Wednesday, December 4, 2024

Drugs Help Switzerland Withstand Pain From Swings in the Franc

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(Bloomberg) — For Swiss policymakers confronting the franc’s strongest levels in almost a decade, there’s comfort to be had: its squeeze on the economy isn’t quite what it used to be.

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A country whose signature exports include chocolate, cheese and watches is benefiting from the rising proportion that pharmaceuticals play in its overall growth mix — offering the Swiss National Bank some limited breathing space to respond to currency shocks. That’s because their overseas sales, often of patent-protected medicines, are more insulated to such swings.

“If I need a drug because I’m in pain, then I don’t care about the price,” said David Marmet, Swiss chief economist at Zuercher Kantonalbank. “The bigger pharma’s contribution to Switzerland’s economy becomes, the less dependent we are on the franc.”

The industry may now may rival the country’s iconic financial services in significance. Classed together with chemicals, it makes up some 6.3% of gross domestic product in Switzerland — double what it was three decades ago, and more than a third of the gradually shrinking contribution of overall manufacturing.

Such insights may have helped embolden the SNB to tolerate strength in a currency whose haven status keeps it in demand amid heightened geopolitical turbulence. Within the past year, the franc touched the highest since early 2015 against both the dollar and the euro.

While the central bank has already cut its interest rate to 1% — and is likely to ease again in December — it has done so in gradual quarterly increments of 25 basis points, unlike the more drastic half-point moves in recent months seen from the US to New Zealand. It has also stopped short of much intervention in foreign-exchange markets.

The shifting contours of Switzerland’s economy tell a tale not only about the drugmakers themselves, but also about the competitive struggles of manufacturing shared throughout advanced economies such as neighboring Germany.

“The strength of pharma masks the weakness of other industries that are more cyclical and sensitive to the exchange rate,” said Alexander Koch, an economist at Raiffeisen in Zurich. “There’s an accelerated structural change away from industrial production in Switzerland.”

At the center of its pharma sector are Roche Holding AG and Novartis AG, whose roots lie in the 19th century innovations of Basel’s dye industry adapting to drug production. Their headquarters there eye each other from opposing banks of the river Rhine, which offered a supply of fresh water, an outlet for waste, and easy transport links.

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