For the updated report accompanying this review, click here.

Rating action

Scope Ratings GmbH (Scope) has today affirmed the Swiss Confederation’s long-term local- and foreign-currency issuer and senior unsecured debt ratings at AAA. Scope has also affirmed the short-term issuer ratings in local and foreign currency at S-1+. All Outlooks are Stable.

Summary and Outlook

Switzerland’s AAA ratings are underpinned by: i) its wealthy and well-diversified economy, highly skilled labour force, and institutional strengths including a stable, consensus-oriented, effective policy framework, which, in aggregate, underpin a high degree of economic resilience; ii) prudent fiscal management and the authorities’ strong commitments to longer-term debt sustainability, underpinned by stringent, constitutionally anchored budgetary rules and favourable financing conditions; and iii) a significant net external asset position, highly competitive exporting industries and the global reserve currency status of the Swiss franc. Challenges include: i) a very large banking sector in relation to GDP, posing contingent liability risk to public finances; and ii) a gradual build-up of imbalances in the real estate market, supported by the low interest-rate environment and reflecting a continued increase in residential property prices and imbalances between regional price and income developments. These risks are mitigated by the Swiss banking sector’s strong credit fundamentals, significant household wealth and the Swiss Financial Market Supervisory Authority’s prudent supervisory framework.

Switzerland’s formal withdrawal from negotiations on the institutional framework agreement with the EU prolongs uncertainty over Swiss-EU near-to-medium-term trade relations. This could have negative effects on the country’s economic outlook over the longer term.

The Stable Outlook reflects Scope’s view that risks to the ratings are balanced over the next 12 to 18 months.

The ratings/Outlooks could be downgraded if, individually or collectively: i) financial stability risks materialised with significant negative implications for the economic growth and public finance outlook – for example, via a sharp correction in the housing market or large, persistent losses weakening banks’ balance sheets; and/or ii) there was an unforeseen deterioration in policy predictability and/or a significant deterioration in relations with the EU, leading to trade disruptions and significant, lasting economic repercussions.

Rating rationale

First, Switzerland’s credit profile benefits from its wealthy and highly competitive economy, with GDP per capita at a high USD 93,516 at the end of 2021. Real growth averaged 1.9% from 2015-19 and Switzerland ranked third globally in the Observatory for Economic Complexity’s economic complexity index in 2019, highlighting the economy’s very high level of sophistication and diversification.

In 2020, due to the outbreak of the Covid-19 pandemic, real GDP declined by a relatively moderate 2.5%, compared to a 6.4% decline in the euro area. The recovery in 2021 has been robust, especially in the second and third quarter with YoY growth rates of 8.0% and 3.3%, respectively, driven by higher private consumption and net exports, and quarterly nominal output reached its pre-crisis level in Q2 2021. Scope expects real GDP growth of 3.5% in 2021, followed by 2.7% in 2022 and 2.0% in 2023. Due to the robust recovery and effective policy response during the crisis, Scope has revised its potential GDP growth estimate to around 1.6%, taking into account an expected stable working age population between 2022 and 2026.

Inflation has historically been very low in Switzerland due to structural factors and deflationary pressures stemming from Swiss franc appreciation making imports relatively cheaper. Inflation averaged around 0% from 2015 to 2020. In 2021, higher energy prices led to more elevated CPI increases, at 1.5% YoY in December 2021, and averaging 0.6% over the full year. Yet these increases are still modest compared to very high inflation in peer economies such as Germany. The Swiss National Bank has maintained its expansionary monetary policy, with a 0.75% interest charge on banks’ sight deposits, and significant foreign exchange interventions.

The Swiss labour market performed robustly during the Covid-19 crisis. The unemployment rate returned to its pre-crisis level of 2.3% in January 2022, from a peak of 3.5% in May 2020. Total employment surpassed its pre-crisis level of around 5.15m persons at the end of the third quarter 2021. Labour market outcomes are supported by the Swiss economy’s low reliance on industries affected by pandemic containment measures, a high adaptability to telework, and a short-time work scheme, which covered 1.08m persons (around 21% of total employment) at its peak in April 2020.

Switzerland’s AAA credit ratings are anchored by very robust public finances. The central government’s debt brake and debt brakes in most cantons call for balanced budgets over the economic cycle. This has resulted in general government budget surpluses averaging 0.9% of GDP over 2015-19.

The government’s fiscal response to the Covid-19 crisis was effective, targeted and sizeable. The main crisis support measure was a swiftly implemented short-time work scheme, which cost CHF 10.8bn in 2020 and CHF 4.5bn in 2021. CHF 800m has been budgeted for the scheme in 2022¹. The aggregate cost of CHF 16bn represents approximately 41.2% of total budgeted crisis measures of CHF 39bn for 2020-22, representing 5.5% of 2020 GDP. Other crisis tools include grants to businesses affected by pandemic containment measures – extended to end-2022 – amounting to CHF 6.8bn, or 17.4% of the total fiscal response, and a program co-financed with the cantons, so called ‘Härtefallfonds’. These measures, along with lower tax revenues, resulted in budget deficits of 2.8% of GDP in 2020 and an estimated 1.7% of GDP in 2021. Scope expects the 2022 general government budgetary result to be broadly balanced, driven by a phase out of support measures and higher tax revenues. Along direct budgetary support, the Confederation also provided guarantees amounting to CHF 17.5bn to ensure access to funding for the corporate sector during the crisis.

The general government debt-to-GDP ratio has begun a downward trend, starting from an expected 40.9% in 2021 from 42.4% in 2020. From there it is projected to be on a comparatively flat trajectory in the years that follow, before ending the forecast horizon at 36.0% in 2026, below Switzerland’s debt ratio of 39.8% at the end of 2019. Above-potential economic growth over the coming years, the very low average cost of the outstanding debt portfolio (effective implied interest rate of 0.35% in 2022) and higher inflation exiting this crisis (assumption of an average GDP deflator of around 1% for 2021-23) support the downward trend in the debt ratio as do balanced budgets at the federal level, as prescribed by the debt brake law. Switzerland’s general government debt ratio of 42.4% in 2020 compares favourably to a 50% average of sovereign peers, and debt affordability metrics are excellent, such as a low 0.15% of GDP interest expenditures in 2020. In Scope’s view, Switzerland retains significant fiscal space.

Switzerland’s AAA ratings are bolstered by a strong external position. Current account surpluses averaged 7% of GDP over 2015-19 and narrowed to 2.8% of GDP in 2020 as a service surplus of CHF 800m in 2019 turned to a deficit of CHF 9.3bn in 2020. In the third quarter of 2021, the current account surplus amounted to CHF 24.4bn, or 13% of third-quarter nominal GDP. Switzerland’s current account resilience is underpinned by highly specialised, price-insensitive exporting industries, such as pharmaceuticals, which made up around 39% of goods exports in 2020. Switzerland’s is an external creditor nation, with a net international investment position of 115.3% of GDP at the end of September 2021, up from 72.2% in 2015. Further, the Swiss franc is considered a safe haven currency, and the Swiss National Bank holds large foreign currency investments of CHF 966bn in December 2021, or 130.5% of expected 2021 GDP.

Despite these credit strengths, Switzerland’s credit ratings face significant challenges in the medium run.

First, the large size of the Swiss financial system, at roughly CHF 3.8trn or 522% of GDP at the end of September 2021, represents a contingent liability risk to the government. In particular, the two globally active banks UBS and Credit Suisse are very large compared to the Swiss economy (both with total exposures of around 130% of GDP), due to the global reach of their wealth management and investment banking activities. Domestically active banks mostly engage in mortgage lending, which represents around 90% of their loans, increasing sensitivities to real estate repricing and interest rate risks. They also face structural profitability issues.

However, Scope acknowledges several factors mitigating financial stability concerns. First, UBS and Credit Suisse, as systematically important banks, must comply with too big to fail regulation, requiring them to maintain higher capital and liquidity ratios and recovery and emergency plans. In addition, the Swiss Financial Market Supervisory Authority oversees resolution planning.

Second, domestically active banks face increasing scrutiny of their mortgage lending, as underpinned by a recent increase in minimum down payments for mortgages for investment property. Additionally, the sectoral countercyclical buffer targeted at residential real estate mortgages will be reactivated to 2.5% in 2022, while the overall countercyclical buffer remains at 0%. Finally, system-wide capitalisation remains comfortable, with a CET1 ratio of 18.8% at the end of September 2021 and the non-performing loan ratio was at a low 0.7% of aggregate loans in Q3 2021. Recent stress testing by the Swiss National Bank also confirms the adequacy of capital buffers, including for the globally active banks². The Swiss National Bank also highlights, however, that macroeconomic stress tests cannot capture idiosyncratic risks, such as large losses recorded by Credit Suisse in 2021 related to Archegos, leading to provisions for credit losses of around CHF 4.3bn in 2021.

More broadly, the Swiss financial system shows signs of significant imbalances in the real estate market, which can also be observed in some of its peers countries. The country’s mortgage-to-GDP reached 153% at the end of 2020. House prices have continued to climb during the Covid-19 pandemic, rising 8.3% YoY in the fourth quarter of 2021 for single-family homes and 6.7% YoY for apartments. Mortgage lending growth remained stable at around 3% in 2020. Accordingly, private debt is high at around 278% of GDP, the highest such ratio among peers. This is offset by very high household wealth, reported at 404% of GDP at the end of 2020.

Secondly, as a highly open economy, Switzerland is sensitive to global trade shocks and relies on favourable trade relations with its main trading partners, such as the EU. The breakdown of negotiations in May 2021 on the institutional framework agreement with the EU, to consolidate bilateral agreements that govern Swiss-EU trade relation and access to the EU’s single market, represents a moderate longer-term risk to the Swiss economic outlook. The three main sticking points that ultimately led to the Swiss decision to end negotiations were on the EU’s Citizens' Rights Directive, wage protection and state aid provisions.

Trade relations between the EU and Switzerland are of macroeconomic importance for both parties. Switzerland is the EU’s fourth largest trading partner and accounted for 7.4% of the EU’s exports and 6.3% of imports in 2020. The EU is Switzerland’s largest trading partner by far. The EU accounted for around 41% of Switzerland’s exports and 50% of imports in 2020. A study by BAK Basel Economics found that a lapsing of agreements collected under the ‘Bilaterals I’ umbrella would leave the Swiss economy around 5%-7% smaller by 2035 than with the agreements in place³.

The first tangible impact of the collapsed negotiations was a lapsing of mutual recognition for conformity assessment of medical devices on 26 May 2021. The next such mutual recognition agreement to be reviewed and potentially lapse in the nearer term is on machinery⁴.

Scope expects overall constructive relations with the EU going forward, even as selective mutual recognition agreements lapse and/or are renegotiated. This is underpinned by not only the rejection in 2020 of a popular initiative that would have ended free movement of persons between Switzerland and the EU, but also the importance as respective trade partners. Further, Ignazio Cassis, now President of the Swiss Confederation, re-affirmed the constructive stance of the Swiss government towards the EU in November 2021 following a meeting with the European Commission’s Maroš Šefčovič.

Core variable scorecard (CVS) and qualitative scorecard (QS)

Scope’s core variable scorecard (CVS), which is based on the relative rankings of key sovereign credit fundamentals, provides an indicative credit rating of ‘aaa’ for Switzerland. The ‘aaa’ indicative rating can be adjusted by the qualitative scorecard (QS) by up to three notches depending on the size of relative qualitative credit strengths or weaknesses against a peer group of countries.

For Switzerland, the following relative credit strengths have been identified via the QS: i) macroeconomic stability and sustainability; ii) fiscal policy framework; iii) debt profile and market access; iv) current account resilience; v) resilience to short-term shocks; and vi) social risks. Conversely, relative credit weaknesses have been identified with regards to banking sector performance and financial imbalances.

Combined relative credit strengths and weaknesses identified in the QS indicate a sovereign credit rating of AAA for Switzerland.

A rating committee has discussed and confirmed these results.

Factoring of environment, social and governance (ESG)

Scope explicitly factors in ESG sustainability issues during its rating process via the sovereign methodology’s stand-alone ESG sovereign risk pillar, with a 20% weighting under the quantitative model (CVS) and the methodology’s qualitative overlay (QS).

Under governance-related factors captured in Scope’s core variable scorecard (quantitative model), Switzerland scores highly on a composite index of six World Bank Worldwide Governance Indicators. This reflects stable political conditions based on consensus-oriented, effective policy making. As a direct democracy, key political issues are decided by popular referenda. The federal council consists of seven members from the four major political parties, each heading one government department, and takes decisions based on consensus. Next elections will be in 2023.

As regards social risks, Switzerland’s CVS score reflects an ageing society via an elevated and increasing old-age dependency ratio, although this development will not be as rapid as in some peer economies, such as Germany and Finland. Income inequality – captured by the ratio of the income share of the 20% of persons with the highest household incomes to the 20% of persons in society with the lowest household incomes – is low in an international comparison and similar to that of Switzerland’s sovereign peer group. In addition, labour force participation of around 84% of the active labour force (ages 15-64) is well above the euro-area average and compares favourably to the ‘aaa’ peer group average. The ‘social risks’ component of the QS assessment is evaluated as ‘strong’, indicating social outcomes are strong and outperform ‘aaa’ sovereign peers. This reflects a low risk of poverty (8.7% of the population affected by income poverty in 2019) and strong educational outcomes, as shown by a high share of persons with tertiary education and high average performance in mathematics, reading and sciences according to 2018 PISA results. Challenges are associated with a high share of part-time labour among women (almost 60% in 2020), reflecting high cost for child-care, but also high wages; and a relatively high unemployment rate among foreigners. In the longer term, an ageing population will make the pension system’s first pillar, the AHV system, more costly. A reform of the system to improve long term financial viability was recently approved by parliament. This legislation still needs to be approved by popular referendum.

Finally, in the sovereign ESG pillar’s environmental risk sub-category, Switzerland’s performance is in line with that of indicative sovereign peers. This is due to a high score on the natural disaster risk assessment vis-à-vis the World Risk Index, a high score for the economy’s carbon intensity (proxy for transition risk to a greener economic model), and relatively poor performance in terms of its footprint of consumption relative to available biocapacity. The last of these is below indicative sovereign peers, given that Switzerland is a relatively small economy that imports most of its natural resources. The government is aiming for a 50% reduction in carbon emissions by 2030 relative to 1990 levels and net carbon neutrality by 2050. Furthermore, the country imposes a carbon levy on fossil fuels, which was increased to CHF 120 per ton of CO2 (around USD 130) in 2022 from CHF 96 in 2021. Environmental policies and challenges are considered under a QS assessment of ‘environmental risks’, which is evaluated as ‘neutral’ against the sovereign peer group.

Rating Committee
The main points discussed by the rating committee were: i) growth prospects and inflation outlook, ii) fiscal dynamics, iii) financial stability risks, iv) external economic risks, v) ESG risks, vi) peer comparison and vii) EU institutional framework agreement and trade relations.

Rating driver references
1. Covid-19: Impact on federal finances
2. Swiss National Bank Stability Report 2021
3. BAKBASEL 2015 
4. European Parliamentary Research Service 2021: Briefing on the EU-Swiss trade relations and the institutional framework agreement 

Methodology
The methodology used for these Credit Ratings and/or Outlooks, (Rating Methodology: Sovereign Ratings’ 8 October 2021), is available on https://www.scoperatings.com/#!methodology/list.
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://www.scoperatings.com/#governance-and-policies/regulatory-EU. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Credit Ratings were not requested by the Rated Entity or its Related Third Parties. The Credit Rating process was conducted:
With Rated Entity or Related Third Party participation      NO
With access to internal documents                                   NO
With access to management                                            NO
The following substantially material sources of information were used to prepare the Credit Ratings: public domain.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Julian Zimmermann, Analyst.
Person responsible for approval of the Credit Ratings: Giacomo Barisone, Managing Director.
The Credit Ratings/Outlooks were first released by Scope Ratings on January 2003. The Credit Ratings/Outlooks were last updated on 29 September 2017.

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.

Conditions of use / exclusion of liability
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