The Swiss Franc Swissy is the only Franc currently issued in the European countries. The currency is issued by the Swiss National Bank and is used in Switzerland and Liechtenstein. The Swiss economy has long been considered the safest economy in the world, heavily dependent on foreign investment. Other major elements of the economy include watches, chemicals, textiles, machinery, and precision equipment. Economically, as politically, the country is neutral and remains independent from the European Union.
In recent years, the Swiss National bank has been determined to weaken the franc. In order to achieve this, inflationary monetary policies have been implemented in order to counter the deflationary problems which have been present for most of the past decade. This translates to negative interest rates.
The main tool in the SNB’s arsenal to inflate the franc is the SARON (Swiss Average Rate Overnight). This is set at -75bps with the overnight CHF LIBOR at -78 to -80. The goal of this setup is to make the currency cheaper in order to spur on exports.
The other big difference between the Swiss Franc and other major currencies is the way in which the SNB does its quantitative easing. For this, the SNB buys foreign assets rather than domestic assets. Purchasing assets such as US stocks weaken the franc and pushes out liquidity. If the SNB was purchasing domestic assets, the outcome would be a stronger Swiss franc.
Despite these policies, the Swiss franc is regarded as a very solid currency. The country has a fiscal surplus, low indebtedness, healthy wages, and a GDP that is very high per capita.
Like many other countries, Switzerland faces a big problem in regard to covid related effects on the economy. When the covid-19 pandemic hit, Switzerland was forced to shut down much of public life and the demand for Swiss exports decreased significantly.
It is estimated that manufacturing in Switzerland will fall by as much as 25% compared to 2019. Experts predict that if a V-shaped recovery is on the horizon, Swiss GDP will fall by up to 7% with unemployment almost doubling from 2% in 2019 to 4% in 2021. More dire estimates put the GDP decrease at 10% with unemployment creeping up to 4.5%
While the situation is still developing, it’s not too early to recognize that businesses and the overall economy have taken a direct hit. Nearly 1 in 5 of self-employed people have reportedly closed their businesses and 21% have reported continued business albeit with no customers. Just 10% of self-employed people report an increase in business.
As for employees, the impact has been just as greatly felt. The majority of workers report being impacted negatively by the pandemic with more than half of workers reporting they’ve had to reduce hours. Out of this group, more than a quarter have reported losing overtime and 2% have reported losing their jobs entirely.
As is with other countries currently trying to navigate the pandemic and its long-term effects, there is much uncertainty around what will and what won’t work going forward. The true devastation of the pandemic and the effect of CHF rates will not be clear until more time has passed.
As stated earlier, the pandemic crisis hit the Swiss economy hard. While the impact was sudden and strong, thanks to effective monetary policy, experts believe Switzerland was able to avoid further devastation by quickly making loans available. Businesses big and small were then able to extend compensation to many employees. Long term, this may not prove feasible but in the short term, this working compensation has kept the economy relatively healthy and stable.
While certain businesses such as watchmaking have taken an incredible hit, Swiss pharmaceuticals have moved through the pandemic unscathed. The pandemic also exposed how behind Switzerland was in regards to digitization and telecommuting. Going forward, businesses in these sectors should see strengthening and growth.
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