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Markus Kuger

Switzerland: When Being a Safe Haven Becomes a Curse

by Markus Kuger | Dun & Bradstreet Editor

July 6, 2015 | No Comments »

Switzerland-flag-mountains_1100px-02Switzerland is still one of the best countries in the world for doing business. However, the value of the Swiss franc has soared against the falling euro. And that is causing financial problems for this tiny nation whose main trading partners are neighboring European countries.

First the good news: Switzerland ranks among the most advanced economies in the world, thanks to strong employment trends, a fiscal surplus, outstanding infrastructure, and a healthy financial sector. The country tops the World Economic Forum’s Global Competitiveness Index again this year, keeping its 1st place for six years in a row.

In the World Bank’s Doing Business Report 2015, Switzerland ranks a strong 20th out of more than 180 economies covered. Dun and Bradstreet assigned the nation a Country Risk Rating of DB2b, a ranking lower than only six other countries. Meanwhile, Switzerland’s unemployment in May stood at 3.3%, while the eurozone average was 11.1%. (Unemployment in the US was 5.5% as of July 2.)

The Swiss government has not run a fiscal deficit since 2007. Infrastructure improvements include the longest tunnel in the world. Strict bank secrecy laws continue to make the country a safe haven for international investors as well as attractive to the domestic financial sector.

Now the bad news: The overvaluation of the Swiss franc poses a threat to the Swiss economy. The franc first jumped from 1.48 francs per euro in early 2010 to 1.20 francs to the euro in mid-2011. As the export-orientated Swiss manufacturing sector and the country’s sizable tourism sector began losing its international price competiveness, the Swiss National Bank (the country’s central bank) introduced an exchange rate ceiling in September 2011. Subsequently, the franc remained stable against the euro and real GDP growth averaged 1.7% from 2011 to 2014.

But as the situation in Greece escalated in early 2015 and the European Central Bank embraced a quantitative easing scheme, Switzerland’s policy was no longer sustainable. Overnight, the central bank lifted the exchange rate ceiling and the franc reached parity against the euro. Since then, it is down a bit and is trading at around 1.05 francs per euro. The events in Greece may put further pressure on the euro, and parity remains on the horizon.

The results for Switzerland’s domestic economy are manifold. Insolvency rates have already risen substantially. Proprietary data from Dun and Bradstreet’s World Wide Network Partner Bisnode shows a 16% year-over-year increase in business failures in May, on top of a 19% increase in April.

Overnight hotel stays by eurozone visitors have fallen by 15% year-on-year in Q1 as a consequence of the strong franc and the warm weather (adversely impacting Swiss ski resorts). Against this backdrop, Dun and Bradstreet expects real GDP to grow by only 1% this year, half the rate of 2014.

Insolvency risk in the tourism sector (hotels and restaurants in particular) will remain high. Dun and Bradstreet also recommends monitoring counterparty risk in the manufacturing sector. As a result of this trend, Dun and Bradstreet recently downgraded the country’s risk rating from DB2a to DB2b.

Despite higher-than-normal payment and credit risks and lower-than-normal growth, the strong franc does create opportunities: Dun and Bradstreet expects imports to the country to remain robust in 2015-16. With a real GDP per capita of more than $85,000 and full employment nearly reached, exporters to the country can expect solid demand for consumer durables and other products. Such a demand will at least partially counter the negative effects of a sharp currency appreciation.

Having previously worked for the European Parliament in Brussels, Markus Kuger joined D&B’s office in Marlow/United Kingdom in June 2010. In his role as Senior Economist in D&B Macro Market/Country Insight Products, he is writing about his home country Germany as well as the UK, France, the Netherlands, and Poland.

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