Download Principality of Liechtenstein `AAA/A- 1+`

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
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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,
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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
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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
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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
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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
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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
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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.
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