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Research Update: Principality of Liechtenstein 'AAA/A1+' Ratings Affirmed Despite Currency Impact; Outlook Stable Primary Credit Analyst: Alois Strasser, Frankfurt (49) 69-33-999-240; [email protected] Secondary Contact: Sabine Daehn, Frankfurt (49) 69-33-999-244; [email protected] Table Of Contents Overview Rating Action Rationale Outlook Key Statistics Ratings Score Snapshot Related Criteria And Research Ratings List WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MARCH 06, 2015 1 1387878 | 302365278 Research Update: Principality of Liechtenstein 'AAA/A-1+' Ratings Affirmed Despite Currency Impact; Outlook Stable Overview • The Principality of Liechtenstein progressed on its budget consolidation and has outstandingly high wealth levels, debt-free public accounts, and consensus-based prudent financial policies. • Liechtenstein's economic and fiscal indicators will be affected by the Swiss National Bank's decision to lift the CHF1.20/EUR1.00 exchange rate cap, with expected stagnating GDP growth in 2015 and lower tax revenues as of 2016. • The monetary union with Switzerland restricts monetary flexibility. • Nonexistence of external accounts constitutes a data deficiency. • We are affirming our 'AAA/A-1+' long- and short-term sovereign credit ratings on Liechtenstein. • The stable outlook reflects our expectation that Liechtenstein will adapt to the changed monetary environment and continue to consolidate its public finances, contain reputational risks, and maintain its strong net asset position. Rating Action On March 6, 2015, Standard & Poor's Ratings Services affirmed its 'AAA/A-1+' longand short-term sovereign credit ratings on the Principality of Liechtenstein. The outlook is stable. Rationale The affirmation reflects our view that Liechtenstein will manage to adapt to the changed monetary environment, since the Swiss National Bank lifted the Swiss franc (CHF)/euro exchange rate cap at CHF1.20/EUR1.00. We expect that the government will continue to consolidate public finances. Liechtenstein's ratings benefit from very high wealth levels in its market-oriented and open economy, as well as debt-free public accounts with a very high amount of liquid government assets, and consensusbased prudent financial policies. The affirmation also takes into consideration the lack of data for external accounts, the monetary risks for the principality of being the junior member of the monetary union with Switzerland, and the contingent liabilities stemming from hosting an international offshore banking center. Economic growth in Liechtenstein relies predominantly on the banking and industrial sectors. Industry is the largest sector, contributing about 38% to gross value added (GVA) in 2012, and is made up of a few relatively large industrial companies that are niche players in global markets. We estimate slow GDP growth in 2015-2017 at 0.6%, which implies stagnating growth at a per-capita level. Since 2008, Liechtenstein's economy has been coping with continued Swiss franc appreciation, WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MARCH 06, 2015 2 1387878 | 302365278 Research Update: Principality of Liechtenstein 'AAA/A-1+' Ratings Affirmed Despite Currency Impact; Outlook Stable which is why we believe that the economy will be able to cope with the recent sudden shift in the CHF/EUR exchange rate. Growth in Liechtenstein can be very volatile because of the small number of contributors to the economy and the country's dependence on major export markets. The limited availability of GDP statistics can lead to gaps when comparing historical and forecast figures. For 2015, we estimate GDP per capita at around US$149,000. When taking into account the impact of nonresident workers--about onehalf of all employees--per capita income still remains very high at an estimated US$75,000, which makes Liechtenstein one of the wealthiest nations in the world. In February 2014, currency treaty partner Switzerland decided by referendum to limit the inflow of foreign workers into Switzerland. We understand that Liechtenstein's government does not expect that this will affect its labor market because many people who intend to work in Liechtenstein in the future could decide to reside in neighboring Austria or Germany instead of Switzerland. In our view, even if the relationship between the EU and Switzerland deteriorated because of this decision, Liechtenstein would have the option to draw on commuting labor from other countries. Liechtenstein's low-tax regime, banking secrecy, and its stable political environment have supported the development of a large financial services sector, in total contributing about 24% of GVA in 2012. Although we do not view the financial industry as monolithic--it consists of asset managers, regional banks, and trusts-we do consider the sector poses a moderate contingent liability for the government. However, this risk is mitigated by the industry's very strong capitalization and the potential access of the three major Liechtenstein banks to the Swiss National Bank (SNB). We rank Liechtenstein in group '2' under our Banking Industry Country Risk Assessment (BICRA; scores range from '1' to '10', with the lowest-risk banking systems in group '1' and the highest-risk in group '10'). Liechtenstein's large financial services industry bears some reputational risks, in our view. We see the government as having proactively addressed some of these risks by meeting the demands of international regulators, for instance via anti-moneylaundering legislation and its willingness to automatically exchange tax information with other jurisdictions (for example, with the U.S. as of Jan. 22, 2015). In recent years, Liechtenstein has amended several double-taxation agreements and signed new tax information-exchange agreements with other countries. Such agreements allow banks and funds to exchange information with or transfer taxes to foreign tax authorities (mostly on request). We expect the general government to achieve an average surplus of 2% over 2015-2017, compared to slight deficits in three of the past four years. Preliminary fiscal results for 2014 indicate overperformance relative to budget at -0.9% of GDP, compared with our previous forecast of -2.1%, owing to increased tax revenues and reduced expenses. This result includes the one-off cash transfer to the state's pension fund, which was like past budgetary deficits financed from the government's liquid assets. We expect general government accounts to be in surplus in 2015, due to improving central government accounts and continued surpluses of the social security system and positively performing municipal accounts. Current central WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MARCH 06, 2015 3 1387878 | 302365278 Research Update: Principality of Liechtenstein 'AAA/A-1+' Ratings Affirmed Despite Currency Impact; Outlook Stable government consolidation effects are related to the full implementation of costcutting measures and implemented revenue-increasing measures. We estimate that the central government has liquid assets available of about 30% of GDP. The general government, which includes municipalities and social security entities, has an even stronger asset position than the central government, reaching above 100% of GDP at year-end 2014, although we assume that not all of the assets are liquid. In the absence of general government debt, the level of assets also equals Liechtenstein's government's net asset position. We forecast that this will improve continuously to 109% of GDP by 2017. This figure will depend not only on the continued success of the central government's budget consolidation, but also on the effects of exchange rate fluctuations on tax revenues as well as on returns achieved on its assets in the financial markets. Liechtenstein is in a monetary union with Switzerland, although the principality has no vote on the SNB's monetary policy. Being the junior member in this monetary union reduces Liechtenstein's monetary flexibility. The SNB's surprise announcement that it had lifted the CHF1.20/€1 exchange rate cap on Jan. 15, 2015, has increased exchange rate flexibility, but in our view the abrupt policy change has somewhat impaired our view of the SNB's policy credibility. The monetary union is based on the 1980 currency treaty, which determines the use of the Swiss franc as currency for the principality. The treaty also provides access to liquidity from the SNB on par with any Switzerland-based financial institution for Liechtenstein's three major banks--although not for other banks in Liechtenstein, which is a core distinction relative to other small financial centers such has Andorra. Andorra has a currency treaty with the European Central Bank (ECB) but its banks have no access to ECB financing tools. The SNB does not act as a lender of last resort to Liechtenstein's banks, however. In our view, the long-standing and stable currency treaty provides an important anchor for Liechtenstein's economy and strengthens its economic links with Switzerland. We do not think the union, and in particular the recent revaluation of the franc, will materially harm Liechtenstein's economic development, given the two countries' similar economic structures. There is only limited data available for external trade, balance of payments, and the international investment position. In line with our criteria, we therefore base our assessment of Liechtenstein's external position on that of the Swiss Confederation. That is, we define Switzerland as the "host country" and use Switzerland's external position as a starting point. We then adjust the initial assessment downward for the lack of external data because these data gaps reduce the visibility of external risks. That said, Liechtenstein's large net asset position and its local banks' predominant business model as asset managers would otherwise suggest a strong external position. Outlook The stable outlook reflects our expectation that Liechtenstein will cope with the appreciated CHF/EUR exchange rate, continue to proactively consolidate its public WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MARCH 06, 2015 4 1387878 | 302365278 Research Update: Principality of Liechtenstein 'AAA/A-1+' Ratings Affirmed Despite Currency Impact; Outlook Stable finances, and maintain a strong asset position. We believe that the principality will continue to adapt its financial sector and implement reforms to secure Liechtenstein's viability as a financial center for private banking if external regulatory pressure were to mount. We expect that the local economy will continue to attract commuters from surrounding countries, contributing to Liechtenstein's wealth levels. Downward pressure on Liechtenstein's ratings could emerge if Liechtenstein's currently superior economic and political profile were to weaken, for example, because of more severe effects of the monetary policy change, leading to a significant structural contraction of the economy and taxation base, in turn undermining the principality's financial performance and position. A contraction of the financial sector following a large-scale outflow of assets under management, which in turn could be triggered by tightening external regulatory pressure could also cause us to lower the ratings. Key Statistics Table 1 Principality of Liechtenstein Selected Financial Indicators Balance Sheet Date Year 2010 2011 2012 2013 2014 2015 2016 2017 Mil. Mil. Mil. Mil. Mil. Mil. Mil. Mil. CHF CHF CHF CHF CHF CHF CHF CHF 5.11 5.80 5.50 5.67 5.89 5.63 5.88 5.93 GDP per capita (US$) 141,345 159,148 149,237 152,811 157,315 149,395 154,892 155,046 Real GDP growth (%) 8.1 (3.4) (0.1) 2.1 2.2 0.3 0.8 0.8 Real GDP per capita growth (%) 7.4 (4.3) (1.1) 1.3 1.3 (0.4) 0.1 0.1 Change in general government debt/GDP (%) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 General government balance/GDP (%) 0.3 (0.9) 2.8 (1.0) (0.9) 2.1 2.1 1.9 General government debt/GDP (%) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (95.6) (101.5) (106.8) (111.6) (104.7) (107.0) (108.3) (109.3) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 244.1 258.6 238.8 237.9 236.6 237.0 237.5 238.0 Denomination Display currency Selected Indicators Nominal GDP (bil. US$) Net general government debt/GDP (%) General government interest expenditure/revenues (%) Other dc claims on resident nongovernment sector/GDP (%) CPI growth (%) Gross external financing needs/CARs plus usable reserves (%) 0.7 0.2 (0.7) (0.2) (0.0) (1.5) (0.2) (0.2) N/A N/A N/A N/A N/A N/A N/A N/A WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MARCH 06, 2015 5 1387878 | 302365278 Research Update: Principality of Liechtenstein 'AAA/A-1+' Ratings Affirmed Despite Currency Impact; Outlook Stable Table 1 Principality of Liechtenstein Selected Financial Indicators (cont.) Balance Sheet Date Year 2010 2011 2012 2013 2014 2015 2016 2017 0.0 0.0 0.0 N/A N/A N/A N/A N/A Current account balance/CARs (%) N.M. N.M. N.M. N/A N/A N/A N/A N/A Narrow net external debt/CARs (%) N.M. N.M. N.M. N/A N/A N/A N/A N/A Net external liabilities/CARs (%) N.M. N.M. N.M. N/A N/A N/A N/A N/A Current account balance/GDP (%) Other depository corporations (dc) are financial corporations (other than the central bank) whose liabilities are included in the national definition of broad money. Gross external financing needs are defined as current account payments plus short-term external debt at the end of the prior year plus nonresident deposits at the end of the prior year plus long-term external debt maturing within the year. Narrow net external debt is defined as the stock of foreign and local currency public- and private-sector borrowings from nonresidents minus official reserves minus publicsector liquid assets held by nonresidents minus financial-sector loans to, deposits with, or investments in nonresident entities. A negative number indicates net external lending. CARs--Current account receipts. The data and ratios above result 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. Ratings Score Snapshot Table 2 Principality of Liechtenstein Ratings Score Snapshot Key rating factors Institutional assessment Strength Economic assessment Strength External assessment Neutral Fiscal assessment: flexibility and performance Strength Fiscal assessment: debt burden Strength Monetary assessment Neutral Standard & Poor's analysis of sovereign creditworthiness rests on its assessment and scoring of five key rating factors: (i) institutional assessment; (ii) economic assessment; (iii) external assessment; (iv) the average of fiscal flexibility and performance, and debt burden; and (v) monetary assessment. Each of the factors is assessed on a continuum spanning from 1 (strongest) to 6 (weakest). Section V.B of Standard & Poor's "Sovereign Rating Methodology," published on Dec. 23, 2014, summarizes how the various factors are combined to derive the sovereign foreign currency rating, while section V.C details how the scores are derived. The ratings score snapshot summarizes whether we consider that the individual rating factors listed in our methodology constitute a strength or a weakness to the sovereign credit profile, or whether we consider them to be neutral. The concepts of "strength", "neutral", or "weakness" are absolute, rather than in relation to sovereigns in a given rating category. Therefore, highly rated sovereigns will typically display more strengths, and lower rated sovereigns more weaknesses. In accordance with Standard & Poor's sovereign ratings methodology, a change in assessment of the aforementioned factors does not in all cases lead to a change in the rating, nor is a change in the rating necessarily predicated on changes in one or more of the assessments. Related Criteria And Research • Criteria - Governments - Sovereigns: Sovereign Rating Methodology - December 23, 2014 Related Criteria • General Criteria: Methodology For Linking Short-Term And Long-Term Ratings For Corporate, Insurance, And Sovereign Issuers - May 07, 2013 • General Criteria: Methodology: Criteria For Determining Transfer And WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MARCH 06, 2015 6 1387878 | 302365278 Research Update: Principality of Liechtenstein 'AAA/A-1+' Ratings Affirmed Despite Currency Impact; Outlook Stable Convertibility Assessments - May 18, 2009 • Banking Industry Country Risk Assessment: Liechtenstein, Jan. 16, 2015 Related Research • Bulletin: Switzerland Ratings And BICRA Unaffected By Swiss National Bank's Change In Exchange Rate Policy, Jan. 15, 2015 • Default Study: Sovereign Defaults And Rating Transition Data, 2013 Update, Sept. 17, 2014 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 were 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 Ratings To From AAA/Stable/A-1+ AAA/Stable/A-1+ AAA AAA Liechtenstein (Principality of) Sovereign credit rating Foreign and Local Currency Transfer & Convertibility Assessment T&C Assessment 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. Alternatively, call one of the following Standard & Poor's numbers: Client Support WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MARCH 06, 2015 7 1387878 | 302365278 Research Update: Principality of Liechtenstein 'AAA/A-1+' Ratings Affirmed Despite Currency Impact; Outlook Stable Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-44206708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow 7 (495) 783-4009. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MARCH 06, 2015 8 1387878 | 302365278 Copyright © 2015 Standard & Poor's Financial Services LLC, a part of McGraw Hill Financial. All rights reserved. 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