DBRS Assigns AAA Rating to Austria

DBRS Inc. (DBRS) has assigned ratings to the Republic of Austria’s long-term foreign and local currency debt at AAA. The trend on both ratings is Stable. The ratings are underpinned by Austria’s high level of productivity, high savings rate and strong international price competitiveness. The Stable trends reflect our expectation that the government’s fiscal consolidation program, supported by a robust economic recovery, will stabilise debt-to-GDP by 2013.

As in many other advanced economies, Austria’s public finances deteriorated during the global downturn. The deficit increased from 0.9% of GDP in 2008 to 4.6% in 2010. Higher deficits were partly due to automatic stabilisers and financial sector support, but discretionary measures, particularly permanent tax cuts, contributed. As a result, general government debt sharply increased from 60.7% of GDP in 2007 to 72.3% of GDP in 2010.

However, the coalition government has passed a multi-year consolidation plan to stabilise debt ratios and reduce the deficit below 3% of GDP by 2013. Moreover, recent reforms to the budgetary framework, including the introduction of multi-annual budget planning with legally binding expenditure ceilings, enhance the credibility of the plan.

As a highly open economy with well-integrated trade and financial links throughout Europe, Austria was particularly exposed to the global downturn. Output contracted 5.4% from a peak in the second quarter of 2008 to a trough in the second quarter of 2009, as exports and investment contracted. However, a broad-based recovery is well underway. The economy is benefiting from a rebound in global trade, strong demand from Germany, Austria’s main trading partner, as well as resilient domestic demand. After contracting 3.9% in 2009, GDP expanded 2.1% in 2010 and could grow as much as 3% this year.

Healthy private sector balance sheets and low unemployment point to good near-term growth prospects. Household debt is low at 57% of GDP and non-financial firm debt is below the Euro area average. Despite the depth of the recession, the effect on the labor market has been relatively mild. The unemployment rate in April 2011 was 4.2%, the lowest rate in the European Union, and employment has increased every month since March 2010. In addition, Austria has very high national savings, which, from 2001 to 2010, averaged 25.1% of GDP, well above the Euro area average. This funds Austria’s high levels of domestic investment and provides financing to the rest of the world.

The Austrian economy is well-diversified, highly productive and competitive. Productivity performance has been strong, growing at an average of 1% per year and accounting for 44% of value added growth from 1999 to 2007. This trend is also reflected in real GDP per capita, which increased at an average annual rate of 2% over the same period.

Productivity gains combined with moderate wage adjustments have preserved Austria’s price competitiveness. From 1999 to 2009, unit labor costs increased at a slower pace than any other in the Euro area with the exception of Germany. This has supported strong export performance, helped Austria maintain its share of global trade and delivered nine consecutive years of current account surpluses.

Notwithstanding these strengths, reducing public debt ratios is a major challenge. Based on the government’s fiscal consolidation plan, debt-to-GDP is expected to peak at 75.5% in 2013 and gradually decline thereafter. In order to put debt ratios on a clear downward trajectory and comply with the 60% of GDP debt ceiling over the next decade, additional fiscal adjustment will likely be required.

Austria also faces long-term budgetary pressures stemming from its ageing population. Reforms in recent years have tempered the expected growth of age-related expenditures and significantly improved the sustainability of public finances. However, if healthcare costs rise more quickly than anticipated or employment assumptions, such as higher employment rates for older workers, fail to materialise, age-related expenditures could put additional pressures on public finances.

Financial sector intervention has added debt and contingent liabilities to the public sector balance sheet. At the end of 2010, the government had assumed financial sector liabilities of EUR 6.1 billion (2.1% of GDP) and provided EUR 22.2 billion (7.8% of GDP) in guarantees, primarily for commercial bank bond issuances. However, the withdrawal of financial support measures has already begun, with government guarantee schemes expiring in December 2010.

Austrian banks still face downside risks given their extensive operations in Central, Eastern and Southeastern Europe. At the end of 2010, Austrian banks’ foreign claims in Central Europe totaled EUR 195 billion, or 69% of GDP. Central Europe is rebounding from a deep recession in 2009, but the pace of recovery varies across the region and non-performing loans in some countries are still rising. Furthermore, a large stock of Austrian bank loans in the region is denominated in Euros and Swiss Francs, making borrowers subject to exchange rate risk. Austrian regulatory authorities have implemented measures to restrict the flow of foreign currency credit, but reducing the outstanding stock while maintaining exposures is an ongoing challenge.

In contrast to their large exposure in Central Europe, Austrian banks have only marginal exposure to peripheral Euro area economies. In the event of a sovereign default in Greece, Austrian banks’ foreign claims in Greece total US$3.1 billion. Nevertheless, disruptive events emanating from Europe’s sovereign debt crisis could lead to renewed stress for European financial markets and negatively impact funding conditions for Austrian banks.

Austria’s AAA ratings are supported by its highly productive economy, high savings, resilient labor market performance and strong price competitiveness. Prolonged deterioration in the public debt ratios could put downward pressure on the ratings. However, DBRS views this as unlikely given the credibility of the fiscal consolidation plan and strong near-term growth prospects.

Notes:
All figures are in Euros (EUR) unless otherwise noted.

The principal applicable methodology is Rating Sovereign Governments, which can be found on our website under Methodologies.

The sources of information used for this rating include the Oesterreichische Nationalbank, Federal Ministry of Finance, Austrian Federal Financing Agency, Statistics Austria, European Central Bank, Eurostat, AMECO, OECD, BIS and IMF. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Lead Analyst: Michael Heydt
Rating Committee Chair: Alan G. Reid
Initial Rating Date: 21 June 2011
Most Recent Rating Update: 21 June 2011

For additional information on this rating, please refer to the linking document below.