

2) Switzerland's very high fiscal strength, supported by relatively low and still-improving government debt metrics.

The rationale behind maintaining the stable rating outlook relates to Moody's expectations that very effective Swiss governance and proactive policy framework will allow the country to successfully confront the near- and longer-term challenges the country faces. These include implementing reforms in its corporate tax system to conform to international best practices and strengthening the funding of the first and second pillars of its pension system. Switzerland is also in the process of negotiating a new framework agreement to replace the many agreements and treaties that now constitute Switzerland's formal relationship with the European Union (EU), a process that was supposed to conclude in 2018 but that could be delayed into 2019.

FIRST DRIVER: EXCEPTIONALLY STRONG ECONOMIC RESILIENCE

The first driver behind the decision to affirm Switzerland's rating relates to the country's exceptional economic resilience, as captured in Moody's "very high (+)" assessment for both economic and institutional strength and as demonstrated by the ability of the economy to withstand the impact of past domestic and external shocks. The economy benefits from its very high wealth, the diversity of its productive base spanning the spectrum from agriculture to high tech, a multitude of trade relationships and its geographic location in the heart of some of the most prosperous countries in Europe. A significant share of its GDP is dedicated to investments in research and development, fostering a level of innovation that helps to maintain productive and export competitiveness.

One characteristic that showcases Swiss economic resilience is the scale of its economic rebound after the global financial crisis compared to peers. The size of Switzerland's economy in 2017 was 15.4% higher in real terms (own currency) than in 2007, demonstrating somewhat stronger performance than those of other Aaa/stable-rated sovereigns such as Netherlands and Germany and the same as the United States, which were 8.8%, 12.9% and 15.5% larger, respectively, although a few other Aaa-rated countries such as New Zealand and Australia had even stronger rebounds. Such resilience derives from Switzerland's open and well diversified economy, featuring a major financial services center and being an important producer of chemicals, pharmaceuticals and other high-value-added manufactured goods.

The country's very high level of competitiveness is also reflected in international surveys like the Global Competitiveness Index by the World Economic Forum (WEF), according to which Switzerland consistently ranked as the top performer over the past eight years. The new WEF index places Switzerland in fourth place, after the US, Singapore and Germany. Switzerland's current account has remained in substantial surplus for decades, such that the country's net international investment position (NIIP) was 127% in 2017 -- compared to Germany's NIIP surplus of 59% of GDP and the US' NIIP deficit of 41% of GDP in 2017.

Exceptional institutional strength is evidenced by the consistency of macroeconomic policy norms and the proactive response to various challenges as they emerged over past decades. Such policy responsiveness has cemented economic, political and financial stability despite or perhaps because of the country's strong direct democracy principles. Switzerland's system of direct democracy involves putting legislative decisions of national importance before the electorate for their approval. Although at times, this process has complicated the enactment of new initiatives, it has proven an effective mechanism to nurture consensus and support the reaction function of the government.

SECOND DRIVER: SWITZERLAND'S VERY HIGH FISCAL STRENGTH

The second driver behind Moody's decision to affirm Switzerland's Aaa rating and maintain the stable outlook is the strength of the government's finances. The government's track record of adhering to strict fiscal rules has placed its general government debt-to-GDP ratio on a steady downward trajectory for more than a decade, with the debt ratio dropping from a peak of 47.9% of GDP in 2003 to an estimated 27.5% of GDP this year, the third lowest of all Aaa-rated countries. The results underscore the country's resilience to economic challenges faced elsewhere in the region and its status as a safe haven for investment.

Still, similar to the situation in most other advanced and many emerging market economies, the aging of the Swiss population will challenge the public pension system and in turn, the government's finances, particularly when Swiss pension funds will struggle to generate sufficient investment income to meet their obligations in an environment of historically low and even negative rates of interest. The government has therefore continually pursued reforms to preserve the financial viability of the pension system, having introduced adjustments meant to avoid the need for drastic tax increases to cover higher health and old-age expenses as demographics deteriorate. After the electorate rejected the latest pension reform proposal in September 2017, another attempt to introduce changes that will support the system's sustainability will be put to a referendum next year.

Moody's notes that the Swiss government's adjustment capacity is significant, with no major constraints on its ability to generate additional revenue or restrain expenditures and ready access to finance in the event of need. Under its baseline assumptions for growth and in light of the government's track record of proactive policymaking, Moody's expects that Switzerland's public debt ratio will remain low and continue to decline modestly throughout the forecast horizon while the challenges facing its pension funds will be very gradually lowered too through pending reforms.

RATIONALE FOR STABLE RATING OUTLOOK

The stable rating outlook reflects Moody's view that Switzerland will capably manage its main credit challenges: its implementation of pension reform and corporate tax reform, the latter to comply with commitments made to the EU and OECD; reaching a new framework agreement with the EU intended to streamline the many treaties that now govern the relationship; and building buffers and implementing regulations to contain the financial stability and credit risks posed by the very large banking system.

An important near-term challenge is Switzerland's plan to put the revamped corporate income tax (CIT) reform to a referendum in May 2019. Swiss voters rejected the previous attempt at reform in February 2017 but the country needs to fulfill its international commitments to eliminate anti-competitive tax practices to avoid incurring penalties from some of its major trading partners such as the EU and the US. Should the measures be approved, the revised CIT reform would also help ameliorate some of the funding pressures on the old-age pension system (AHV) for a few years. Additional pension reforms to address longer-term funding shortfalls for the AHV as well as to raise the coverage ratio of the second pillar of the pension system to accommodate increased longevity and lower conversion rates.

Regarding Switzerland's relationship with the EU, Moody's views the overwhelming defeat of the "Swiss law first" referendum in late November as evidence that maintaining international relationships and commitments is extremely important to the Swiss electorate as well as to the Swiss government. Delays in reaching a new framework agreement are in part attributable to Brexit, because the EU has been reluctant to agree to any particulars with the Swiss that might set a precedent for the Brexit negotiations. Although reaching an agreement may be difficult by the end of 2019 because of the European parliament elections in May and Switzerland's own parliamentary and government elections later in the year, Moody's thinks that both sides see it in their interest to make progress as quickly as possible.

With respect to the banking system, Swiss banks' healthy loan books and capital buffers are among the best in Europe. The banks' strong solvency will cushion them from tail risks such as a sharp property price correction. The Swiss government remains committed to improving stability in domestic financial markets so as to protect the large Swiss financial system and the economy from potential shocks caused by a failure of one of the country's larger banks. It has increased capital and reserve requirements that are designed to insulate the government from the potential contingent liability arising from the large Swiss banking system.

WHAT COULD CHANGE THE RATING DOWN

Given the stable outlook, Moody's does not anticipate downward rating pressure to emerge on Switzerland's Aaa government rating over the near- to medium-term time horizon. However, such pressure would arise in the unlikely event of a sustained deterioration in the government's economic resilience or fiscal strength over several years. Although not a current source of concern given the financial health of the banking system and the strong regulatory framework, a system-wide crisis in this large industry could place some pressure on the sovereign credit profile if it were to lead to severe economic disruptions and on a sustainable basis weaken the balance sheet of the government.

GDP per capita (PPP basis, US$): 62,125 (2017 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 1.7% (2017 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 0.8% (2017 Actual)

Gen. Gov. Financial Balance/GDP: 1.3% (2017 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: 9.5% (2017 Actual) (also known as External Balance)

External debt/GDP: [not available]

Level of economic development: Very High level of economic resilience

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 04 December 2018, a rating committee was called to discuss the rating of the Government of Switzerland. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's institutional strength/ framework, have not materially changed. The issuer's governance and/or management, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. The systemic risk in which the issuer operates has not materially changed. The issuer's susceptibility to event risks has not materially changed.

The principal methodology used in these ratings was Sovereign Bond Ratings published in November 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Kristin Lindow
Senior Vice President
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
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JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653