ACRA has affirmed the following ratings to the Swiss Confederation (hereinafter, Switzerland, or the country) under the international scale:
- Long-term foreign and local currency credit ratings at AAA;
- Short-term foreign and local currency credit ratings at S1+.
The outlook on the long-term foreign currency credit rating is Stable and local currency credit rating is Stable.
The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.
Credit rating rationale
Switzerland’s AAA sovereign credit rating is based on a developed, diversified, innovative and competitive economic structure, a moderate level of public debt, and a strong external position. In ACRA’s opinion, the risks of a high level of private debt and the large size of the banking sector, which may potentially become contingent liabilities for the government, are balanced by the high level of household assets, as well as the high quality of assets and capital adequacy of Swiss banks.
According to ACRA, the economy of Switzerland, one of the ten richest countries in the world in terms of GDP per capita, is expected to grow by 3.5% in 2021 after contracting by around 3% in 2020. It is supported by the global recovery and so far a low number of new COVID-19 cases within the country, with risks for this scenario being mutations of the virus and low resiliency of current vaccines to these variants. Due to recovering domestic demand, ACRA expects a pickup in inflation in 2021. Therefore, the inflation rate is likely to be inside the 0–2% target corridor set by the Swiss National Bank (SNB). ACRA expects the heightened risk of franc appreciation to cause the SNB to keep its policy rate in negative territory for an extended period and undertake interventions in the foreign exchange market when necessary.
Unlike many developed countries, after a relatively large anti-crisis package in 2020, Switzerland managed to preserve its room to maneuver for countercyclical budget policies in the future. Its public debt amounted to 42.9% of GDP by the end of 2020, having recorded a modest debt increase compared to the onset of the pandemic. At the end of 2019, general government debt stood at a moderate 39.8% of GDP.
In 2021, Switzerland expects to record a deficit budget, having decided to continue some anti-crisis programs this year, which may push up the country’s public debt to about 43–46% of GDP by the end of 2021. However, ACRA assumes that the strong fiscal rule at the federal level, which makes up almost a third of GG revenue, and historically good compliance with it, will trigger fiscal consolidation in the near term. The federal government’s fiscal rule mandates balancing the budget throughout the business cycle by allowing for a certain level of deficit during times of recession and mandating surpluses during times of economic growth, while also making exceptions for extraordinary circumstances.
However, in the medium to long term, maintaining public debt at a moderate level may be challenged by the need to increase spending due to the country’s population aging, which has been partially mitigated by the increased contributions to pension funds in 2020. There is a proposal by FDP (a political party) to organize a referendum on increasing the retirement age and linking it to life expectancy, while the federal government also plans to raise value-added tax rates, and increase incentives to work after the age of 65 as additional measures to alleviate the pension related burden.
Switzerland’s external position is strong, it is supported by persistently high current account surpluses and a very high positive international investment position. ACRA assumes Switzerland’s export structure, which has a big share of pharmaceutical exports, will allow the country to maintain a current account surplus in 2021 and beyond. A very high positive net international investment position of around 94% of GDP as of the end of 2020 is the result of the country’s competitive export-oriented goods and services sector, which allowed a high positive current account balance of 8% of GDP on average to be maintained over the last five years (2015–2019).
A relatively high level of external debt coverage and investors’ perception of the franc as a reserve currency also support the strength of the country’s external position. ACRA notes that investors turn to franc-denominated assets during periods of global economic slowdown and heightened international uncertainty. This triggers appreciation of the franc, which in turn negatively affects Swiss exports due to their increased cost. To prevent this in 2020, the SNB resorted to monetary policy measures aimed at preventing appreciation of the franc, including injecting francs into the market and accumulating foreign currency liquidity. These measures resulted in international reserves increasing from 118% of GDP at the beginning of 2020 to about 133% of GDP as of the end of 2020. However, interventions have been minor in 2021 with no substantial effect on the level of international reserves. The increased level of international reserves improved the outstanding total external debt coverage ratio from 43% at the beginning of the year to 47.3% at the end of Q1 2021 and that of short term external debt from 83.9% to 86.3%, respectively.
Unlike the public sector, the debt load of Switzerland’s private sector is very high, which is associated with a prolonged period of low interest rates. At the end of 2020, household debt amounted to 133% of GDP. This is high even when compared to other European countries with similar economic structures. The lion’s share (about 90%) of household debt is made up of mortgage loans granted by Swiss banks. The fact that mortgage lending is a significant part of portfolios held by some large banks may be problematic for the country’s banking sector in the event of a sudden deep real estate price correction if and when it happens. However, this risk is hedged by the high level of household wealth, which stood at 47% of GDP at the end of 2020.
It is also worth noting that at the end of 2020, the total volume of banking sector assets amounted to about 470% of nominal GDP. The sheer size of the banking sector poses a contingent liability risk and places Switzerland in the group of countries whose economies are highly dependent on the banking sector. The mitigating factors are high capital buffers maintained by the biggest banks and high asset quality — according to the latest Financial Stability Report compiled by the SNB, the Tier 1 capital ratio of the two major national banks, UBS and Credit Suisse, are 19.6 and 17.6, respectively, as of Q1 2021. The recent cases of Archegos and Greensill demonstrate the ability of Credit Suisse to absorb unexpected shocks financially, though reputational damage may take a bit longer to restore.
In ACRA’s view, Switzerland can be considered a “safe haven” due to the highest level of trust in public institutions and the authorities and high quality of public governance. Over the past ten years, Switzerland has had some of the highest and most stable World Governance Indicators (WGIs) as measured by the World Bank. This is a reflection of the high quality of institutional governance and the very favorable environment for allocating resources within the economy. However, the recent developments in negotiations between Switzerland and the EU over the framework agreement, which has been halted, create much uncertainty about country’s future relationship with its major European partners.
Sovereign model application results
Switzerland has been assigned an AAA Indicative credit rating in accordance with the core part of ACRA’s sovereign model. One of the modifiers in the modifiers part of the model allows the Indicative credit rating to be decreased. This includes the following, which is determined by the Methodology for Credit Rating Assignment to Sovereign Entities under the International Scale:
- Contingent liabilities and the risk of them materializing.
Positive modifiers are the following:
- Sustainability of economic growth;
- Fiscal policy framework and budget flexibility;
- Market access and sources of funding;
- Debt sustainability;
- Balance of payments vulnerabilities.
A Final credit rating of AAA has been assigned to the country. There are no extraordinary factors that could result in an adjustment of the Final rating. In connection with this, the Assigned credit rating remains at AAA.
Potential rating downgrade factors
Potentially serious financial shock for Switzerland’s banking sector associated with a sudden deep price correction in the real estate market.
No outstanding issues have been rated.
The sovereign credit ratings were assigned to Switzerland under the international scale based on the Methodology for Credit Rating Assignment to Sovereign Entities under the International Scale and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities.
The sovereign credit ratings of Switzerland were published by ACRA for the first time on September 10, 2019. The sovereign credit ratings and their outlook are expected to be revised within 182 days following the publication date of this press release as per the Calendar of sovereign credit rating revisions and publications.
The sovereign credit ratings are based on information from publicly available sources and ACRA’s own databases. The sovereign credit ratings are unsolicited. The Swiss government did not participate in the credit rating assignment.
In assigning the credit ratings, ACRA used only information, the quality and reliability of which was, in ACRA's opinion, appropriate and sufficient to apply the methodologies.
ACRA provided no additional services to the Swiss government. No conflicts of interest were discovered in the course of the sovereign credit rating assignment.