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, headquarters of international groups and organizations
- Limited sensitivity of exports to foreign exchange due to the emphasis on high technology and quality
- Very strong public and external accounts
- European crossroads with excellent communication network
- Small, open economy (foreign trade = 116% of GDP) and landlocked
- Swiss franc as a safe-haven currency
- High dependence on trading and financial services
- High housing prices with rising vacancy rates
- Exposure of banks to real estate (85% of domestic loans), two of which account for half of domestic assets
- Demographic ageing compensated by immigration (33% of the working population is foreign)
Following (relative) resilience, the rebound
The country will return to growth in 2021, after experiencing its worst recession in decades in 2020 because of the consequences of COVID-19. In order to curb the spread of the pandemic, many activities deemed "non-essential" were suspended in the spring and autumn of 2020, leading to an unprecedented drop in activity. However, this fall was less pronounced than in the rest of the region (a 9% fall in GDP between the end of 2019 and mid-2020, compared to -15% in the Eurozone), due to the faster lifting of restrictions and the sectoral structure of the economy. The important chemicals and pharmaceuticals industries (6.4% of GDP in 2019, a third of the manufacturing sector) and the financial sector (10% of GDP, including insurance), relatively less affected, have slightly compensated for the fall in activity in the other main export sectors (metals, jewelry, mechanics, watchmaking). The rebound in activity in 2021 should be driven mainly by household consumption which, despite the ongoing health uncertainty, should consume part of the large precautionary savings built up in 2020, thanks to government support measures (short-time work, aid to the self-employed) that have limited the rise in the unemployment rate (3.3% in October, compared to 2.3% before the crisis) and their loss of purchasing power (-1.1% in the second quarter), despite the collapse in activity. While the uncertain environment will also affect business decisions, investment should rebound, driven by the recovery in domestic and - albeit more gradual - external demand, after having fallen sharply in 2020, despite major public support measures (state-guaranteed loans, postponement of tax and social security payments). Moreover, unless postponed or canceled at the last minute - a scenario that cannot be totally ruled out at the end of 2020 - the sales of licenses generated by the holding of the Olympic Games and Euro 2020 (to the benefit of the IOC and UEFA, which are based in Switzerland), considered as exports of services, should allow a positive contribution from trade.
In line with recent years (key interest rate of -0.75%, unchanged since 2015), the Swiss National Bank has pursued a very accommodative policy in 2020 by intervening on the foreign exchange market and providing liquidity to commercial banks in order to limit the appreciation of the franc, the safe haven value par excellence in times of crisis, to alleviate deflationary pressures and to support activity. For the same reasons, the SNB will continue to pursue this strategy in 2021.
Public finances in deficit but still strong
For once, the public accounts will remain in deficit in 2021, after having deteriorated considerably in 2020, due to the successive measures implemented to support households and businesses, at a total cost of over 10% of GDP. Despite the probable extension of certain support measures, such as short-time work (cost estimated at 2% of GDP in 2020), at least in the first part of the year, in connection with the health situation, the deficit is expected to be reduced, particularly thanks to the rebound in tax revenues made possible by the growth in activity. Having consistently recorded - with the exception of 2013 and 2014 - budget surpluses over the previous 15 years, the government has significant fiscal room for maneuver. After rising in 2020, public debt is expected to stabilize at a particularly low level for a developed economy. Divided between the Confederation (48% of the total), the cantons (30%) and the municipalities (22%), its cost remained extremely low at the end of 2020 with a negative return (-0.5%) on 10-year issues.
Moreover, the country will continue to show a large current account surplus, thanks to both the balance of goods (7% of GDP in 2019) and the balance of services (3% of GDP, thanks to finance and sports licences). The balance of income is balanced, with revenues from Switzerland's considerable investments abroad offsetting transfers from foreign workers domiciled in Switzerland and cross-border commuters. Switzerland's substantial assets abroad enable the country to have a substantial net foreign asset position (120% of GDP at the end of June 2020), the extent of which varies with stock market prices.
Federal Council unchanged despite breakthrough by the Ecologists
Despite their historic breakthrough in the October 2019 elections, the left-wing Ecologists (PES), which on that occasion became the fourth largest political force in the National Council (lower house of the Assembly) with 28 out of 200 seats (+17), were unable to enter the Federal Council (government), whose 7 members were re-elected by the National Council. Despite their electoral setback, the nationalist conservatives (UDC, 53 seats), the Socialist Party (39 seats) and the Liberal Democrats (PLR, 29 seats) each retained two ministerial posts, and the Christian Democrats (PDC, 25 seats) retained their councilor. The attempt by the Greens to enter the Federal Council to replace one of the two PLR councilors, whose weight in the government appeared disproportionate to its electoral result, ran up against the desire for stability in the Assembly, where the center and the right remain the majority.