OREANDA-NEWS. Due to a heavy reliance on tourism--continued to be a constraint relative to its national peers. The ratings also reflected our viewof Graubuenden's average budgetary flexibility and moderate contingent liabilities. At the time of the withdrawal, the long-term issuer credit ratingon Graubuenden was equivalent to our 'aa+' assessment of its stand-alone credit profile (SACP).

The extremely predictable and supportive institutional framework for Swiss cantons is backed by the strong intercantonal equalization system. It providesfunds to cantons with below-average tax resource potential, such as Graubuenden, by redistributing funds from stronger cantons as well as the federal government. Because Graubuenden has high infrastructure costs due to its alpine topography, it is the largest recipient of equalization funds underthe system's geographic-topographic segment. We assumed that the equalization system would not change significantly in the medium term, with the geographic-topographic element of the equalization system remaining an important and adequately endowed component.

The appreciation of the Swiss franc (CHF) in 2015-2016 has strained Graubuenden's economy, especially its tourism sector, in which a large share of the canton's employment and gross value added is concentrated. Overnight stays in the 2015-2016 winter season declined significantly for the third consecutive year, producing a total contraction in overnight stays of almost 25% since 2008. That said, the canton's economic profile remained strong in aninternational comparison, with GDP per capita at more than $75,000. We assumedthat the canton's economy would expand by slightly less than the Swiss averageover the forecast horizon, underpinning our assessment of the canton's sound tax revenue base.

We believed that the canton would maintain strong budgetary performance over 2016-2019 amid ongoing budgetary challenges, such as rising operating expenditures (health care, social services, and education) and capital expenditure for large-scale investment projects. According to our base-case scenario, the average operating balance would remain sound at about 8.5% of operating revenues, with an average deficit after capital accounts of around 0.2% of adjusted total revenues in 2014-2018. We believed that the canton's strong management has the ability and commitment to counteract potential fiscal pressure if needed, thereby limiting operating expenditure growth in line with the prudent budget guidelines. The canton has the option to revise tax multipliers or optimize parts of the tax code if fiscal flexibility is needed. In our view, any potential measures would have to be aligned with the canton's tax strategy and overall positioning among other cantons, particularly in light of Switzerland's upcoming corporate tax reform. The canton's taxation is currently broadly in line with the Swiss average.

In our view, Graubuenden's debt burden at the time of the withdrawal was very low, even though the canton issued a CHF250 million bond in 2015. While this issuance increased Graubuenden's tax-supported debt burden from about 11% to 17% of consolidated operating revenues, we did not expect the canton to finance its deficit through borrowing in 2016-2018. We assumed in our base-case scenario that the canton would be able to cover potential deficits after capital accounts with its very high liquid reserves over the forecast horizon.

We classified Graubuenden's contingent liabilities as moderate. The canton's largest contingent liability related to its majority ownership of and statutory guarantee for its cantonal bank, Graubuendner Kantonalbank.

LIQUIDITY

We assessed Graubuenden's liquidity position as exceptional, given its internal liquidity and access to external liquidity. Under our base-case scenario, the canton's average available cash over the coming 12 months covered far more than 100% of its debt service for the same period. Our liquidity assessment also reflected the canton's strong access to external liquidity in domestic capital markets, similar to other Swiss cantons.

Our Banking Industry Country Risk Assessment places Switzerland's banking sector in group '2' on a scale of '1' to '10' (with '1' denoting the lowest risk and '10' the highest risk; see "Banking Industry Country Risk Assessment:Switzerland," published Sept. 9, 2015, on RatingsDirect).

OUTLOOK

At the time of the withdrawal, the stable outlook reflected our view that Graubuenden's management would maintain prudent financial policies to counteract potential negative dynamics in operating as well as capital spending for 2016-2018. The canton's large cash and liquid asset reserves provided a cushion against projected deficits after capital accounts and, in turn, against large debt accumulation over the forecast horizon.