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

DBRS Ratings Limited has today 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 Stable trends reflect DBRS’s view that risks to the ratings are broadly balanced. The acceleration in real GDP growth along with progress in fiscal consolidation counterbalance the vulnerabilities stemming from the banking system and high stock of public debt.

Austria’s ratings could come under downward pressure if the government departs significantly from its consolidation plan, leading to higher-than-expected deficits and debt, or macroeconomic prospects materially worsen, placing public debt ratios on an upward trajectory. In addition, further material losses in the banking sector that lead to a deterioration of Austria’s debt position could put downward pressure on the ratings.

The AAA ratings are underpinned by the country’s wealthy and diversified economy with no large macroeconomic imbalances. Austria’s economy, with GDP per capita 26% higher than the Eurozone average, demonstrated considerable resilience throughout the 2008 financial crisis, and GDP surpassed its pre-crisis peak in 2012.

An unemployment rate of 5.7% in 2015 is among the lowest in the EU and reflects the economy’s high degree of competitiveness. Austria has a strong external sector, which bolsters its economic resilience. This is evident in a current account which has remained in surplus since 2001.

However, the Austrian economy has expanded at a slower pace than the Eurozone average in recent years. GDP grew by 0.4% in 2014 and 0.9% in 2015, compared with 0.9% and 1.7% in the Eurozone, respectively. This difference appears to primarily reflect lower domestic demand in Austria relative to the Eurozone average. DBRS expects economic activity to pick up over the coming years, underpinned by an acceleration in private consumption following the tax reform in 2015-2016, which should increase disposable income. Greater investment activity should also materialise as firms replace equipment and housing construction picks up. Additionally, expenditures for asylum seekers are likely to contribute positively to growth.

Austria has made steady progress in fiscal consolidation. The country has posted a fiscal deficit below the 3% of GDP threshold for the last four years by relying on a mix of spending cuts and tax measures. In 2015, the fiscal deficit narrowed to 1.2% of GDP (from 2.7% in 2014) as a result of lower than projected interest payments and a very positive outturn on the revenue side. This was partly offset by further support for the banking sector (EUR 1.7 billion or 0.5% of GDP) following the decision of the Austrian constitutional high court to qualify the HaaSanG law on Hypo Alpe Adria’s liabilities as unconstitutional. In structural terms, the fiscal position shifted to a small surplus of 0.1% of GDP in 2015. The structural balance suggests Austria is in a relatively strong position to navigate pressures stemming from the tax cut and greater spending on immigration as the cyclical recovery takes hold.

Austria also benefits from a favourable public debt profile. The average maturity of government debt is 8.4 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 2.4% of GDP in 2015, 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 55.0% of GDP in 2015. While Austrian bank subsidiaries operating in CESEE have improved their funding structures, non-performing loans remain high and, in some countries, asset quality continues to be under pressure. Moreover, the exposure in foreign currency, despite a significant deleveraging both in Austria and in CESEE region, still poses a concern. DBRS believes that legislative measures to convert loans into local currency, in particular in Poland and in Croatia where the shares of Swiss Franc denominated loans as share of the total FX denominated loans (57% and 16% respectively) are the highest, could materially impact the profitability.

DBRS also anticipates a lower likelihood of government support for the banking sector as evidenced by the authorities’ implementation of the EU's Bank Recovery and Resolution Directive (BRRD) and its decision to limit additional banking support. Nevertheless, financial sector risks persist, especially with regard to the HETA asset resolution, a wind-down company owned by the Republic of Austria designed to dispose of the non-performing portion of Hypo Alpe Adria. HETA’s restructuring and legacy guarantees by the Austrian State of Carinthia amount to EUR 11 billion, or 3% of GDP.

Another challenge stems from Austria's high and rising government debt stock. In particular, in the last two years the government debt increased substantially on the back of the inclusion of liabilities of distressed financial institutions. In 2014, liabilities of EUR 14.2 billion from HETA were reclassified within the general government. The increase in public debt to 86.2% of GDP in 2015, on the other hand, was primarily caused by the inclusion of some liabilities of Kommunalkredit Austria AG and Immigon, for a total amount of EUR 8.7 billion. Moreover the Austrian high constitutional court qualified the HaaSanG law as unconstitutional, resulting in a reinstatement of EUR 1.7 billion of liabilities from HETA into the public debt. Under our baseline assumption, the public debt-to-GDP ratio will begin to ease in 2016 and decline in the coming years due to brighter economic prospects and the sale of assets of the distressed banks. However, weaker-than-expected growth or an escalation of geopolitical tensions pose downside risks to our baseline scenario.

Notes:
All figures are in euros 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

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

This rating included participation by the rated entity or any related third party. DBRS had access to accounts, management and other relevant internal documents for the rated entity or a related third party.

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.

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

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: Carlo Capuano, Assistant Vice President
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer, Global FIG and
Sovereign Ratings
Initial Rating Date: 21 June 2011
Last Rating Date: 13 November 2015

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