Soaring Swiss Franc Tests Mettle Of Smaller Firms by Matthew Allen, swissinfo.ch
Small and medium-sized enterprises (SMEs) – the bedrock of the Swiss economy – face a survival of the fittest test following the Swiss National Bank’s (SNB) decision to axe its CHF1.20 exchange rate peg against the euro.
Thursday’s surprise SNB announcement saw the franc soar against the euro, adding some 20% to the cost of Swiss exports to its main trading partner. In the panic that followed, several organisations warned of dire consequences for many Swiss firms.
“The Swiss franc was overvalued even at the euro exchange rate of CHF1.20,” Swissmem, the umbrella body for the machine building, electrical engineering and metal industries, said in a statement. “A sustained and significant appreciation of the franc against the euro and dollar could threaten the existence of many companies.”
“Margins, which are comparatively slim in our industries, would melt away.”
The day after the SNB’s policy reversal saw companies across the country hold emergency meetings to digest the consequences and work out new strategies. From their point of view, the beauty of the SNB exchange rate ceiling was that it gave them some sense of certainty for financial planning.
One of the angriest responses to the SNB’s decision from the SME sector was penned by Edouard Meylan, boss of niche watchmaker H Moser & Co, in an open letter to the central bank’s chairman Thomas Jordan.
“I trust you have a strong plan that will help all of us in the long run,” Meylan wrote. “Because otherwise, along with many other wonderful Swiss creations, H Moser watches may just have become very, very, very rare.”
“As an entrepreneur in a small Swiss company, I like a challenge,” he added. “Well, today, Mr President, your dramatic move helped step it up a notch: over 95% of our watches are sold to people outside of Switzerland, and the first retailers called the same day to cancel orders.”
The problems created by the appreciating Swiss Franc adversely affect exporters of all sizes. But the large multinationals at least have the cushion of gaining better purchasing prices through scale, a broader global footprint and specialist departments that source raw materials and hedge against currency fluctuations.
The vast majority of Swissmem’s members (72%) employ less than ten staff while only 1.4% have more than 250 employees, according to 2011 statistics. Some 80% of all members export their specialist goods with 64% of those exports ending up in the eurozone.
These numbers are typical of other sectors. Some 99.6% of all Swiss firms employ less than 250 staff, accounting for two-thirds of all jobs in Switzerland. A survey by the KOF Swiss Economic Institute last year revealed that the manufacturing sector expected sales to fall 3.4% within six months of the SNB ending its Swiss Franc peg policy, worsening to 4.2% after 18 months.
Fittest will survive
But the Swiss SME Association was more sober in its evaluation of events, arguing that companies should have known that the SNB currency intervention, that started in September 2011, could not go on forever.
“The SNB repeatedly told us that the exchange rate ceiling was a temporary measure,” SME Association executive Henrique Schneider told swissinfo.ch. “Companies have had three and a half years to prepare for this moment.”
“Some of the reactions to the SNB’s announcement, talking about bankruptcies and so forth, are just a feeling of shock because it happened so suddenly,” he added. “Now it is up to each company to evaluate. The coming months will show us how many of them prepared well for this moment.”
Preparations could have included cutting costs, improving manufacturing processes, investing in new technologies or opening up new export markets away from the euro.
Schneider’s remarks broadly echoed those of the SNB’s Thomas Jordan when he announced the policy reversal on Thursday: “The economy was able to take advantage of this phase to adjust to the new situation,” he said.
The SME Association, which has 300,000 member firms, has called on the government to urgently reduce red tape costs to help small firms through the difficult months and years ahead. Last autumn, a government report found measures that could reduce administrative costs for businesses by up to CHF10 billion.
These included cutting the amount of paperwork firms have to fill out to meet VAT obligations and aligning Swiss import and export regulations more closely with the European Union to save firms from having to meet two sets of rules.
“After the report came out we asked the government to act on it quickly,” Schneider told swissinfo.ch. “Their response was that this was not their most pressing issue. Well now it has become a most pressing issue.”
Industry bodies and economists continue to reacted with pessimism to the SNB’s abandonment of the franc-euro exchange rate peg.
UBS bank has drastically reduced its Swiss GDP growth forecast for 2015 from 1.8% to 0.5%, predicting that the appreciating franc will cost exporters CHF5 billion. UBS also cut its 2016 GDP growth forecast from 1.7% to 1.1%. BAK Basel, warned that the Swiss economy could lost up to 2% of previously predicted growth by the end of next year with a CHF1.05 franc-euro exchange rate while the rate of unemployment would climb from the current 3.1% to 3.8% in the same period.
The Fitch ratings agency warned that exchange rates could result in adverse implications for Swiss banks. “Many banks, including the country’s two largest and many larger private ones, generate a high proportion of revenue in foreign currency, whereas a larger proportion of operating costs are in Swiss francs,” Fitch said in a note.
“The SNB’s lowering of interest rates on some sight deposit account balances to -0.75% from -0.25% will put additional pressure on banks’ already narrow net interest margins. The full effect [of the SNB’s announcement on banks’ profits] will depend on where the exchange rate settles, and the effectiveness of the banks’ hedging strategies.”
By Matthew Allen, swissinfo.ch