How Countries Earn AAA Rating: Part 1 of 5

How Countries Earn Triple A Rating: Part 1

Sovereign Rating is a crucial measure of a country’s financial, political, and economic health. A country’s Credit Rating impacts its domestic and international financial development and serves as a focal point for financial monitoring. Credit Rating Agencies provide important information to investors for their decision-making process, and a favorable rating can improve a country’s international financial integration.

However, only a few countries are part of the AAA club in the world of credit rating. Switzerland is one of those countries, having climbed to this height due to various factors. Its AAA Rating is supported by its large net creditor position, high and persistent current account surpluses, and the global reserve currency status of the Swiss franc.

Switzerland’s general government fiscal deficit narrowed substantially in 2021, helped by strong revenue generation, underspending on Covid-19 measures, and extraordinary SNB profit distribution. The country’s prudent fiscal policymaking and strong revenue performance during the pandemic led to a small increase in debt, but a further debt reduction is expected. The debt-GDP ratio is expected to return to pre-pandemic levels in 2023, and Switzerland’s strict fiscal rules call for a further CHF25 billion-CHF30 billion (3.2%-3.8% of GDP) debt reduction over the next five years, corresponding to all extraordinary expenditure during the pandemic (minus extraordinary revenue).

In addition to its fiscal discipline, Switzerland’s economic resilience to shocks, relatively low inflation, and strong banking sector have further strengthened its credit rating. However, as AAA is the highest level on a rating scale, the only rating action that can occur in the future is a downgrade. Rating Agencies warned that a sharp correction in the Swiss residential real estate market or large losses on banks’ trading and lending portfolios could lead to a negative rating action or downgrade, resulting in significant spill-overs to Switzerland’s public finances and economic performance given the large size of the banking sector.

(Please note that the Credit Rating view expressed in this write-up was only adapted and not that of DataPro.)


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