Switzerland: Risk Assessment
Country Risk Rating
Business Climate Rating
- Political, economic and social stability and consensus; role of direct democracy
- Close relations with the EU
- International financial center and headquarters of international groups and organizations
- Limited sensitivity of exports to foreign exchange due to focus on high technology and quality
- Surplus public accounts and a large external asset position
- European crossroads with excellent communication network
- Small, open and landlocked economy (foreign trade = 116% of GDP)
- Swiss franc used as a safe haven
- Highly dependent on trading and financial services
- High housing prices with rising vacancy rates
- Banks’ exposure to real estate (85% of domestic loans), with two institutions accounting for half of domestic assets
- Population aging offset by immigration (foreign labor makes up 33% of the workforce)
Domestic demand remains the growth factor
Growth is expected to increase in 2020. However, the improvement will be artificial, as it will be due to carryover growth at the beginning of the year and the organization of the Olympic Games and the Euro football tournament, which will generate license sales for the Switzerland-based IOC and UEFA. Household consumption (53% of GDP) will remain by far the main contributor to growth, supported by continued employment growth, low inflation and the very low cost of credit. In addition, the labor shortage, due to very low unemployment and reduced immigration since 2018, is driving wage growth. Investment (24%) will be the second-largest contributor thanks to the purchase of equipment by companies, particularly in the area of automation, and their research and development expenses. Civil engineering financed by the federation, cantons, and municipalities should remain on track. Conversely, the construction of rental housing could decline due to saturated supply. On the external front, despite weak demand in all the country’s main markets, the contribution of foreign trade is expected to turn slightly positive simply because of license sales, which are treated as services exports. Export performances by pharmaceuticals, jewelry, watches, tourism, and medical devices will remain satisfactory due to their resilience to less supportive external economic conditions and the strength of the Swiss franc. Events in Hong Kong will merely slow the growth of watch sales. The same should be true for finance and insurance. In contrast, mechanical engineering, precision instruments, and electrical and electronic equipment will have to contend with the poor health of the European industry. Imports will once again be driven by strong domestic demand, continuing to generate large deficits in the automotive and clothing sectors. Retail trade is expected to grow modestly in line with the positive trend in employment and moderate immigration. Competition from foreign supermarkets in border areas is expected to remain marginal. Food retail is doing better than other segments, particularly clothing.
Solid external and public accounts
Switzerland has a massive current account surplus comprising a surplus in goods (7% of GDP in 2019), as well as in services (3%), the latter being mainly generated by finance, sports licenses, patents, and tolls. Transfers from foreign workers, whether Swiss-domiciled or cross-border (20% of the total), plus Switzerland’s remittances to international aid agencies and programs are balanced by income from Swiss investments abroad. Even when international trade in precious metals (gold), gemstones, artworks and antiques (4%) is taken out, the surplus is still 6.4%. In addition, recurrent surpluses have made it possible to accumulate significant foreign assets, to the point that Switzerland has a net external asset position equivalent to 128% of GDP. Swiss households are at the origin of this, through the savings that they invest in retirement plans. Meanwhile, to prevent the franc from appreciating, but also to support activity and counter deflationary pressures, the Swiss National Bank (SNB) is applying a highly accommodative monetary policy, with the key interest rate set at -0.75%. This rate also applies to banks’ sight deposits held with the SNB, although exemption thresholds result in an actual rate of around -0.2%. In addition, the SNB buys foreign currency assets (mainly government bonds in euros and dollars) as required. As a result, its balance sheet is equivalent to 120% of GDP and foreign currency reserves stand at more than two years of imports.
Going beyond the fiscal rule adopted in 2003 by the federation and replicated by most cantons, the public accounts show a structural surplus. In the event of a significant economic deterioration, the federal and cantonal authorities, based on a vote by the representative assemblies, would have access to significant fiscal stimulus capacity. The public debt is divided equally between the federation, on the one hand, and the cantons and municipalities, on the other. Its cost is extremely low with a negative yield (-0.8% at the end of 2019) on 10-year issues. Net of claims held by public authorities, the debt is almost zero. Budget margins will remain under little pressure.
Despite a breakthrough for greens, right-wing and center parties remain in the majority
The October 2019 elections saw a historic breakthrough for left-wing environmentalists (PES), who won 28 seats out of 200 (+17) and the liberal green party (PVL), which took 16 seats (+9), at the expense of traditional right-wing and left-wing parties, namely the nationalist conservatives (SVP) with 53 seats (-12), social democrats (PS) with 39 seats (-4), plus the liberal democrats with 29 seats (-4) and Christian democrats with 25 seats (-2), both in the center-right. The shift reflects the fact that the climate question has eclipsed immigration as the key issue. Nevertheless, the right and the center remain in the majority in the National Council, as well as in the Council of States and the Federal Council (government), of which seven ministerial seats are voted on by both chambers, taking into account the results of the parties, the various regions, and linguistic communities. The free movement of people and the institutional framework agreement with the EU will be voted on in 2020.