This European alpine nation of 7.5 million is rich, successful and very wealthy which reflects in its sound national currency, the Swiss franc (CHF). Today, Switzerland is an international money haven and financial centre home to over $1 trillion US-dollars (USD) deposited in ‘offshore’ accounts of an estimated $3 trillion USD of trans-national liquid wealth thus making Switzerland the world’s top tax haven. These international capital flows into Swiss banks & insurance companies among other Swiss industries has helped to maintain the aura of the Swiss franc as the world’s premiere currency next to gold. Historically, the Swiss franc has attracted investors worldwide as investors have been rewarded with excellent performance relative to other currencies, particularly in an era of currency crashes and economic instability. Switzerland is a progressive, advanced first world country home to modern capital markets and a diversified productive economy. The lifestyle is one of the world’s highest with both Zurich and Geneva consistently ranked as one of the best urban cities in the world to live. Switzerland has a long history of independence and neutrality.
POLITICS: very stable. The country is democratic following a decentralized political structure with less central power. However, this quiet peaceful country saw a surprise election result in November 1999 with political strength for the extreme right-wing party ‘Swiss People’s Party’ in support of their anti-immigration policy, opposition to multinational institutions and to the European Union (EU). They are in favor of preserving the national identity and culture of Switzerland. During September 2002, Switzerland voted to join the United Nations with a very slim majority of the vote. EU membership for Switzerland is years away as a referendum in March 2001 rejected EU membership. Membership to the EU maybe a costly venture for Switzerland with a disportionate transfer of Swiss francs to Brussels thus curtailing national investment and pushing up domestic interest rates.
ECONOMY: the economy has flirted with recession from years 2001-03 and is now slowly rebounding with stronger GDP growth. During the 1990’s, Swiss firms have restructured, implemented cost cutting measures while improving their international competitiveness. Switzerland’s central bank, Swiss National Bank (SNB) has a policy to keep a ceiling on inflation at 2 percent. The Swiss economy is widely diversified in areas of pharmaceuticals, chocolates, tourism, banking & insurance, military hardware sales, consumer goods, airlines and clocks to name just a few. In year 2001-02, the budget balance law takes affect after year 2001-02 recorded a deficit due to the economic slowdown and the rescue package for then Swissair. The mainstay of the Swiss economy is the large annual current account surpluses that have averaged around 10 percent over the last 5 years. Switzerland holds one of the world’s highest net international investment position with net assets at 135 percent of GDP.
GDP is approximately $250 billion USD representing one of the world’s highest per capita incomes at $33,000 USD. GDP growth to pick up to 2.1 percent for year 2005, year 2004 at 1.8 percent, year 2003 fell 0. 3 percent, 2002 at 0.2 percent, 2001 at 0.8 percent and year 2000 recorded strong GDP growth of 3.4 percent. CPI inflation for year 2004 came in at a very low 0.6 percent, year 2005 is forecasted at 0.8 percent, years 2000-03 inflation figures range from 0.5 to 2 percent. The current account is in surplus with year 2004 recording a positive balance of 9.6 percent of GDP, year 2005 is estimated to climb to 11.5 percent of GDP, year 2000 came in at 12.9 percent of GDP (highest among OECD countries), 2001 at 11 percent, 2002 at 9.6 percent and 2003 at 10 percent. The trade surplus measured $8 billion USD (2004). The fiscal account is in deficit with 2004 recording a shortfall of 2.5 percent of GDP. Public debt is at 57 percent of GDP. Unemployment is very low in the 4 percent range. Year 2003 FDI inflows attracted 1.6 percent of world capital inflows. Germany is Switzerland’s largest trade partner.
POSITIVE: very healthy savings ratio, strong military capability, tax revenue of 30 percent of GDP is quite low when compared to other industrialized countries, underground economy is very low at 8 percent of GDP, world class service sector. CONCERN: ageing population, collapse of Swissair in 2001, few natural resources.
SWISS FRANC AND GOLD
In the old Swiss constitution, it stated that every Swiss franc in circulation had to be backed by a minimum of 40 percent in gold reserves. However, the government set the official price of gold at $93.90 USD per ounce. Since gold currently trades in the area of $425 USD ounce, this means that the Swiss franc is effectively 100 percent backed by gold even with modest gold sales by the SNB. Under the new constitution of which voters approved and amended in April 1999, the Swiss National Bank shall accumulate sufficient reserves to back the franc, including gold reserves. The recent gold sales - world’s 4th largest holding (1998) and by far the highest reserves per capita. Complimenting this strength, Switzerland has one of the world’s largest holdings in foreign currencies and other reserves. Much more than gold backs the Swiss franc. These holdings are one of the largest to GDP with only Japan as the other country in the same class. The Swiss National Bank from 1999 - December 2003 has been on of the biggest central bank sellers as it has sold 871 tonnes of gold. Swiss gold sales are not an overly threatening scenario. In December 2004, it was announced that Switzerland plans to sell further gold positions to the beneficiary of the countries cantons. BI.C forecasts continued higher US-dollar gold bullion prices as this is indeed very supportive and bullish for the Swiss franc. Swiss gold itself may not even be sold outright. Swiss National Bank may decide to issue gold-backed bonds or lend gold for revenue purposes. Continual trade and capital surpluses will give Switzerland the ability to add to its total reserves going forward.
The Swiss franc will remain stable even with gold sales. Although it is technically not ‘backed’ 100 percent by gold, the Swiss franc for the most part is a fiat currency albeit a historically well managed currency. Switzerland is an expensive country to live and work, Swiss businesses look abroad for investment and growth opportunities. Swiss workers/voters see their incomes stagnate with a strong currency. Although many citizens desire a weaker currency, the Swiss National Bank will very much unlikely implement policies that will lead to a decline in the value of the Swiss franc. SNB view gold as the only government independent medium payment, maintaining a substantial reserve of the precious metal is essential in preserving Swiss neutrality. The use of gold will gold to play an important role in the future of SNB policy even with future gold sales in an era where many national central banks are reversing policy and are beginning to accumulate gold rather than selling.
BANKING SECTOR: solid, very sound. The Swiss National Bank ‘SNB’ has one of the world’s best records for managing inflation resulting in the Swiss franc as one of the hardest fiat currencies in circulation today. The Swiss banking sector is dominated by two large main stream commercial banks coupled with a few hundred privately held banks and insurance companies that manage the huge domestic and offshore wealth invested in Switzerland estimated at 35 percent of the world’s private and institutional offshore monies. The Swiss financial sector represents 12 percent of GDP. January 2005 short-term interest rates have the 3 month LIBOR CHF at 0.74 percent within the 0.25 to 1.25 percent range as set out by the SNB. It is likely that rates will stay low to help mitigate appreciation pressures on the Swiss franc with an interest rate differential of over 100 basis points lower than interest rates presently in the eurozone. Official reserves including gold are measured at $70 billion USD (November 2004) with gold accounting for $18.5 billion USD equivalent to 44 million ounces.
KNOWLEDGE: Tax Amnesties
Tax amnesties potentially within many countries may reverse Swiss capital flows. This was evident with Italy during 2002-03 as many Italian depositors then transferred funds out of Swiss banks ($58 billion USD) back home to Italian banks under the tax amnesty arrangement issued by Italy’s government. The threat to the Swiss franc is a mass exodus or a significant change in Swiss banking secrecy laws. Tax evasion is not considered a criminal offence under Swiss law however in the case of criminal activities (ie. drug trade, money laundering, etc.) information maybe provided. The Swiss view is that tax evasion is best tackled by lowering taxes. The European Union is currently putting significant pressure on the Swiss to dismantle banking secrecy laws because of its concerns with regard to tax evasion. Switzerland has responded by offering to levy a withholding tax on EU citizen deposits. Both the EU and the United States have requested greater information and transparency about their citizens banking in Switzerland. The far-right Swiss People’s Party wants to protect Swiss banking secrecy by enshrining it into the constitution. Switzerland’s federal government have announced that ‘Swiss banking secrecy is not negotiable’, no change to the status quo. However, an agreement with the OECD may allow for Swiss authorities to provide information on Swiss holding companies. International tax amnesties by many countries including the possibility of Germany and Belgium, the rise of competing offshore tax havens and a potential for a future compromise on Swiss banking laws are significant medium term threats to the value of the Swiss franc as large capital inflows into Swiss banks and other financial Swiss services companies may cease to continue at consistent high levels.
REGIONAL and GLOBAL ANALYSIS: European Union, United States
It is very unlikely that the Swiss will give up the Swiss franc for the euro and EU membership. The wave of EU integration taking hold throughout Eastern and Central Europe will not include Switzerland. The Swiss people do NOT want to join the European Union, nor do they wish to give up the Swiss franc for the euro and inherit the risk of importing instability including potential immigration difficulties from the EU. The Swiss franc is a marketing tool to attract a large pool of international investors of which the positive capital flows help to maintain the strong Swiss economy and its highly profitable financial services industry. The Swiss franc has had a long history of stability, particularly during very turbulent times in Europe with two World Wars in the 20th century and with Germany experiencing hyperinflation in the 1920’s. Any further international crisis including both financial or terrorism related, this will further strengthen the Swiss franc. Switzerland is well placed geographically and surprisingly, the United States is Switzerland’s second largest trading partner. The EU countries are Switzerland’s largest trading partner accounting for 60 percent of Swiss trade. Amongst Eastern Europe, Swiss trade is increasing with countries like Hungary, Poland and the Czech Republic. International trade is a key component of Swiss prosperity.
CURRENCY: ISO symbol ‘CHF’, Swiss franc. At time of review on January 12, 2005, the Swiss franc has an exchange value of 1.1655 CHF to 1 USD and/or 1.5476 CHF to 1 EUR (Euroland euro). The currency regime in place is that of a floating exchange rate. CHF is under the control of the Swiss National Bank which has the CHF positioned as a managed float currency via intervention in the money markets. Historically stable, the Swiss franc has attained global ‘safe haven status’ in part due to its large gold and foreign currency holdings backing the fiat currency. The Euroland euro is becoming Switzerland’s parallel currency as ATM’s are now dispensing euros in addition to Swiss francs. The Swiss franc and gold are widely viewed as the world’s soundest currencies in use today. Amongst the fiat currencies, the Swiss franc is in a class of its own due to a multiple of variables as outlined in this currency analysis particularly after the September 11, 2001 terrorist attacks on the United States. In the days following the terrorism strikes, CHF appreciated by 6 percent versus the USD.
CURRENCY HISTORY: there has been a huge currency appreciation for the Swiss franc versus the USD since 2001. Currency crisis dates include November 1978 for the CHF. From year 1993-95, CHF appreciated versus the USD, then from 1995 it began to depreciate as the start of the United States stock market mania and runaway bull market in US-dollars took hold. CHF bottomed out in October 2000 as it was valued at 1.81 CHF to the USD (55.2 US cents for 1 CHF). The trading range for the Swiss franc is in the area of 55 to 88 US cents as it has remained consistent over the last 12 years. During year 2002 year to date, both the Swiss franc and the euro are appreciating versus the USD. CHF has remained relatively stable in value versus the euro as gains in each respective currency will offset one another as both the euro and CHF are set to make modest gains against an imploding USD. Most of the appreciation for the Swiss franc versus the majority of other world currencies occurred from 1970-86 during a period of high inflation in the United States economy. The Swiss franc appreciated 258 percent against the USD from 1970 to 1995. It is interesting to note that during 1985-88, the Swiss franc rose dramatically from 35 US cents to nearly 80 US cents. During these high inflationary times, the Swiss government actually imposed negative interest rate on deposits of non-Swiss investors in a move to stem the rise of the value of the currency.
A historical snapshot includes the Swiss franc in year 1971 at 4.30 CHF to the USD, 1972 at 3.89, January 1973 at 3.72, January 1974 at 3.36, June 1975 at 2.49, January 1976 at 2.60, December 1977 at 2.07, October 1978 at 1.53, January 1979 at 1.67, January 1980 at 1.59, July 1981 at 2.09, November 1982 at 2.19, January 1984 at 2.20, March 1985 at 2.8, April 1986 at 1.90, May 1987 at 1.47, January 1988 at 1.34, May 1989 at 1.73, November 1990 at 1.256, January 1991 at 1.27, March 1992 at 1.49, March 1993 at 1.52, April 1995 at 1.138 (high), August 1997 at 1.51, August 1999 at 1.53, May 2000 at 1.71, June 2001 at 1.78, May 2002 at 1.58, December 2004 at 1.147 CHF to 1 USD. As measured by purchasing power parity, the Swiss franc was approximately 44 percent overvalued to the USD in April 2001 and 39 percent overvalued in April 2000.
CURRENCY FORECAST: modest appreciation to occur over the next year with December 2005 in the low 90 US cent range. There is also a high probability of a peak at par with the USD within the next 2 to 3 years at which point the Swiss franc may reverse trend cycle. The Swiss franc hit recent highs of 88.11 US cents on December 27, 2004. With the United States experiencing a massive currency devaluation delaying the inevitable hard double dip landing that BI.C now forecasts to arrive in late 2005 - early 2006, this crash of the USD is bullish for both the CHF and gold bullion over the next 3 to 5 years. Some analysts believe the USD is a disaster waiting to happen. BI.C remains bullish on the Swiss franc versus the USD over the medium term although the CHF remains vulnerable in the long term as suggested by its currency overvaluation as measured by purchasing power parity ‘PPP’. On January 11, 2005, the CHF was measured as high as 59 percent overvalued as suggested by PPP theory. However, the Swiss franc has been in currency overvaluation as measured by purchasing power parity for years. At present, the Swiss franc is a stronger/sounder currency than the USD. PPP suggests that over the very long term, the over/under valuation of a currency will correct itself.
It is quite possible that SNB may raise interest rates by mid 2005, this is a bullish scenario for the Swiss franc. With respect to Switzerland’s economy, the EUR exchange is much more important than the USD exchange due to the large export market for Swiss products within the European Union. BI.C forecasts a continued stable exchange in the range of 1.55 CHF to the EUR.
UPDATED: January 12, 2005