DBRS Confirms Republic of Austria’s Rating at AAA, Stable Trend

DBRS Ratings Limited (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 remains Stable.

The confirmation of the Stable trend reflects DBRS’s expectation that the government will keep to its fiscal consolidation programme and put the country’s debt on a firm downward trajectory over the medium term. DBRS expects that the country’s robust fiscal framework, combined with its track record of stable and predictable economic policies, is likely to support fiscal consolidation going forward. Downward pressure on the ratings could arise if the government departed significantly from its consolidation plan, leading to higher-than-expected deficits and debt. In addition, if there are further material losses in the banking sector that lead to a deterioration of Austria’s debt position, this could put downward pressure on the ratings.

The AAA ratings are supported by the country’s high income per capita and productivity. Labour productivity in Austria, measured as gross domestic product (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 20% higher than the euro area average. Austria has also maintained a solid external balance by delivering 13 consecutive years of current account surpluses. This performance, combined with the country’s strong external position, underscores the country’s economic resilience.

The Austrian economy weathered the 2008 financial crisis relatively well, reflecting the absence of large pre-crisis domestic imbalances. Since 2012, employment and real GDP have exceeded their pre-crisis levels, and unemployment at 5.6% in 2014 has remained among the lowest in the European Union (EU). After growing at a slow pace of 0.3% in 2014, DBRS expects the economy to recover steadily with GDP set to expand by 0.8% in 2015 and 1.3% in 2016, on the back of further easing of credit conditions, relatively low energy prices and a gradual improvement of the external environment.

The government’s steady efforts to adhere to its fiscal consolidation path and strengthened fiscal framework also support the ratings. Over the past four years, Austria’s structural fiscal deficit declined to 0.3% of GDP in 2014 from 3.4% in 2010. The headline deficit for 2014 increased temporarily to 2.4% of GDP as a result of additional support measures (1.4% of GDP) related to the establishment of Heta Asset Resolution AG (Heta), the “bad bank” set up to deal with the winding down of Hypo Alpe-Adria Bank (HAA). DBRS expects the fiscal deficit to decline to 2.2% of GDP in 2015 reflecting, in large part, the diminishing impact of the one-off support to HAA. However, the fiscal outlook suffers from uncertainties related to the finalisation of Heta’s restructuring and the recently announced tax reform due to come into effect in 2016.

Austria also benefits from a favourable public debt profile. The average maturity of government debt is 8.6 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 2.1% of GDP in 2014, lower than pre-crisis levels despite a higher stock of debt. This reflects the low interest rate environment and investor flight to safety.

Despite these strengths, the Austrian economy faces several challenges. In particular, Austrian banks’ foreign exposure to Central, Eastern and South Eastern Europe (CESEE) is high at 56.0% of GDP in 2014. Following strong expansion in recent years into Russia and Ukraine, Austrian banks are among those most exposed to a further escalation of tensions between the EU and Russia. The total exposure to Russia and Ukraine amounts to EUR 15 billion (4.6% of Austria’s GDP). While DBRS acknowledges that Austrian bank subsidiaries operating in CESEE have improved their funding structures, non-performing loans remain high and, in some countries, asset quality continues to remain under pressure. Overall, Austrian banks’ exposures to CESEE have the potential to add a significant burden on Austria’s fiscal position, particularly if a serious deterioration in the political and economic environment in these countries were to require the Austrian government to provide support to domestic lenders. DBRS specifies that this potential outcome represents a tail risk, however, and is not included in the baseline scenario. Finally, DBRS also anticipates a lower likelihood of government support for the banking sector as evidenced by the authorities’ decision to place limits on additional banking support to HAA and Österreichische Volksbanken-AG and the recently introduced legislation which allows the government to bail in the subordinated debtholders of Heta.

Another challenge stems from Austria's high and rising government debt stock. Following the creation of Heta “bad bank,” government debt increased by over 3.5% to approximately 84.5% of GDP in 2014. Under DBRS’s baseline scenario, government debt is projected to peak at 86.8% of GDP in 2015 as a result of the KA Finanz AG bank restructuring (2.2% of GDP) and then gradually decline to 80.0% by 2019. Weaker-than-expected growth or an escalation of tensions between the EU and Russia, however, pose downside risks to DBRS’s baseline scenario.

As in many other advanced economies, the costs of an aging population in Austria could add to fiscal pressures over the medium term. Public expenditures on pensions and health care are forecast to increase to 24.6% of GDP in 2040 from 22.2% in 2013. However, the government has introduced ambitious targets to increase the official retirement age by 2018, which should contain cost pressures.

Notes: All figures are in Euro unless otherwise noted.

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

These can be found on www.dbrs.com at:
http://www.dbrs.com/about/methodologies

The sources of information used for this rating include Federal Ministry of Finance, Statistic Austria, Oesterreichische Nationalbank Statistical Office of the European Communities, IMF, OECD, BIS, and Haver Analytics. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com.

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

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period, while reviews are generally resolved within 90 days. DBRS’s outlooks and ratings are under regular surveillance.

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

For further information on DBRS historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Giacomo Barisone, Senior Vice President.
Initial Rating Date: 21 June 2011
Rating Committee Chair: Roger Lister
Last Rating Date: 28 November 2014

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