OREANDA-NEWS. Fitch Ratings has affirmed the Swiss Canton of Zurich's Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at 'AAA'and Short-Term Foreign Currency IDR at 'F1+'. The Outlooks on the Long-Term IDRs are Stable.

The affirmation reflects Zurich's high degree of autonomy, as demonstrated by its power to adjust personal and corporate income tax rates, in line with all Switzerland's cantons, its wealthy and dynamic economy and its track record of sound financial performance and flexibility. The affirmation also reflects a slightly decline in budgetary performance and a potential increase in debt. The Stable Outlooks reflect Fitch's expectation that the canton's budgetary performance and debt level will remain in line with its rating, despite slightly weaker debt coverage following a proposed decline of the operating margin from 2.3% in 2015.


Zurich's operating margin improved to 2.3% in 2015. Despite lower financial revenues and slightly growing interest costs, the current margin was 3.7%, covering 43% of capex. The increase of Zuercher Kantonalbank's (ZKB; AAA/Stable/F1+) equity capital by CHF500m in 2015 resulted in higher capex and a corresponding decline in capital revenues eventually resulted in a deficit before debt variation of 3.6%. According to the canton's 2016 budget and medium-term 2017-2019 plan, the current margin is expected to remain weak between 1.1% in 2017 and 3.7% in 2016 and a roughly equalised balance before debt underpinned by the canton's obligation to achieve a balanced budget over 2012-2019 on a cumulative basis.

Zurich's direct risk declined to CHF5,524m at end-2015 from CHF6,284m at end-2014. The canton paid back debt on a net basis of CHF225m due in 2015 and reduced its short-term debt to CHF400m (2014: CHF935m). The canton's medium and long-term debt may increase by CHF93m until 2019. We expect Zurich to close funding gaps with occasional short-term debt. The canton's debt level will remain sound over 2016-2019 with debt to current revenue remaining below 40%.

Cash and cash equivalents declined to CHF561m at end-2015 from CHF1.54bn in 2014 following the repayment of maturing debt during 2015. Zurich's cash reserves and committed credit line in place ensure good access to short-term liquidity in case of need, further mitigating the canton's refinancing risk.

Zurich has contingent liabilities, and net overall risk was about CHF23bn at end-2015. Most of this relates to guaranteed obligations of the canton's 100%-owned ZKB and the unfunded portion of Zurich's pension fund. Fitch views risk stemming from ZKB as limited and the pension fund prudently managed following capital measures and a high coverage ratio of 97.2% at end-June 2016.

Fitch expects real GDP growth for Switzerland of 1.2% in 2016 and 1.7% in 2017. Due to the canton's well-diversified and dynamic economy, Zurich should continue to mirror the national performance and could even outperform it. However, the abolition of the EUR-CHF peg is still pressuring the canton's industry, trade and tourism and the effects of the Brexit vote leave the canton's economic growth with some uncertainties.


Given the canton's tax dynamics and tax raising potential supporting revenue generation, a downgrade is unlikely. However, an operating margin close to zero and a continued increase in debt with a direct debt to current revenue consistently exceeding 50% (2015: 38%), or its contingent risk requiring ongoing capital injections, would lead us to review Zurich's ratings.

Significant changes in the canton's financial leeway or additional financial obligations, in either the intra - or inter-cantonal context, could also be rating negative. Any negative rating action on Switzerland would trigger rating action on Zurich.