November 29, 2015    5 minute read

Made in Switzerland – The Swiss Unpegging

   November 29, 2015    5 minute read

Made in Switzerland – The Swiss Unpegging

Switzerland remains one of the few independent countries in Western Europe. Despite keeping close ties with neighboring countries, they have historically regarded themselves as neutral. This is one of the main reasons as to why they have not joined the European Union (EU), or the Eurozone. In January of this year, the Swiss National Bank (SNB) decided to unpeg the Franc from the Euro; yielding dramatic consequences for the Swiss economy. Almost a year later we delve deeper into the consequences it has had, and how the economy has reacted.

The Swiss Franc has been kept at a fixed rate with the Euro since 2011, meaning it was being pegged to the Euro. One unit of EU currency was worth 1.2 Francs, until the SNB opted for a floating exchange regime. This drastic and sudden move shocked the world and its financial markets. In less than a day, the Franc appreciated by 20%, resulting in massive losses for hedge funds, investment banks, corporations and individual investors alike, who now need to hedge for increasing currency FX fluctuations. However, insane this move might seem, there are good reasons behind the decision.

Firstly, pegging the Franc to the Euro stripped Switzerland of almost all of their monetary policy autonomy. This meant that the country’s economy was mainly regulated through government-issued financial policies, leaving little space for central bank intervention. However, with the return of a floating exchange rate between Switzerland and their EU neighbors, the SNB will be able to implement restrictions or expansions according to the economy’s needs. We also need to consider the high level of speculation in January regarding the European Central Bank’s (ECB) plans of implementing quantitative easing. We now know that the speculation was correct, and the aim of reducing, or buying-out EU debt by increasing the money supply would have had serious implications for a pegged Switzerland.

The ECB is now well into their quantitative easing plan, thus causing the Euro to depreciate against the dollar and other notable currencies. With a still-pegged Franc, the SNB would have had to ‘print money’ to artificially depreciate their own currency in line with the Euro, causing losses for Swiss depositories. However, the main reason why the SNB unpegged the Franc is related to the county’s foreign exchange reserves which almost surpassed 70% of their gross domestic product (GDP). This was mainly due to the SNB buying up large amounts of Euros to keep their currency fixed at 1.2. Eventually, Swiss citizens protested and even started a referendum, which if passed, would have limited the amount of foreign currency the central bank could hold. The SNB really had no choice in the matter, keeping the Franc pegged was unsustainable, but what are the outcomes of a freely floating Franc?

The first thing we need to consider is the manner by which Switzerland operates. Its main source of revenue are exports, primarily to Europe, accounting for approximately 62% of total exports. The Swiss are known for their chocolate, luxury watches, and first-tier financial institutions, all of which suffered due to the unpegging. The Swiss Franc was being kept artificially low, raising demand for exports, and drastically appreciated following the unpegging. The resulting drop in demand for exports caused the current account balance of the country to take a large hit. Exports from Swiss-based multinational conglomerates such as Nestle took a nose dive, with their stock price falling from 74.40 CHF to 64.80 CHF in a couple of days.

Nestle 1 Year Stock Price

Nestle 1 Year Stock Price (Source: Google finance)

That being said, Nestle was able to recover, with their current stock price at a 1-year high of 76 CHF. The real problem lay in the luxury export business. Numerous watch-manufacturers such as Rolex and Hublot had to hike their prices due to the appreciation of their home currency, this, coupled with other international incidents like the pro-democracy Hong Kong protests, caused short-term revenue declines for the respective financial quarters. The only positive outcome of the unpegging was the increase in purchasing power for people who own Swiss Francs or deposits .

Almost a year later, the Swiss Franc has adjusted to the unpegging, depreciating to a seemingly stable level of 0.92 EUR for 1 CHF. This new trend comes as a sigh of relief for the Swiss economy and Swiss multinational companies reliant  on exports. Swiss debt is currently at 129Bn USD, accounting for only about 34% of its GDP, and their trade surplus actually hit an all-time high in October by widening the gap to 4.16Bn CHF, up 1Bn CHF from the previous year. This means that, even though the exchange rate should be unfavorable, there have been more exports than imports compared to a year earlier. Furthermore, with a relatively stable inflation rate and unemployment rate of -1.4% and 3.3% respectively, Switzerland is doing very well given the short-term losses from the unpegging; youth unemployment rate even decreased by 3.9% from the previous month. Lastly, total GDP expanded by 0.2% in the second quarter of 2015 over the previous quarter, giving clear signs that the Swiss economy is back and better than ever.

Screen Shot 2015-11-27 at 12.32.15

(Source: Trading economics)

All in all, Switzerland has demonstrated to be a resilient economy that is able to take a hit and bounce right back. Their banking sector is still strong and their export-led business continues to grow despite some setbacks earlier in the year. Now that the Franc is freely floating it is much more sustainable in the long run and the negative effects that resulted from the unpegging have been mitigated. Switzerland is in a good position and it should remain so in the near future.


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