Swiss Canton of Zurich Rating Affirmed At 'AAA'; Outlook Stable
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Research Update:
Swiss Canton of Zurich Rating
Affirmed At 'AAA'; Outlook Stable
Primary Credit Analyst:
Sabine Daehn, Frankfurt (49) 69-33-999-244; sabine.daehn@spglobal.com
Secondary Contact:
Thomas F Fischinger, Frankfurt (49) 69-33-999-243; thomas.fischinger@spglobal.com
Research Contributor:
Julia I Binder, Frankfurt +49 69 33 999 261; julia.binder@spglobal.com
Table Of Contents
Overview
Rating Action
Rationale
Outlook
Key Statistics
Ratings Score Snapshot
Key Sovereign Statistics
Related Criteria And Research
Ratings List
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1762673 | 302471038Research Update:
Swiss Canton of Zurich Rating Affirmed At 'AAA';
Outlook Stable
Overview
• The Swiss Canton of Zurich benefits from a very strong economy. We anticipate that
the canton will be able to maintain its low debt burden despite budgetary
pressures by exercising its budgetary flexibility.
• We are affirming our 'AAA' rating on Zurich.
• The stable outlook reflects our view that the canton's management will remain
committed to consolidating the budget and stabilizing budgetary performance beyond
our forecast horizon of 2016-2018.
Rating Action
On Nov. 25, 2016, S&P Global Ratings affirmed its 'AAA' long-term issuer credit
rating on the Swiss Canton of Zurich. The outlook remains stable.
Rationale
The rating reflects our view of the canton's very strong and diversified economy, as
well as Switzerland's extremely predictable and supportive institutional framework,
in which Zurich contributes to the equalization system. Zurich displays exceptional
liquidity and strong budgetary flexibility, in our view. This flexibility, combined
with very strong financial management and a commitment to balancing accounts over
the medium term, should allow the canton to maintain at least average budgetary
performance. In our view, the canton's debt remains low, even considering funding
needs resulting from projected deficits after capital accounts under our base-case
scenario for 2016-2018. The ratings are, however, constrained by moderate contingent
liabilities, most of which stem from the canton's guarantee to Zuercher Kantonalbank
(ZKB). The long-term rating on Zurich is in line with the canton's stand-alone
credit profile (SACP) of 'aaa'.
In our view, Zurich has a very strong regional economy, with high wealth levels
relative to national and international peers. We estimate Zurich's GDP per capita at
about Swiss franc (CHF) 95,000 (about $96,000) in 2016. The canton is Switzerland's
financial center, and it contributes more than one-fifth of the national gross value
added. As a result, Zurich contributes the largest amount (CHF445 million) in
nominal terms to the national equalization system, about 3% of its adjusted
operating expenditures.
We classify the Swiss institutional framework as extremely predictable and
supportive, owing to its strong and stable equalization system. Following the recent
system evaluation for 2012-2015, which revealed equalization goals had been
exceeded, the federal government, together with the cantons, agreed to reduce the
total distributions payable under the equalization system by CHF165 million from
2016. We expect the equalization framework to remain conceptually unchanged over the
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1762673 | 302471038Research Update: Swiss Canton of Zurich Rating Affirmed At 'AAA'; Outlook Stable
next three years, although the revised corporate taxation rules
("Unternehmenssteuerreform III") will come into effect from 2020. Zurich has
designed a proposed cantonal implementation plan, which includes tax adjustments.
Although the overall effect on cantonal finances is still uncertain, we estimate
that Zurich could lose out by about CHF300 million a year. The federal government
will cover part of this amount from additional tax sharing but we expect the canton
to need to find additional sources for about one third of the amount.
The canton's overall budgetary flexibility should allow the canton to weather the
changes in the medium term. We assess its flexiblity as stronger than that of most
of its Swiss peers because a very high share of its revenues are modifiable. Even
though tax competition between cantons and public opposition somewhat limits the
canton's ability to raise taxes, the medium-term balancing requirement offsets this
effect, and we anticipate that the canton would use its flexibility, if needed. Even
though some of Zurich's expenditure items, such as payments to the equalization
system, are relatively inflexible, we see that the canton is focusing on managing
its expenditure with respect to investments and operating costs to achieve budgetary
consolidation.
The canton has included a consolidation package in its current financial plan for
2017-2020 that totals CHF1.6 billion. About 75% of the measures are focused on
expenditures, especially those that were projected to display a strong growth rate.
The rest of the canton's efforts focus on improved revenue intake. The canton also
prioritizes investment projects; it targets an investment volume of about 75% of the
total projects proposed for the planning period 2017-2020. Overall, we view the
canton's financial management as very strong, due to its approval-based annual
budgeting process and very prudent long-term planning. Zurich's strong commitment to
balancing accounts is shown by its medium-term balancing requirement, which calls
for an automatic consolidation program if, for the rolling eight-year period of four
previous and four future years, the accounts do not balance.
Zurich's operating balance for 2016 is likely to be similar to 2015 results, owing
to solid tax revenue growth and an increase in other revenues. We believe the
canton's cost-cutting measures over our 2016-2018 forecast period may not be
sufficient to achieve balanced budgets after capital accounts by 2018, but budgetary
performance is gradually improving. In our view, the canton is on a solid trajectory
to achieve its budgetary balancing requirement. We expect the operating balance to
remain below 5% of adjusted operating revenues over the next three years, as has
been the case since 2012. Consequently, we forecast it at about 2.9% of operating
revenues over 2014-2018, which represents a steady improvement compared with our
base case in November 2015.
We estimate Zurich's deficit after capital accounts will remain below 5% of adjusted
total revenues, similar to the current five-year average deficit of about 4%. The
canton's average budgetary performance remains somewhat below average for
international 'AAA' rated local governments over the forecast horizon 2016-2018.
Several factors have contributed to this budgetary trend since 2011, including the
impact of Switzerland's hospital funding reform and lower tax revenue growth; and
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cantonal finances are unlikely to get easier in the medium term, when the corporate
tax reform will come into force.
Zurich's nominal debt has increased substantially due to a CHF2 billion pension fund
cash contribution in 2013. We expect nominal debt to edge up further, considering
projected deficits after capital accounts. However, we forecast that the canton's
tax-supported debt will remain low, at about 40% of consolidated operating revenues
by 2018, depending on its use of liquidity reserves and conditions in capital
markets. Due to the pension fund's very high coverage ratio, we regard Zurich's
unfunded pension liabilities as limited.
The canton has provided a legal guarantee for practically all of ZKB's liabilities.
The rating on the canton would come under pressure if ZKB were to call on the
guarantee or rely on the canton for an additional considerable capital injection. We
currently view the likelihood of this occurring as very low, given the bank's strong
SACP of 'aa-'. Consequently, we assess the canton's contingent liabilities as
moderate.
Liquidity
We view Zurich's liquidity as exceptional. Our assessment takes into account the
canton's high cash reserves and strong access to Switzerland's deep and liquid
capital market.
The canton's average available liquid assets over the past four quarters totaled on
average about CHF730 million. This amount is sufficient to cover maturing debt
service of CHF700 million (principal) over the next 12 months until October 2017.
Taking into account the projected deficit and interest payments, as well as
additional liquidity lines of roughly CHF500 million, increases the debt service
coverage ratio to above 120%. Over our forecast period, we assume that the amount of
liquid assets will likely remain at this reduced level as cash holdings are costly
for the canton due to the current interest rate environment.
In our view, the canton has highly predictable cash flows, which form the basis of
its liquidity planning. Yearly interest payments are low and stable at about 1% of
operating revenues. Debt service, however, fluctuates somewhat--CHF1.2 billion will
mature in 2017 and roughly CHF200 million is due thereafter. Zurich plans for a
minimum cash position of about CHF500 million, slightly below 4% of operating
expenditures.
We factor our view of the canton's access to external liquidity as strong into our
assessment of its liquidity. This is in line with our favorable view of
Switzerland's banking sector (see "Banking Industry Country Risk Assessment:
Switzerland", published Sept. 2, 2016, on RatingsDirect).
Outlook
The stable outlook reflects our expectation that the canton's management will remain
committed to consolidating the budget and stabilizing budgetary performance beyond
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1762673 | 302471038Research Update: Swiss Canton of Zurich Rating Affirmed At 'AAA'; Outlook Stable
our forecast horizon of 2016-2018. Furthermore, in our base-case scenario for that
period, we forecast Zurich's deficit after capital accounts will stabilize at below
5% of adjusted total revenues and that debt levels will not deviate substantially
from about 40% of operating revenues.
We could lower the rating if Zurich's fiscal performance deteriorated substantially,
resulting in operating deficits, and deficits after capital accounts structurally
larger than 5% of total adjusted revenues on average. In addition to signaling a
weakening of managerial strength, such deficits could lead to a significant increase
in debt above 60% of consolidated operating revenues. However, we currently consider
this scenario to be unlikely.
Key Statistics
Table 1
Canton of Zurich Financial Statistics
--Fiscal year end Dec. 31--
(Mil. CHF) 2013 2014 2015 2016bc 2017bc 2018bc
Operating revenues 13,512 13,626 14,175 14,460 14,712 14,958
Operating expenditures 13,067 13,259 13,674 14,057 14,356 14,521
Operating balance 445 367 500 403 357 437
Operating balance (% of operating revenues) 3.3 2.7 3.5 2.8 2.4 2.9
Capital revenues 51 76 27 34 40 55
Capital expenditures 2,853 966 1,184 1,010 966 1,014
Balance after capital accounts (2,357) (524) (657) (573) (570) (522)
Balance after capital accounts (% of total revenues) (17.4) (3.8) (4.6) (4.0) (3.9) (3.5)
Debt repaid 700 1,000 225 500 1,200 207
Net budget loans 199 448 74 16 13 (37)
Balance after debt repayment and onlending (2,858) (1,076) (808) (1,057) (1,757) (766)
Balance after debt repayment and onlending (% of total revenues) (21.1) (7.9) (5.7) (7.3) (11.9) (5.1)
Gross borrowings 1,464 1,285 0 600 1,300 500
Balance after borrowings (1,394) 209 (808) (457) (457) (266)
Operating revenue growth (%) 0.1 0.8 4.0 2.0 1.7 1.7
Operating expenditure growth (%) 0.9 1.5 3.1 2.8 2.1 1.2
Modifiable revenues (% of operating revenues) 72.1 73.2 71.4 72.5 72.3 72.2
Capital expenditures (% of total expenditures) 17.9 6.8 8.0 6.7 6.3 6.5
Direct debt (outstanding at year-end) 5,064 5,349 5,124 5,224 5,324 5,617
Direct debt (% of operating revenues) 37.5 39.3 36.1 36.1 36.2 37.6
Tax-supported debt (% of consolidated operating revenues) 37.6 39.4 36.2 36.2 36.3 37.6
Interest (% of operating revenues) 1.2 1.0 1.3 0.9 0.8 0.7
Debt service (% of operating revenues) 6.4 8.4 2.9 4.4 8.9 2.1
The data and ratios above result in part from S&P Global Ratings' own calculations, drawing on national as well as international sources, reflecting
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1762673 | 302471038Research Update: Swiss Canton of Zurich Rating Affirmed At 'AAA'; Outlook Stable
S&P Global Ratings' independent view on the timeliness, coverage, accuracy, credibility, and usability of available information. The main sources
are the financial statements and budgets, as provided by the issuer. Base case reflects S&P Global Ratings' expectations of the most likely scenario.
Downside case represents some but not all aspects of S&P Global Ratings' scenarios that could be consistent with a downgrade. Upside case
represents some but not all aspects of S&P Global Ratings' scenarios that could be consistent with an upgrade.
Table 2
Canton of Zurich Economic Statistics
--Fiscal year end Dec. 31--
2013 2014 2015 2016bc 2017bc 2018bc
Population 1,425,540 1,446,350 1,466,080 1,485,760 1,506,400 1,526,960
GDP per capita (local currency) (single units) 96,520 96,410 95,160 94,780 95,630 97,540
Unemployment rate (%) 3.2 3.3 3.5 N/A N/A N/A
The data and ratios above result in part from S&P Global Ratings' own calculations, drawing on national as well as international sources,
reflecting S&P Global Ratings' independent view on the timeliness, coverage, accuracy, credibility, and usability of available information. Sources
typically include national statistical offices, Eurostat, and Experian Ltd. N/A--Not applicable.
Ratings Score Snapshot
Table 3
Canton of Zurich Ratings Score Snapshot
Key Rating Factors
Institutional framework Extremely predictable and supportive
Economy Very strong
Financial management Very strong
Budgetary flexibility Strong
Budgetary performance Average
Liquidity Exceptional
Debt burden Low
Contingent liabilities Moderate
*S&P Global Ratings bases its ratings on local and regional governments (LRGs) on eight main rating factors listed in the table above. Section A
of our "Methodology For Rating Non-U.S. Local And Regional Governments" summarizes how the eight factors are combined to derive the
foreign currency rating on an LRG.
Key Sovereign Statistics
• Research Update: Swiss Confederation 'AAA/A-1+' Ratings Affirmed; Outlook Stable,
Nov. 18, 2016
Related Criteria And Research
• Criteria - Governments - International Public Finance: Methodology For Rating Non-
Related Criteria
U.S. Local And Regional Governments - June 30, 2014
• Criteria - Governments - International Public Finance: Methodology And Assumptions
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 25, 2016 6
1762673 | 302471038Research Update: Swiss Canton of Zurich Rating Affirmed At 'AAA'; Outlook Stable
For Analyzing The Liquidity Of Non-U.S. Local And Regional Governments And Related
Entities And For Rating Their Commercial Paper Programs - October 15, 2009
• General Criteria: Use Of CreditWatch And Outlooks - September 14, 2009
• Public Finance System Overview: Swiss Cantons, Nov. 3, 2016
Related Research
• International Public Finance Rating Trends: German, Austrian, And Swiss Local And
Regional Governments, Nov. 2, 2016
• Sovereign Risk Indicators, Oct. 13, 2016. An interactive version is available at
www.spratings.com/sri
• Banking Industry Country Risk Assessment: Switzerland, Sept. 2, 2016
• 2015 Annual International Public Finance Default Study and Rating Transitions,
June 30, 2016
• Institutional Framework Assessments For Non-U.S. Local And Regional Governments -
April 21, 2016
In accordance with our relevant policies and procedures, the Rating Committee was
composed of analysts that are qualified to vote in the committee, with sufficient
experience to convey the appropriate level of knowledge and understanding of the
methodology applicable (see 'Related Criteria And Research'). At the onset of the
committee, the chair confirmed that the information provided to the Rating Committee
by the primary analyst had been distributed in a timely manner and was sufficient
for Committee members to make an informed decision.
After the primary analyst gave opening remarks and explained the recommendation, the
Committee discussed key rating factors and critical issues in accordance with the
relevant criteria. Qualitative and quantitative risk factors were considered and
discussed, looking at track-record and forecasts.
The committee agreed that all key rating factors remained unchanged.
The chair ensured every voting member was given the opportunity to articulate
his/her opinion. The chair or designee reviewed the draft report to ensure
consistency with the Committee decision. The views and the decision of the rating
committee are summarized in the above rationale and outlook. The weighting of all
rating factors is described in the methodology used in this rating action (see
'Related Criteria and Research').
Ratings List
Rating
To From
Zurich (Canton of)
Issuer Credit Rating
Foreign and Local Currency AAA/Stable/-- AAA/Stable/--
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1762673 | 302471038Research Update: Swiss Canton of Zurich Rating Affirmed At 'AAA'; Outlook Stable
Ratings List Continued...
Senior Unsecured
Local Currency AAA AAA
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