DBRS Confirms Austria at AAA, Trend Remains Stable

DBRS, Inc. (DBRS) has confirmed the Republic of Austria’s long-term foreign and local currency issuer ratings at AAA. DBRS has also confirmed the short-term foreign and local currency issuer ratings at R-1 (high). The trend on all ratings is Stable. The ratings are supported by Austria’s high level of productivity, elevated savings rate and strong international price competitiveness. In addition, the Stable trend reflects DBRS’s assessment that the planned fiscal consolidation and moderate growth outlook will likely be sufficient to put public debt ratios on a downward trajectory over the medium term.

The Austrian economy has slowed amid deteriorating economic conditions across Europe. Following strong growth in 2010 and 2011, GDP expanded 0.8% last year. Private consumption and investment moderated as uncertainty stemming from the euro-area crisis adversely affected household and business confidence. In addition, Austria’s export performance was dampened by weak demand from European trading partners. Growth is expected to remain subdued this year but gradually accelerate as domestic demand strengthens and external conditions improve. The IMF forecasts GDP growth of 0.8% in 2013 and 1.6% in 2014.

The AAA ratings are underpinned by Austria’s strong macroeconomic fundamentals. 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. This translates into high income per capita, which adjusted for purchasing power parity is 7% higher than Germany and 19% higher than the euro area as a whole. Moreover, productivity gains combined with moderate wage adjustments have preserved Austria’s price competitiveness. From 1999 to 2012, unit labour costs increased at a slower pace than any other country in the euro area with the exception of Germany. This has supported Austria’s strong export performance and delivered eleven consecutive years of current account surpluses.

With healthy private sector balance sheets and a strong labour market, the domestic economy is well-positioned to support growth as the external environment improves. Household debt in Austria is low compared to euro-area peers and favourable financing conditions should support investment once demand picks up. At the same time, the labour market continues to perform well. The unemployment rate in April 2013 was 4.9%, the lowest in the European Union.

Fiscal results improved over the last two years on account of consolidation measures and moderate economic growth. The deficit narrowed from 4.5% of GDP in 2010 to 2.5% of GDP in 2011 and 2012. To redress lingering imbalances, the Austrian parliament passed a multi-year fiscal adjustment plan that aims to balance the budget by 2016. 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 levels of government. DBRS recognizes that there is uncertainty about whether some deficit-reduction measures will ultimately be implemented or yield the estimated savings. Nevertheless, the consolidation plan, in DBRS’s view, should be sufficient to put debt dynamics on a clear downward trajectory over the medium term.

Austria also benefits from a 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. Moreover, debt servicing expenditures amounted to 2.6% of GDP in 2012, lower than pre-crisis levels despite a higher stock of debt. This reflects the low interest rate environment and investor flight to safety.

However, economic weakness and financial fragility in the euro area present clear downside risks to Austria’s growth outlook, principally through Austria’s well-integrated trade and financial links to the region. Moreover, if a destabilising event in the euro area were to have negative spillover effects on Central and Eastern Europe (CEE), Austrian bank balance sheets could come under significant stress. At the end of 2012, Austrian banks’ foreign claims in CEE totalled 61% of GDP. While this cross-border exposure is diversified across a heterogeneous region, 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. In response to these challenges, banks have reduced liquidity risks and increased capital levels, while regulatory authorities have tightened the criteria for foreign currency lending and introduced guidelines to foster local funding bases for bank subsidiaries.

As in many other advanced economies, the costs of an ageing population in Austria could also add to fiscal pressures over the medium term. According to the Ministry of Finance, public expenditures on pensions, healthcare and long-term care are forecast to increase from 22.3% of GDP in 2011 to 24.6% in 2025, although these projections are subject to considerable uncertainty. If healthcare costs increase more than anticipated or employment assumptions underperform, age-related expenditures could put pressure on public finances.

In our baseline scenario (excluding ESA reclassifications), debt-to-GDP is projected to peak at 74% this year and then gradually decline to 63% by 2020. However, weaker than expected growth, potential capital shortfalls at several medium-sized banks and longer-term age-related spending pressures pose downside risks to our baseline scenario. DBRS notes that the reclassification of some public enterprise debt in 2014 will add approximately 4% of GDP to the general government debt burden. However, DBRS views the reclassification as an accounting issue that does not affect the overall strength of the public sector balance sheet.

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 Austria’s track record of prudent macroeconomic policymaking and the moderate economic growth outlook.

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 principal applicable rating policies are Commercial Paper and Short-Term Debt, and Short-Term and Long-Term Rating Relationships, which can be found on our website under Rating Scales.

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 is an unsolicited rating. This credit rating was not initiated at the request of the issuer.

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: 16 November 2012

For additional information on this rating, please refer to the linking document under Related Research.