DBRS Confirms Austria at AAA, Stable Trend

DBRS Ratings Limited (DBRS) has today confirmed the long-term foreign and local currency issuer ratings of the Republic of Austria at AAA and the short-term foreign and local currency issuer ratings at R-1 (high). The trend on all ratings remains Stable.

The ratings confirmation reflects the Austrian government’s strong commitment to fiscal consolidation and the expected downward trajectory of the public debt ratio. DBRS expects that Austria’s robust fiscal framework, combined with its track record of stable and predictable economic policies, will continue to support fiscal consolidation going forward. The AAA ratings are underpinned by the country’s wealthy, diversified and open economy with no large macroeconomic imbalances. Moreover, Austria benefits from a favourable public debt structure and a moderate household debt.

The Stable trends reflect DBRS’s view that risks to the ratings are broadly balanced. The pick-up in real GDP growth projected in 2016-2017 along with sound fiscal performance counterbalance the remaining vulnerabilities stemming from the banking system and a relatively high stock of public debt.

Austria’s economy, which benefits from a GDP per capita 27% higher than the Eurozone average, demonstrated considerable resilience throughout the 2008 financial crisis. GDP surpassed its pre-crisis peak as early as 2011 and the unemployment rate at 6.2%, albeit rising slightly mainly due to the influx of refugees, remains one of the lowest in the EU.

The country also benefits from a strong external sector, as evidenced by its current account which has remained in surplus since 2002 and a positive Net International Investment position.

While the Austrian economy has expanded at a slower pace than the Eurozone average in recent years, its growth is now expected to pick up and come back to a level commensurate with that of other Eurozone countries in 2016 and going forward. This largely reflects the tax reform implemented in 2015-2016, with the objective to boost households’ disposable income. In 2016, expenditures for asylum seekers are also contributing positively to the country’s GDP growth. However, these are currently foreseen to remain largely one-offs with a likely reduced impact on growth from 2017 onward. This implies that additional structural effort could be needed to improve productivity and boost the economy over the medium-term. Despite the ceremonial role of the Austrian presidency, a victory by Mr Norbert Hofer of the Freedom Party in the upcoming Presidential elections on the 4th of December, could signal a potential change in the direction of policies ahead of the next general election in 2018. DBRS will continue to monitor the government’s commitment to stabilising public finances, passing structural reforms and implementing a sustainable consolidation path.

The Austrian government’s commitment to fiscal consolidation is strong. The country has posted a fiscal deficit below the 3% of GDP threshold since 2011 thanks to a mix of spending cuts and tax measures. Lower than projected interest payments and a very positive outturn on the revenue side resulted in a fiscal deficit of 1.0% of GDP in 2015. For 2016, however, fiscal consolidation is expected to ease slightly with a headline deficit forecast at 1.4% of GDP, as a result of the effects of the tax reform and greater spending on immigration. Going forward, DBRS believes that fiscal performance and discipline will remain strong bringing a gradual decline in the headline deficit below 1% over the medium-term.

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 potential effect of abrupt changes in interest rates on public finances. Moreover, interest costs projected at 2.2% of GDP in 2016 are lower than their pre-crisis levels despite a higher debt-to-GDP ratio. This reflects the low interest rate environment and investors’ flight to safety, from which Austria has largely benefited. In addition to that, household debt remains moderate, lowering the country’s vulnerability to potential shocks.

Despite these strengths, the Austrian economy faces several challenges. Since the financial crisis, the support to the banking sector has resulted in a sharp increase of the country’s debt-to-GDP ratio which peaked at a relatively high level of 85.5% in 2015. However, Austria’s debt is now on a downward trajectory and DBRS anticipates a lower likelihood of government support to the financial sector going forward, as evidenced by the authorities’ implementation of the EU's Bank Recovery and Resolution Directive (BRRD) and the country’s decision to limit additional banking support. Public debt-to-GDP is therefore expected to decline in 2016. In the coming years, as the economy continues to grow at a moderate pace, DBRS believes that fiscal consolidation, as well as the gradual disposal of distressed bank assets will support further debt reductions.

Austrian banks’ foreign exposure to Central, Eastern and South Eastern Europe (CESEE) remains high at 54% of GDP at the end of Q1 2016. While Austrian banks’ subsidiaries operating in CESEE have improved their funding structures, non-performing loans remain elevated and, in some countries, asset quality continues to be under pressure. Moreover, despite a significant deleveraging both in Austria and the CESEE region, the exposure in foreign currency still poses a concern. In particular in Austria, the still very high share of foreign currency loans to total lending remains a considerable risk factor for households. In addition to that, the high share of households’ variable interest rate loans (77%) to total lending is a concern in case of abrupt increase in interest rates in the future.

DBRS assesses positively the recent resolution of creditors’ claims on HETA Asset Resolution AG (HETA). The acceptance from senior and subordinated bondholders of the settlement offer is credit positive as it removes uncertainties related to the deficiency guarantees granted by the Austrian State of Carinthia (equivalent to EUR 11 billion, or around 3% of the country’s GDP). This resolution will have no negative impact on the country’s deficit and debt metrics, given that all of HETA’s liabilities were already consolidated under Austria’s general government debt (ESA 2010).

Austria continues to face pressures from its aging population. The Austrian Federal Ministry of Finance estimates that pensions, health-care and long-term care will increase to 30.1% of GDP in 2040 from 27.8% in 2015. In 2014, several measures to slow the growth of health-care spending and raise the effective retirement age came into force, including stricter eligibility criteria for early pensions. These reforms have brought some good progress towards an increase in factual retirement age and these are likely to reduce the sustainability risks, to some extent, if they are accompanied by improvements in labour market conditions that allow older workers to stay in employment longer.

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

Notes:

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 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 Statistik Austria, Austrian Federal Ministry of Finance, Öesterreichische Nationalbank, OeBFA, Eurostat, Ministry of Finance, OECD, Austrian Federal Ministry of Finance, European Commission, IMF, Haver Analytics, and DBRS. DBRS considers the information available to it for the purposes of providing this rating to be 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 no access to 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 historical default rates published by the European Securities and Markets Authority (“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 May 2016

DBRS Ratings Limited
20 Fenchurch Street
31st Floor
London
EC3M 3BY
United Kingdom
Registered in England and Wales: No. 7139960

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