Research: Rating Action: Moody’s affirms Switzerland’s Aaa ratings, maintains stable outlook

London, February 17, 2023 — Moody’s Investors Service (“Moody’s”) has today affirmed the Government of Switzerland’s Aaa domestic and foreign-currency long-term issuer and domestic-currency senior unsecured debt ratings. The outlook remains stable.

The key drivers for the affirmation of Switzerland’s Aaa ratings are:

1) Switzerland’s very strong public finances – supported by highly effective fiscal policymaking – will continue to provide a significant buffer to economic shocks;

2) Switzerland’s very wealthy and competitive economy as well as its robust institutions underpin the sovereign’s very strong economic resilience which mitigates the impact from the energy crisis; and

3) Switzerland’s broad political consensus supports the longevity of policy decisions, while strong regulation mitigates credit risks from the very large banking sector and its high exposure to the property market.

The stable outlook reflects Moody’s expectation that Switzerland’s very strong economic fundamentals, ample fiscal space and its highly effective institutions will allow it to effectively manage the impact from the energy crisis. Furthermore, the country’s proactive policy framework will help to mitigate the credit challenges arising from adverse demographic trends, uncertainty over the longer-term relationship with the European Union (EU, Aaa stable) and vulnerabilities emanating from the property market.

Switzerland’s local and foreign-currency country ceilings remain unchanged at Aaa. The local-currency ceiling at Aaa reflects Switzerland’s very predictable, reliable and effective institutions, very low external vulnerability, low political risks and a relatively moderate footprint of the government in the economy. The foreign-currency ceiling at the same level as the local currency ceiling reflects the country’s very high degree of policy effectiveness and a highly open capital account.

RATINGS RATIONALE

RATIONALE FOR THE AFFIRMATION OF THE Aaa RATINGS

FIRST DRIVER: SWITZERLAND’S VERY STRONG PUBLIC FINANCES, SUPPORTED BY HIGHLY EFFECTIVE FISCAL POLICYMAKING, WILL CONTINUE TO PROVIDE A SIGNIFICANT BUFFER TO SHOCKS

The first driver of the decision to affirm Switzerland’s ratings is the country’s very strong fiscal metrics, supported by a highly effective fiscal policy framework and very low debt servicing costs, which Moody’s expects will continue to provide ample capacity to absorb shocks.

Despite a small rise in the debt burden as a result of extraordinary spending during the pandemic, Switzerland’s general government debt (at around 27% of GDP in 2022) remains below the median of Aaa-rated sovereigns (39%). Furthermore, given its highly credible fiscal policy, low borrowing requirements and stable investor base, Switzerland’s interest payments are expected to remain around 1% of general government revenues through the rising interest rate cycle, which is one of the strongest debt affordability ratios among rated sovereigns. Debt affordability assumes a greater importance in Moody’s assessment of Switzerland’s fiscal strength given the Swiss franc’s status as a reserve currency.

Moody’s expects Switzerland’s very strong fiscal position will continue to be reinforced over the medium term by its consistent adherence to its “debt brake” rule. The fiscal rule, which ensures spending is kept in line with structural revenues, has supported almost continuous general government budget surpluses over the decade prior to the pandemic (averaging 0.5% of GDP between 2009 and 2019). Furthermore, this strong track record of fiscal prudence gives Moody’s a high level of confidence that the fiscal deterioration arising from the pandemic will be corrected, with the general government fiscal balance expected to remain in surplus in the coming years. Moody’s considers fiscal policy effectiveness a Governance consideration under its ESG framework.

In particular, the government has committed to address the estimated CHF25 billion (around 3% of GDP) shortfall in its amortization account, arising due to extraordinary pandemic-related expenses, using profit distributions from the central bank and structural financing surpluses, even as the time period for making up the shortfall has been extended from six to twelve years in order to avoid an excessively sharp tightening in fiscal policy.

Looking further ahead, Switzerland faces rising old-age related spending given its adverse demographics which, in the absence of reforms, will push up its public debt ratio to around 45-50% of GDP by 2050 according to the government’s latest fiscal sustainability report. The government received public backing in September 2022 to implement a substantial new pension reform for the first time in many years, including raising the retirement age for women to 65 years, although the government estimates that further measures will still be needed from around 2030 to ensure the longer-term sustainability of the pension system. Moody’s expects proactive policymaking will continue to mitigate long-term fiscal risks, even as progress on pension reform is likely to remain slow.

SECOND DRIVER: SWITZERLAND’S VERY WEALTHY AND COMPETITIVE ECONOMY AS WELL AS ITS ROBUST INSTITUTIONS UNDERPIN THE SOVEREIGN’S VERY STRONG ECONOMIC RESILIENCE

The second driver of the decision to affirm Switzerland’s ratings is the sovereign’s very high economic resilience to shocks, reflected in Switzerland’s relatively mild economic contraction during the pandemic, which underpins the sovereign’s very strong credit profile through the energy crisis.

Switzerland’s very strong economic resilience is based on its very high wealth levels and the competitiveness of its economy, which is very strong even when compared with other Aaa-rated sovereigns. Switzerland’s export-oriented economy also benefits from a focus on high value-added goods and services that tend to have low price sensitivity, which will help to insulate the economy from shifts in external demand and financial conditions. As a result, while Switzerland’s economy will slow in 2023 given the headwinds from tight monetary policy and weak external demand, real GDP growth will still remain robust compared to many other European peers.

Switzerland’s very robust institutions, which are underpinned by consensus-oriented and effective policymaking as well as the consistency of macroeconomic policy norms, also help to cement its economic, political and financial stability, further contributing to its very strong resilience to shocks. In particular, Moody’s expects Switzerland’s highly credible central bank will help to engineer a soft landing for the economy during the energy crisis, as moderate growth in wages and well-anchored long-term inflation expectations help to contain upside risks to inflation.

Furthermore, Switzerland’s economic reliance on gas is limited. The Swiss government has also undertaken a number of measures to improve the security of its energy supply. Nevertheless, an acute energy shortage across Europe would likely still have material negative consequences for Switzerland’s economy and increase the risk of a much more damaging scenario of prolonged power outages.

Like other advanced economies, Switzerland’s rapidly ageing population is a constraint on the country’s long-term growth potential, which Moody’s estimates at around 1.5%, in line with the assessment by the International Monetary Fund. The decision in 2021 to abandon negotiations with the EU on a common institutional framework will also, in Moody’s view, gradually give rise to trade frictions. Furthermore, the ongoing uncertainty around Switzerland’s longer-term relationship with the bloc, not only through trade but also participation in R&D programmes, will weigh on investment decisions, even as exploratory talks for restarting negotiations between the two parties are continuing. Despite this uncertainty, Moody’s expects Switzerland’s very strong economic fundamentals and robust institutions will continue to be the main drivers of inward investment.

THIRD DRIVER: SWITZERLAND’S BROAD POLITICAL CONSENSUS SUPPORTS POLICY LONGEVITY, WHILE STRONG REGULATION WILL MITIGATE RISKS FROM LARGE BANKING SECTOR

The third driver of the decision to affirm Switzerland’s ratings is Moody’s view that Switzerland’s high degree of political consensus will continue to underpin domestic political stability and ensure a high degree of longevity to policy decisions.

The country’s focus on direct democracy, through frequent referenda on a wide array of policy matters, ensures broad social acceptance of adopted policies and helps to support the sustainability of reforms, even though it can slow policy implementation. Furthermore, Switzerland’s tradition of the main political parties working together in government with equal-status ministerial posts mitigates the risk of a material change in policy direction from the forthcoming federal elections in October 2023.

At the same time, Switzerland, similar to the rest of Europe, faces a rise in geopolitical risks emanating from Russia’s invasion of Ukraine (Ca stable). Switzerland has aligned itself with EU sanctions on Russia and the probability of security, energy and trade risks spilling over from other European countries has become more elevated in light of the ongoing military conflict. However, as a non-NATO member, Switzerland is not exposed to contagion security risks through the potential activation of NATO’s collective defense clause.

The third driver also captures the strengthening of Switzerland’s regulatory framework and significant deleveraging since the global financial crisis which helps mitigate the contingent liability risk to the government’s balance sheet from Switzerland’s very large banking sector (around 500% of GDP at end 2021).

One key source of macro-financial risk is the banking system’s significant exposure to a potential sharp downturn in the real estate sector, which is exacerbated by elevated levels of household debt (around 130% of GDP at end 2021).

That said, households’ solid net financial asset position provides an important buffer, with cash and deposits held by households sufficient to cover their aggregate mortgage debt. Furthermore, Swiss banks continue to benefit from very robust capital buffers relative to most European peers and their resilience will be further strengthened by the recent reactivation of the countercyclical capital buffer for residential real estate at the maximum 2.5%.

RATIONALE FOR STABLE OUTLOOK

The stable outlook reflects Moody’s expectation that Switzerland’s very strong economic fundamentals, ample fiscal space and its highly effective institutions will allow it to effectively manage the economic and fiscal impact from the energy crisis and broader spillovers from Russia’s invasion of Ukraine.

Furthermore, the country’s proactive policy framework will help to mitigate the credit challenges arising from adverse demographic trends, uncertainty over the longer-term relationship with the EU and vulnerabilities emanating from the property market. The stable outlook is also supported by the safe haven status of Switzerland in the global financial architecture.

Moody’s expects weak growth in key trading partners, continued monetary policy tightening and uncertainty around how the energy crisis develops over next winter will weigh somewhat on Switzerland’s economic performance, with real GDP growth forecast to decelerate to around 0.8% in 2023, before growth is expected to improve to 1.5% in 2024. A sharper than expected slowdown in the EU or difficulties in importing electricity during the winter months poses downside risks to economic growth. Nevertheless, Moody’s expects Switzerland’s high wealth buffers and its highly competitive exports will continue to support the resilience of its economy through this uncertain period.

Moody’s expects the government’s fiscal balance will continue to improve, with the general government budget averaging a surplus of 0.5% of GDP over the next two years after pandemic-related budget deficits in 2020 and 2021. This will support a further decline in the general government debt burden to around 25% of GDP by the end of 2024. In contrast to many other advanced economies, the Swiss government has extended very limited fiscal support to households and firms during the energy crisis given the underlying strength in the economy and relatively contained rates of inflation. Furthermore, Switzerland’s strong track-record of budget prudence will, in Moody’s view, help the government to navigate the budget pressures arising from the uncertainty around future profit distributions from the central bank and political commitments to raise spending on the military and healthcare insurance subsidies in the coming years.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Switzerland’s ESG Credit Impact Score is positive (CIS-1), reflecting neutral to low exposure to environmental and social risks, and the credit benefits deriving from its very strong governance and forward-looking policymaking.

Switzerland’s exposure to environmental risks is generally low across all categories. Industrial sectors subject to carbon transition risks comprise a relatively small share of value added. Switzerland’s high reliance on hydropower for electricity generation means that disruptions to rainfall patterns can increase uncertainty around energy supply, although the authorities have taken steps to establish a hydropower reserve to help mitigate this risk. Its overall E issuer profile score is therefore neutral to low (E-2).

Similarly, Switzerland has low exposure to most sources of social risks, given widely available high-quality education, healthcare and basic services. That said, demographic challenges are somewhat stronger than in other advanced economies given its rapidly ageing population. Despite strong immigration flows helping to support employment, adverse demographics contribute to labour shortages which have become an increasingly limiting factor for potential growth. Furthermore, the projected sharp rise in the old-age dependency ratio will push up on age-related spending and pose risks to the long-term sustainability of the pension system. That said, the consensus-based political system helps ensure public acceptance of adopted policies and therefore helps to mitigate the risk of a rise in social discontent negatively impacting on the country’s reform agenda. Overall, Moody’s assesses Switzerland’s S issuer profile score as neutral to low (S-2).

Switzerland’s very high institutions and governance strength is reflected in a positive G issuer profile score (G-1). This is underpinned by the government’s high credibility, transparency and consensus on key fiscal policy goals and macroeconomic policies. It also reflects the professional and well-staffed public administration and Switzerland’s very strong scores in global surveys assessing rule of law, voice and accountability, and the control of corruption. Coupled with comparatively strong government financial strength this supports a high degree of resilience to shocks.

GDP per capita (PPP basis, US$): 77,741 (2021) (also known as Per Capita Income)

Real GDP growth (% change): 4.2% (2021) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 1.5% (2021)

Gen. Gov. Financial Balance/GDP: -0.5% (2021) (also known as Fiscal Balance)

Current Account Balance/GDP: 7.9% (2021) (also known as External Balance)

External debt/GDP: 296.2% (2021)

Economic resiliency: aaa

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 14 February 2023, a rating committee was called to discuss the rating of the Switzerland, Government of. The main points raised during the discussion were: The issuer’s economic fundamentals, including its economic strength, have not materially changed. The issuer’s institutions and governance strength has materially increased. The issuer’s fiscal or financial strength, including its debt profile, has not materially changed. The issuer’s susceptibility to event risks has not materially changed.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Switzerland’s rating is Aaa, which is already at the top of Moody’s rating scale. An upgrade to a higher rating is therefore not possible.

Switzerland has one of the strongest credit profiles among all rated sovereigns and as such downside rating pressures are very limited. Although not Moody’s baseline assumption, a severe escalation of the Russia-Ukraine military conflict, including the possibility of more significant negative economic spillovers and acute energy shortages across Europe, would increase Switzerland’s susceptibility to geopolitical event risk and could lead to downward credit pressure.

Downward credit pressures could also emerge over the longer-term if structural challenges related to the ageing population, in particular the long-term sustainability of the pension system, were not adequately addressed and weakened Switzerland’s government financial strength significantly over time. While unlikely, a material breakdown in relations with the EU which leads to a significant reduction in immigration from the bloc would amplify the credit challenges posed by Switzerland’s adverse demographics and could also contribute to downward rating pressure.

Furthermore, a system-wide crisis in the very large banking sector could also be a source of downward pressure for the Aaa rating, particularly given the banking system’s significant exposure to a potential sharp downturn in the real estate sector. However, this is a remote risk given the financial health of the banking system and the strong regulatory framework.

The principal methodology used in these ratings was Sovereigns published in November 2022 and available at https://ratings.moodys.com/api/rmc-documents/395819. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

REGULATORY DISCLOSURES

For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are unsolicited.

a.With Rated Entity or Related Third Party Participation: YES

b.With Access to Internal Documents: YES

c.With Access to Management: YES

For additional information, please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.

Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.

Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.

Evan Wohlmann
VP – Senior Credit Officer
Sovereign Risk Group
Moody’s Investors Service Ltd.
One Canada Square
Canary Wharf
London, E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Dietmar Hornung
Associate Managing Director
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody’s Investors Service Ltd.
One Canada Square
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London, E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454