DBRS Confirms Austria at AAA, Trend Remains Stable

DBRS, Inc. (DBRS) has confirmed the Republic of Austria’s long-term foreign and local currency debt at AAA. The trend on both ratings is Stable. The ratings are supported by Austria’s high level of productivity, high savings rate and strong international price competitiveness. The Stable trends reflect DBRS’s assessment that multi-year fiscal consolidation supported by moderate economic growth will likely be sufficient to put public debt ratios on a downward trajectory over the medium term.

Austria experienced a strong recovery in 2010 as external demand rebounded, particularly from Germany, and domestic demand benefited from low unemployment and healthy private sector balance sheets. The economy also performed remarkably well in 2011. Output expanded 3.1%, despite a sharp deceleration in the second half of the year as financial stresses intensified in the Euro area and external demand waned. Moreover, Austria appears to have averted a recession with growth recovering in the first quarter of 2012. The economy is projected to grow 0.4% in 2012 and 1.4% in 2013.

The Austrian parliament passed a comprehensive five-year fiscal consolidation plan in March 2012 that aims to balance the budget by 2016. Deficit-reduction measures amount to EUR 27.8 billion (9.2% of GDP), with most of the adjustment on the expenditure side. The updated Stability Pact, or budgetary agreement between federal, state and municipal governments, reinforces the credibility of the plan, as significant cost-cutting measures, particularly in healthcare, depend on action across all three government levels. Fiscal consolidation will also put public finances on a path to comply with the debt brake, which was approved by the Austrian parliament in December 2011. Although there is uncertainty about whether some measures will ultimately be implemented, particularly the financial transaction tax, the consolidation plan and budgetary reforms, in DBRS’s view, strengthen the fiscal framework and improve prospects for debt stabilisation over the medium term.

The AAA ratings are underpinned by Austria’s well-diversified, highly productive and competitive economy. Labour productivity in Austria, measured as GDP per hour worked, is among the highest in the world, although lower than the United States and some European peers. Income per capita adjusted for purchasing power parity is 17% higher than the Euro area average. Moreover, productivity gains combined with moderate wage adjustments have preserved Austria’s price competitiveness. From 1999 to 2010, unit labour costs increased at a slower pace than any other country in the Euro area with the exception of Germany. This has supported strong export performance and delivered ten consecutive years of current account surpluses.

The domestic economy is also well-balanced with sound balance sheets and a strong labour market. Household debt amounted to 57.3% of GDP in 2010, below the Euro area average, and the real estate market is healthy. The job market has also performed well throughout the crisis. In fact, in March 2012 the unemployment rate was 4.0%, the lowest in the European Union.

Austria benefits from relatively low funding risk due to its favourable public debt profile. The average maturity of government debt is 8.5 years, the redemption calendar is well-balanced and nearly all outstanding bonds have fixed rates. These factors reduce rollover risk and mitigate the effect of abrupt changes in interest rates on public finances.

Despite these strengths, reducing public debt ratios is a major challenge. Public debt increased from 60.2% of GDP in 2007 to 72.2% in 2011. Based on the government’s fiscal consolidation plan, debt-to-GDP is expected to peak at 75.3% in 2013 and gradually decline thereafter. However, fallout from the sovereign debt crisis and financial fragility in the Euro area present clear downside risks to the economic outlook.

Moreover, potential fiscal costs stemming from Austrian banks’ exposure in Central and Eastern Europe (CEE) could put additional pressure on public finances. At the end of 2011, Austrian banks’ foreign claims in CEE amounted to EUR 197 billion, or 65% of GDP. The exposure is diversified across a heterogeneous region and bank subsidiaries have remained profitable throughout the crisis. However, non-performing loans are high and, in some countries, asset quality continues to deteriorate. In addition, foreign currency loans constitute a sizeable share of the loan portfolio, exposing unhedged borrowers to exchange rate risk. If a destabilising event in the Euro area were to have negative spillover effects on CEE, bank balance sheets could come under significant stress.

Austria also faces long-term budgetary pressures stemming from an ageing population. Several reforms to Austria’s pay-as-you-go pension system over the last decade have tempered the projected growth of age-related spending. However, if healthcare costs increase more 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.

Material deviation from the expected trajectory of Austria’s public debt ratios – either due to significant fiscal support for the financial sector or a sustained deterioration of the fiscal stance – could put downward pressure on the ratings. However, in DBRS’s view, this is unlikely given the strong political commitment to fiscal consolidation and moderate growth outlook.

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

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

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

This credit rating has been issued outside the European Union (EU) and may be used for regulatory purposes by financial institutions in the EU.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

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 under Related Research.