ERA rates Switzerland AAA, outlook Stable |
Friday, 05 October 2018 | ||||||
ERA issues the following unsolicited credit rating for Switzerland. Long term unsolicited credit rating at level AAA. The agency expects a stable outlook for the following 12 months. The rated entity was notified on October 3, 2018, about the rating and after the notification there weren’tchanges or amendments in the rating. This is the first release of the rating for distribution. The credit rating assigned to Switzerland stems from a strict fiscal rule, high level of foreign reserves and a very high assessment of governance and economic stability. The fiscal rule, which assumes balanced budgets over the business cycle, is lowering the debt to GDP ratio, which is expected to decline to even lower levels in the future. Rating componentsMacroeconomic factors of rating assessmentThe Swiss economy has somewhat below average growth perspectives in the medium term, low government deficit and debt levels, and plentiful resources to tackle possible headwinds. Growth perspectives of a high income country: Inflation and nominal GDP growth rates Switzerland also experienced a period of very low nominal GDP growth. In the last five years, nominal GDP growth has averaged at 1.3%. This was due to negative price growth. The ultra-loose policy of the Swiss National Bank, which keeps the three month benchmark LIBOR rate at -0,75%, the lowest in the world, succeeded in ending deflation. The year-on-year change of the consumer price index rose above 1% recently, for the first time since 2010. A pick-up in inflation has had a positive effect on the nominal GDP growth, which is thus expected to grow by more than 2.5% in the coming years. Balanced budget and low debt levels: Unlike other countries with extremely low nominal GDP growth levels (i.e. Japan or Italy), Switzerland did not experience a worsening of fiscal health. This is due to a balanced-budget fiscal rule. It was approved by means of a referendum and took effect in 2003. According to this rule, the budget must be in balance over the business cycle. It allows certain adjustments by either allowing for deficits during recessions or forcing lawmakers to have surpluses during economic booms. The Swiss government follows this rule strictly. The highest deficit recorded during the last decade was only -0.4% GDP. Balanced budgets are the main factor contributing to the decline in debt levels. Debt to GDP ratio fell from its peak of 59.6% in 2004 to 42.8% in 2017, even in a low nominal GDP growth environment, and is expected to decline further. Foreign currency reserves higher than GDP: A massive build-up in foreign reserves has occurred during the past decade, when the Swiss National Bank was fighting deflationary risks by selling large quantities of Swiss francs on the foreign-exchange markets in exchange for foreign assets. Foreign-exchange reserves currently exceed 100% of GDP and can cover almost 20 months of imports. The foreign dependency indicators are among the best in the world. The risk of a currency crisis is, thus, extremely low. Foreign currency reserves in USD and months of imports High population growth: Forward-looking factors of rating assessmentOne of the highest levels of governance indicators and R&D spending in the word. One of the world’s leaders in R&D spending: In 2015, Switzerland invested 3.4% of its GDP into research and development, the third highest in the world after Israel and Korea. Switzerland is also among the world’s leaders is patent applications and R&D personnel per capita. The economy has, thus, a very high innovative potential, which is likely to contribute to higher potential GDP growth levels in the future. Trust in public institutions: According to the EU survey on income and living conditions, Switzerland has by far the highest level of trust in the political system and scored among the best in trust in police and justice system. This implies a very supportive environment for the allocation of the resources in the economy and thus for the future potential growth. Very high governance indicators: Switzerland scores among the best in the world in World Governance Indicators, which are released by the World Bank. This implies high quality of government institutions and low rent-seeking.
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International Monetary Fund |
World Bank |
Bank for International Settlements |
Eurostat |
The Federal Statistical Office |
Swiss National Bank |
Regulatory disclosure
The unsolicited credit rating and outlook were issued in accordance with ERA methodology for sovereign entities in the version from July 4, 2018 (available at www.euroratings.co.uk, section Methodology). In the same section, there is a rating scale, including an explanation of the importance of each rating category, and a default definition. Information on the rate of historical failure is available at www.cerep.esma.europa.eu, and the explanatory statement of the meaning of those default rates is available at www.euroratings.co.uk (Regulatory Framework/Disclosure). This rating is issued as an unsolicited rating, i.e., was not initiated by the rated entity or a related third party. The rated entity did not participate in the rating process and the information and documentation for its development was obtained from publicly available sources in accordance with ERA methodology. ERA did not have access to the rated entity’s internal documents. ERA, in the context of routine care, verified all sources entering the rating process. ERA considers the scope and quality of the information entering the analytical process to be sufficient to assign a credit rating. The disclosure of the unsolicited rating and outlook was preceded by the approval of the Rating Committee. No actual or potential conflicts of interest have arisen. Since July 30, 2012, ERA has been a registered credit rating agency according to the Regulation of (EC) No 1060/2009 of the European Parliament and of the Council of September 16, 2009 on credit rating agencies.
Download pdf:
Switzerland_Sovereign Rating Report.pdf
Approved by the Rating Committee:
Natalia Porokhova, Head of credit rating analysts
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