Fitch Affirms Switzerland at 'AAA'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed Switzerland's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'AAA' with Stable Outlooks. The issue ratings on Switzerland's senior unsecured foreign and local currency bonds have also been affirmed at 'AAA'. The Country Ceiling has been affirmed at 'AAA' and the Short-term foreign currency IDR at 'F1+'.
KEY RATING DRIVERS
Switzerland's 'AAA' rating reflects its track record of prudent economic and fiscal policies, a diversified and wealthy economy, and high levels of human development. Switzerland surpasses its 'AAA' peers on most key indicators. GDP per capita is 1.5x the 'AAA' median. General government gross debt is low (34.4% of GDP estimated for 2015) and the government runs a small budget surplus. An estimated net external creditor position of 159% of GDP in 2015 is underpinned by a history of current account surpluses and the Swiss franc's status as a global reserve currency.
Fitch expects the Swiss economy to recover from the impact of the franc's appreciation against the euro in 2015. We forecast GDP growth of 1.2% in 2016 and 1.7% in 2017, up from 0.9% in 2015. These forecasts assume robust private consumption and an uptick in investment. We expect low interest rates and lower oil prices to further support higher real wages. Sustained demand for Swiss goods and modest recovery in the eurozone will spur investment in the export-oriented sectors and rising property prices and low interest rates will also likely support investment in the housing and construction sector.
Annual change in the consumer price index (CPI) remains negative and we assume the Swiss National Bank will maintain a negative policy rate over the forecast period. CPI inflation bottomed out at -1.4% between August and November 2015, reflecting decreasing downward pressure from the removal of the ceiling on the franc against the euro early in 2015. On an annual average basis, we expect inflation to move back to -0.5% in 2016 before turning positive in 2017 at +0.3%.
The banking sector is large and concentrated, with the two largest banks' assets representing about half of the total sector's assets at the end of 2015. However, Swiss banks are better capitalised (on the basis of risk-weighted capital) than most European peers. Vulnerabilities arise from a potential correction in house prices, as Swiss banks' mortgage lending represented 84% of domestic bank loans in 2014. Residential property prices remain high, boosted by very low interest rates, and high immigration supporting population growth. The increase in mortgage loans has pushed up household debt, and although upward pressures eased in 2015, the residential mortgage debt/GDP ratio is still 150%.
We believe prolonged negative interest rates will put further pressure on the banks' core business margins, notably on domestically focused commercial banks, which are less diversified by nature than the large banks. Following the Swiss National Bank's decision in January 2015 to cut rates further, and the subsequent decline of capital and money market interest rates, mortgage lending rates are little changed, resulting in a slight improvement in interest margins.
The Stable Outlook reflects Fitch's assessment that the downside risks to the 'AAA' rating are currently not material. Nonetheless, negative rating action could result from a material shock to the financial sector, for example due to a sharp correction in the Swiss residential real estate market, or large losses on trading and international lending portfolios.
We assume that the EU and Switzerland will not permit a costly rupture of economic relations even if they cannot agree on amending Switzerland's current Free Movement of Persons Agreement with the EU.
Lengthening life expectancies and an environment of extremely low interest rates weigh on the sustainability of the Swiss pension system and public finances over the longer term. We assume that the reforms necessary to ensure sustainability will be passed before demographic pressures significantly erode the fiscal position.