Switzerland: Risk Assessment
Country Risk Rating
Business Climate Rating
- Stability and political, economic and social consensus, linked with direct democracy
- Close relations with the European Union, except for agriculture
- Balanced public accounts despite relatively low taxation
- Limited sensitivity of exports to exchange rates; high technology, quality
- Strength of external surpluses
- Low unemployment and diversified labor
- European crossroads with excellent communication network
- Small, open and landlocked economy
- Overvalued Swiss franc seen as a safe-haven, sensitivity to global economy
- Level of dependence on commodity trade, financial services and the presence of multinational companies
- House prices and high level of household debt (almost 200% of disposable incomes)
- Presence of systemic banking establishments
- Aging demographic offset by immigration (foreign labor makes up 30% of the workforce)
Economy Benefiting from European Upturn and Weakening Franc
In 2017, the economy succeeded in adapting to the strong franc and achieved moderate growth. Thanks to productivity improvements and cost reductions, companies have largely restored their margins that had contracted as a result of the price cuts made to try and offset the appreciation of the Swiss franc following the lifting of the exchange ceiling by the Swiss National Bank (SNB) in January 2015. 2018 should see a sharp upturn. The business and consumer confidence indexes at the end of 2017 point towards this. Both domestic demand and foreign trade will contribute towards this. Despite the slow rate of growth in wages, the gradual improvement in the jobs market will help sustain household consumption. Investment is expected to rise, that by companies and households helping boost that by the Federation, the Cantons and Communes which is flagging. Thanks to the strong market outlook and with the production capacity utilization rate in October 2017 reaching its highest level since 2012, there should be a strong upturn for equipment. Research and development, which also suffered following the appreciation of the Swiss franc, should also feel the benefits. To a lesser extent, cheap credit will also help boost construction, in particular residential. Exports are also likely to benefit from the positive movement in European, US and Asian economies, as well as from the drop in the real effective exchange rate since the second half of 2017. Pharmaceuticals (30% of exports) and engineering, not overly sensitive to prices, and thus to the franc, will remain strong. Machines and industry in general (precision instruments, in particular medical, agri-food, electrical equipment, chemicals), financial services, commodity trading, tourism, and transport are expected to perform better. The recovery will be less visible for watchmaking (11% of exports) which will again suffer with the slowdown in the Chinese economy. The outlook will remain difficult for retail trade, facing competition from foreign supermarkets in the border regions, and hotel and catering sectors, despite the gradual return of foreign customers, as well as for metallurgy, wood, paper, printing, and clothing. Given these conditions, the number of company insolvencies, on the rise since 2014, should, at the least, stabilize, despite a rate of insolvency that will remain high in the construction, hotel, catering and retail sectors.
External Accounts in Surplus and Accommodative Monetary Policy
There is a sizeable current account surplus. This consists of a surplus for goods (7.9% of GDP in 2016), as well as a surplus for services (2.9%) mainly generated by finance, licences and patents, exceeding the remittances of foreign workers (3.8%) which have increase significantly as the numbers of foreign workers have grown (in excess of 300,000). Even after removing the trade in commodities (3.9%), the surplus is still 4%. In addition, the recurrence of surpluses has enabled the creation of sizeable assets abroad to the extent that the net external credit position is equal to 130% of GDP.
In order to prevent any further appreciation of the franc, the SNB will have to continue its very flexible policies. Its key lending rate will continue to be negative (-0.75% in November 2017), as will the three-month LIBOR (range of -0.25 to -1.25%). However, the weakening of the franc should remove the need for the SNB to buy assets in foreign currencies, the balances of which are in excess of the GDP. The exposure of the banking system to property will continue at a high level as 80% of domestic lending is in this sector. The fact that only 45% of households are home-owners reveals how high the debt levels of borrowers must be. Households do however have assets that are equal to three times their debts and non-performing loans account for less than 3% of the total. In addition, the applicable prudential regulations have been and will be strengthened. Two establishments hold half of domestic assets within the sector, alongside Cantonal, cooperative and small private establishments. Whilst maintaining close external links, they have significantly reduced their balance sheets since the crisis with a focus on managing assets for third parties.
Solid Public Accounts
In compliance with the budget rule approved in 2003 by the Federation and replicated by most Cantons, a structural equilibrium has been enforced for the public accounts. In the event of significant worsening in local economic conditions, the Federal and Cantonal authorities, by a vote of the representative assemblies, would have significant expansionary budgetary discretion. The public debt is split equally between the Federation, on one hand, and the Cantons and Communes, on the other. The cost of this is very low with a zero or negative yield on bonds of 10 years or less (October 2017). Budgetary policy will remain uncontentious. The three parties on the right and center-right (Democratic Union of the Centre, le Christian-Democratic People’s Party, and the FDP-Liberal Party) will dominate the Federal Assembly and the National Council (executive of 7 members with a rotating annual presidency) until the next elections scheduled for 2019. The Socialist Party has two seats on the Council. The major areas of debate will remain immigration, relations with the EU, as well as reforms to pensions and corporate taxation.