Switzerland: Risk Assessment
Country Risk Rating
|A1||The political and economic situation is very good. A quality business environment has a positive influence on corporate payment behavior. Corporate default probability is very low on average.|
Business Climate Rating
|A1||The business environment is very good. Corporate financial information is available and reliable. Debt collection is efficient. Institutional quality is very good. Intercompany transactions run smoothly in environments rated A1.|
Gradual adjustment to the appreciation of the franc through a fall in prices (and margins)
Following the Swiss National Bank’ removal of the exchange-rate ceiling (in place since 2011) of 1.2 franc per euro on 15 January 2015 and the resulting appreciation (17% straight away, but 10% after stabilization), the Swiss economy, which is very open, has slowed down markedly in 2015. Barring a further significant appreciation, the adjustment to the new exchange rate should be completed and growth increase slightly in 2016. The main contributor will be domestic demand. Household consumption should confirm its resilience since, while unemployment will probably increase slightly, real disposable income will benefit from the imported fall in prices. Furthermore, the resident population will continue to grow due to the additional immigration. Corporate investment is more uncertain. On the one hand, the capacity utilization rate is far from its all-time highs and companies' margins - for which the fall in the cost of imported input will not offset the reduction in selling prices granted to dampen the impact of the appreciation of the franc on their competitiveness - have decreased (muted increase in bankruptcies in 2015 among industrial SMEs in the cantons of Zurich, Basel, Zug and Vaud). On the other hand, credit is cheap, prices of imported capital goods have decreased and investment, in particular in automation, can make it possible to live with high labor costs and, given the prospect of a tightening of the migratory policy by 2017, with reduced availability of skilled labor. From negative in 2015, the contribution of external trade to growth is likely to become zero or slightly positive. With a moderate recovery in Europe and a vigorous North-American market, the fall in exports, more marked in value terms than in volume terms after the price reductions granted to make up for the appreciation of the franc, should come to an end. Sales of pharmaceuticals (29% of the total) and watches (11%) are likely to resume their growth. By contrast, it will be more difficult for machines (12%), chemicals (9%), precision instruments (7%) and electronics (6%). Financial services will benefit from their excellent reputation. The tourism sector, rather upmarket, will probably be resilient; especially since the increase in US visitors will dampen the impact of the reduction in the number of European visitors.
Atypical external accounts, not very sensitive to exchange rates
The current-account surplus is comfortable. It results, in particular, from a surplus in traditional trade of goods (3.9% of GDP in 2014), a services surplus (3.1%) primarily generated by financial services and royalties for licenses and patents, sizable transfers from foreign workers to their home countries (3.1%), contributions to international organizations (0.6%) and pay to foreign cross-border workers (3.1%). However, if we deduct the commodity trading activity (3.9%) and foreign revenues (estimated at 1.4%) of multinationals and wealthy non-residents established in the country for tax reasons, the surplus is only 0.8%. The domination of atypical factors in the current account partly explains the relatively limited impact of the appreciation of the Swiss franc. Traditional exports are holding up quite well due to their strong non-price competitiveness linked to their sophistication, their quality reputation and the low level of personnel costs (cf. pharmaceuticals: 7% of GDP but 0.8% of jobs).
Solid public accounts likely to reinforce the accommodating monetary policy
In accordance with the budgetary rule, public accounts post a structural equilibrium. In the event of a significant deterioration in the economic situation, the federal and cantonal authorities, by a simple vote of the representative assemblies, would have significant fiscal stimulus capacity. The public debt is divided equally between the federation on the one hand and the cantons and the municipalities on the other hand. Its cost is extremely low with negative interest rates on 10-year issues. Given the imported deflation, the upward pressures on the franc and the cyclical slowdown, the central bank has a negative monetary policy rate (-0.75% in December 2015), likely to be lowered in 2016. We cannot rule out the possibility that it will start buying foreign assets. Furthermore, in order to encourage credit, it applies a similar negative interest rate on banks’ deposits as soon as they exceed 20 times the amount of required reserves.
The financial sector is reforming
Under the pressure from the OECD and the major partners which seek to combat money laundering and tax evasion, the Swiss authorities are imposing transparency and external supervision on their financial sector, especially the banking sector (10% of GDP and 6% of jobs). From 2018, the banks must automatically provide some countries’ tax authorities with data relating to their residents. This will strengthen a sector made up of, both, two large institutions with a significant investment activity and quite high leverage effect, and a multitude of small actors.