Download Swiss Canton of Geneva Rating

Research Update:
Swiss Canton of Geneva Rating
Affirmed At 'AA-'; Outlook Stable
Primary Credit Analyst:
Laurent Niederberger, Paris (33) 1-4420-6704; [email protected]
Secondary Credit Analyst:
Christophe Dore, Paris (33) 1-4420-6665; [email protected]
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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Research Update:
Swiss Canton of Geneva Rating Affirmed At 'AA-';
Outlook Stable
Overview
• We believe the Swiss Canton of Geneva has a very strong economy and benefits from
a very favorable institutional framework.
• We are affirming our 'AA-' long-term rating on the Canton of Geneva.
• The stable outlook reflects our expectation that the canton will maintain average
budgetary performance and limit debt accumulation over 2015-2017.
Rating Action
On Nov. 13, 2015, Standard & Poor's Ratings Services affirmed its 'AA-' long-term
issuer credit rating on the Swiss Republic and Canton of Geneva (Canton of Geneva).
The outlook remains stable.
Rationale
The affirmation reflects our view of the extremely predictable and supportive
institutional framework for Swiss cantons, as well as the Canton of Geneva's very
strong economy in an international context. Moreover, the rating factors in the
canton's strong financial management.
The rating also incorporates the Canton of Geneva's average budgetary flexibility
and budgetary performance, as well as its moderate contingent liabilities.
Additionally, the rating reflects the canton's adequate liquidity, notably thanks to
strong access to external funding.
However, the rating remains constrained by the Canton of Geneva's very high debt
burden incorporating unfunded pension liabilities. The long-term rating is at the
same level as the canton's stand-alone credit profile, which we assess at 'aa-'.
In our view, the Canton of Geneva continues to benefit from a wealthy and
diversified economy, with real GDP per capita at Swiss franc (CHF) 113,472 (more
than $112,000) in 2014, which is very high in an international context. However,
compared with previous years, the canton's GDP growth has recently slowed, and we
expect this trend will continue until 2016 in line with Switzerland's (see
"Sovereign Risk Indicators," published Oct. 12, 2015, on RatingsDirect. A free-ofcharge interactive version is available at http://www.spratings.com/sri). We believe
this trend in GDP growth will have a significant impact on the canton's finances,
since the bulk of its operating revenues is made of locally collected taxes (close
to 80% as of 2014). In that regard, the increase in operating margins in 2014 to
7.2% of operating revenues from 4.4% in 2013 is mainly linked to higher-thanexpected tax revenues (up 4% from 2013), especially on personal income tax, as well
as a very tight grip on operating expenditures (up 0.3% from 2013).
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Research Update: Swiss Canton of Geneva Rating Affirmed At 'AA-'; Outlook Stable
Like all Swiss cantons, the Canton of Geneva has extensive legal flexibility in
setting personal income and corporate profit tax rates, but we regard its revenueraising flexibility as low in practice, because tax hikes are subject to popular
referendum, tax rates are high in a Swiss context, and, given the nature of the
corporations it hosts, the Canton of Geneva is particularly sensitive to global tax
competition. This, combined with the largely rigid nature of operating expenditures
(mostly consisting of personnel, social aid, and allowances and transfers for health
care and public transport) and limited capital expenditures in an international
context (8.3% of total expenditures on average over 2015-2017 under our base-case
scenario), supports our view of limited budgetary flexibility.
In the context of the upcoming abolition of the cantonal lump-sum taxation system
for holding companies, the canton has stated its willingness to cut the corporate
tax rate to 13% from about 24% currently for normal status corporations (and 11% for
holding companies) to retain international corporations in its territory. We
understand that this could lead to a reduction in revenues of up to CHF500 million
per year. However, at this stage, we understand that the Canton of Geneva is still
refining its policy response for a possible implementation from 2019, since there is
no settled view on its potential impact on the Canton of Geneva, including likely
compensation from the Swiss Confederation. Consequently, we do not include it in our
base-case scenario at this stage. Given our view of an extremely predictable and
supportive institutional framework for Swiss cantons, we expect this reform would be
implemented progressively and negotiated with cantons, notably with regard to
financial compensation from the Swiss Confederation for cantons' tax cuts.
We still assess the Canton of Geneva's financial management as strong. Given the
canton's current political situation with no clear political majority at the
cantonal parliament, the cantonal executive needs to build a consensus around its
strategy, especially regarding the corporate tax reform. We positively view the
cantonal executive's renewed commitment to controlling debt and implementing costcutting measures starting in 2015. Moreover, the canton continues to display, in our
view, prudent debt and liquidity management.
Under our base-case scenario, we expect that the Canton of Geneva will record
average budgetary performance in 2015-2017. We expect that the operating balance
will progressively contract to 3% of operating revenues in 2017 (in line with our
previous base case). We expect that reduced tax revenues (in the context of lower
GDP growth prospects) and increasing social aid and health expenses will be partly
mitigated by lower-than-expected equalization transfer payments and cost-control and
cutting measures, including on personnel expenditures and transfers. In line with
our previous base case, we anticipate capital expenditures will average CHF696
million over 2015-2017, compared with CHF772 million in 2014 (including a one-time
cash injection in the public pension fund of CHF146 million). This, combined with a
decreasing operating margin and a one-time asset sale of CHF100 million expected in
2015, would lead to deficits after capital accounts of close to 4% of total revenues
in 2015-2017 (1% in 2014).
Consequently, and also given lower working capital needs on the back of sizable tax
prepayments by individuals and corporates, we anticipate that the canton's tax-
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Research Update: Swiss Canton of Geneva Rating Affirmed At 'AA-'; Outlook Stable
supported debt will slightly decrease in 2015 to 152% of consolidated operating
revenues from 154% in 2014 and then increase to 160% at year-end 2017. We include in
our calculation of tax-supported debt the Canton of Geneva's direct debt and as well
as the debt for non-self-supporting government-related entities (such as
transportation company Transports Publics Genevois and the public hospital Hôpitaux
Universitaires de Genève). Meanwhile, interest charges should remain limited, in our
view, at close to 3% of operating revenues through year-end 2017. The canton also
records high unfunded pension liabilities, representing 91% of the canton's
operating revenue at year-end 2014, and we expect these liabilities will remain
sizable in the coming years, which erodes our assessment of its debt burden.
In our view, the canton has moderate risks associated with contingent liabilities,
mainly through the cantonal bank Banque Cantonale de Geneve (A+/Stable/A-1), of
which it remains the majority shareholder.
Liquidity
We assess the Canton of Geneva's liquidity as adequate, according to our criteria.
This reflects our expectation that the canton's average available amounts on its
bank lines will cover more than 50% of its debt service over the next 12 months. The
canton currently benefits from extensive short-term facilities, comprising CHF1.3
billion of contracted bank lines and CHF2.8 billion of liquidity lines, which are
not formally contracted but generally available, with various public sector entities
and Swiss and international banks.
In our view, the canton continues to exhibit strong access to external funding via
the financial markets, as reflected by frequent public bond issuances in recent
years.
Outlook
The stable outlook reflects our base-case expectation that the Canton of Geneva will
maintain average budgetary performance and limit debt accumulation over 2015-2017.
In our upside scenario, we could consider a positive rating action if the Canton of
Geneva improved its budgetary performance so that it could structurally enhance its
liquidity position.
In our downside scenario, we could consider lowering the rating if the canton
recorded structurally negative operating margins and increasing deficits after
capital accounts, prompting increased debt accumulation, which would lead us to
revise downward our assessment of the canton's financial management.
However, we view both our upside and downside scenarios as unlikely at this stage.
Key Statistics
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Research Update: Swiss Canton of Geneva Rating Affirmed At 'AA-'; Outlook Stable
Table 1
Republic and Canton of Geneva Financial Statistics
--Fiscal year ending Dec. 31--
(Mil. CHF)
2013
2014
2015bc
2016bc
2017bc
Operating revenues
7,796
8,060
7,904
7,903
8,039
Operating expenditures
7,453
7,479
7,566
7,648
7,787
Operating balance
343
581
338
255
252
Operating balance (% of operating revenues)
4.4
7.2
4.3
3.2
3.1
Capital revenues
82
78
154
61
79
Capital expenditures
1,215
772
639
708
742
Balance after capital accounts
(790)
(113)
(147)
(392)
(411)
Balance after capital accounts (% of total revenues)
(10.0)
(1.4)
(1.8)
(4.9)
(5.1)
Debt repaid
1,061
852
850
780
1,000
Gross borrowings
1,933
1,448
700
1,172
1,411
82
483
(297)
0
0
Modifiable revenues (% of operating revenues)
78.1
78.8
77.3
77.9
77.6
Capital expenditures (% of total expenditures)
14.0
9.4
7.8
8.5
8.7
Direct debt (outstanding at year-end)
12,792
13,389
12,839
13,331
13,742
Direct debt (% of operating revenues)
164.1
166.1
162.4
168.7
170.9
Tax-supported debt (% of consolidated operating revenues)
152.6
153.5
152.3
157.9
160.1
2.9
2.8
3.0
3.1
3.3
16.5
13.4
13.8
13.0
15.8
Balance after borrowings
Interest (% of operating revenues)
Debt service (% of operating revenues)
The data and ratios above result in part from Standard & Poor's own calculations, drawing on national as well as international sources, reflecting
Standard & Poor's 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. bc--Base case reflects Standard & Poor's expectations of the most likely
scenario. CHF--Swiss franc.
Table 2
Republic and Canton of Geneva Economic Statistics
--Fiscal year ending Dec. 31--
2010
2011
2012
2013
2014
Population
463,919
466,918
470,512
476,006
482,545
GDP per capita (CHF)
104,166
103,495
110,548
111,978
113,472
Real GDP growth (%)
4.1
0.3
1.5
2.2
2.1
Unemployment rate (%)
6.5
5.4
5.3
5.6
5.5
The data and ratios above result in part from Standard & Poor's own calculations, drawing on national as well as international sources, reflecting
Standard & Poor's independent view on the timeliness, coverage, accuracy, credibility, and usability of available information. Sources typically
include national statistical offices, Eurostat, and Experian Limited. Source: Canton of Geneva's Statistics Office (OCSTAT). CHF--Swiss franc.
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Research Update: Swiss Canton of Geneva Rating Affirmed At 'AA-'; Outlook Stable
Ratings Score Snapshot
Table 3
Republic and Canton of Geneva Ratings Score Snapshot
Key rating factors
Institutional framework
Extremely predictable and supportive
Economy
Very strong
Financial management
Strong
Budgetary flexibility
Average
Budgetary performance
Average
Liquidity
Adequate
Debt burden
Very high
Contingent liabilities
Moderate
*Standard & Poor's ratings on local and regional governments are based on eight main rating factors listed in the table above. Section A of
Standard & Poor's "Methodology For Rating Non-U.S. Local And Regional Governments," published on June 30, 2014, summarizes how the eight
factors are combined to derive the rating.
Key Sovereign Statistics
• Sovereign Risk Indicators, Oct. 12, 2015. An interactive version is also available
at http://www.spratings.com/sri.
Related Criteria And Research
• Criteria - Governments - International Public Finance: Methodology For Rating NonU.S. Local And Regional Governments - June 30, 2014
Related Criteria
• Criteria - Governments - International Public Finance: Methodology And Assumptions
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
• Default, Transition, and Recovery: 2014 Annual International Public Finance
Default Study And Rating Transitions, June 8, 2015
Related Research
• Public Finance System Overview: Swiss Cantons, May 4, 2015.
• Standard & Poor's Publishes Latest Institutional Framework Assessments For
International Local And Regional Governments, February 5, 2015
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.
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Research Update: Swiss Canton of Geneva Rating Affirmed At 'AA-'; Outlook Stable
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's assessment of the key rating factors is reflected in the Ratings
Score Snapshot above.
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
AA-/Stable/--
AA-/Stable/--
AA-
AA-
Geneva (Republic and Canton of)
Issuer credit rating
Foreign and Local Currency
Senior Unsecured
Local Currency
Complete ratings information is available to subscribers of RatingsDirect at
www.globalcreditportal.com and at spcapitaliq.com. All ratings affected by this
rating action can be found on Standard & Poor's public Web site at
www.standardandpoors.com. Use the Ratings search box located in the left column.
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783-4009.
Additional Contact:
International Public Finance Ratings Europe; [email protected]
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