OREANDA-NEWS. Fitch Ratings has affirmed Switzerland's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'AAA' with Stable Outlooks. The issue ratings on Switzerland's senior unsecured foreign and local currency bonds have also been affirmed at 'AAA'. The Country Ceiling has been affirmed at 'AAA' and the Short-term foreign currency IDR at 'F1+'.

KEY RATING DRIVERS
Switzerland's 'AAA' rating reflects its track record of prudent economic and fiscal policies, a diversified and wealthy economy, and high levels of human development. Switzerland surpasses its 'AAA' peers on most indicators. GDP per capita is 1.5x the 'AAA' median. General government debt is low (34% of GDP forecast for 2015) and falling. A forecast net external creditor position of 156% of GDP in 2015 is underpinned by a history of current account surpluses and the Swiss franc's status as a global reserve currency.

We expect Swiss GDP to grow 0.9% in 2015 and 1.3% in 2016, driven primarily by private consumption growth. As expected, the Swiss economy avoided recession despite the business uncertainty and loss of competitiveness following the Swiss National Bank's discontinuation of the franc/euro exchange rate ceiling. Real GDP grew 0.2% qoq in 2Q15 following a 0.2% contraction in the previous quarter.

Our forecast for annual average HICP inflation is -1% in 2015 and 0% in 2016, lower than regional peers due to the appreciation of the exchange rate in 1Q15. Nevertheless, we view the emergence of a pernicious deflationary spiral as unlikely in Switzerland, given buoyant domestic demand, credit growth dynamics and that the price declines are mostly for imported goods.

General elections held on 18 October saw the right-wing SVP win 29% of the vote, slightly more than their previous high point in 2007. The result is unlikely to dramatically change the political landscape or lead to radical policy shifts given the consensual system of Swiss politics. However, the issue of immigration may place strains on Switzerland's relationship with the EU.

The growth rates of real estate prices and private credit slowed somewhat in 2015. Although real estate prices remain at high levels, regulation and generally prudent bank lending practices have restrained the build-up of imbalances.

The franc appreciation and the introduction of negative interest rates have so far had a limited impact on the banking system. This is due to the diversified nature of large banking groups and the high threshold above which negative interest rates are being applied. However, large interest rate and mortgage affordability risks have built up in the financial system. Although not all practical aspects of the too big-to-fail bank resolution regime have yet been fully put in place, we expect implementation to continue.

RATING SENSITIVITIES
The Stable Outlook reflects Fitch's assessment that the downside risks to the 'AAA' rating are currently not material. Nonetheless, negative rating action could result from a material shock to the financial sector, for example due to a sharp correction in the Swiss residential real estate market, or large losses on trading and international lending portfolios.

KEY ASSUMPTIONS
In February 2014, Switzerland voted in a referendum to impose a quota on immigration by 2017. This would likely contravene Switzerland's Free Movement of Persons Agreement (FMPA) with the EU and could endanger other treaties with the EU, many of which are mutually dependent. In February 2015, the Federal Council approved draft legislation that provides the general framework for imposing caps on immigration, but left the regulation of immigration from the EU open to negotiation. We assume that the EU and Switzerland will not permit a costly rupture of economic relations even if they cannot agree on amending the FMPA.

Lengthening life expectancies and an environment of extremely low interest rates weigh on the sustainability of the Swiss pension system and public finances over the longer term. We assume that the reforms necessary to ensure sustainability are passed before demographic pressures significantly erode the fiscal position.