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 is Stable.

The rating confirmation reflects the country’s wealthy, diversified, and open economy with no large macroeconomic imbalances as well as a robust fiscal framework that consistently produces manageable fiscal deficits. Moreover, Austria benefits from a favourable public debt structure and moderate levels of household debt.

The Stable trend reflects DBRS’s view that the declining trajectory of public debt-to-GDP ratio, mainly as a result of higher economic growth, low deficits and the disposal of distressed banks’ assets, offsets the vulnerabilities stemming from the banking system and the relatively high stock of public debt.

Austria’s economy, which benefits from a GDP per capita 26% higher than the eurozone average, demonstrated considerable resilience throughout the 2008 financial crisis. GDP rebounded quickly and surpassed its pre-crisis peak as early as 2011. The current unemployment rate of 6.0%, although on a slightly upward trend, remains one of the lowest in the European Union, despite labor market pressures stemming from the influx of refugees and foreign workers.

While the country’s economy has expanded at a slower pace than the eurozone average in recent years, activity has picked-up and growth is expected to be more commensurate with the eurozone average. This largely reflects the effects of the tax reform implemented in 2015–2016, which boosted household disposable income and higher investment. According to the European Commission, Austria’s growth is expected to remain moderate at around 1.6% in 2017-2018. This is despite lower expected capital investments linked to equipment replacement and the projection that public sector expenditures related to asylum seekers gradually recede, as the number of refugees arriving to Austria declines. While the brighter eurozone economic outlook supports cyclical growth in Austria, additional structural changes are likely needed to improve productivity and boost medium-term growth.

The Austrian government’s commitment to fiscal consolidation is strong. The country has posted a fiscal deficit below the 3% of GDP Maastricht benchmark since 2011 thanks to a mix of spending cuts and tax measures. Despite a slight increase in the fiscal deficit to 1.6% of GDP in 2016, up from 1.1% in 2015, chiefly as a result of the income tax relief, DBRS nonetheless believes that fiscal discipline will remain strong and the headline deficit will likely narrow to below 1% over the medium-term.

Austria also benefits from a favourable public debt profile. The average maturity of government debt is 8.8 years, the redemption schedule is well balanced and nearly all outstanding bonds have fixed rates. These factors reduce rollover risk and mitigate the potential effect of abrupt changes to interest rates on public finances. Interest costs of 2.1% of GDP in 2016 are lower than 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, household debt remains moderate at 52.8% of GDP in 2016. This lowers the country’s vulnerability to potential shocks. The country also benefits from a sound external sector, as evidenced by its current account, which has remained in surplus since 2002 and a positive net International Investment Position (NIIP).

Despite these strengths, the Austrian economy faces several challenges. Since the financial crisis, 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 with debt-to-GDP ratio at 84.6% in 2016. Moderate economic expansion, fiscal consolidation, and the gradual disposal of distressed bank assets is expected to support further debt reductions over the forecast period. In addition, 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 and the country’s decision to limit additional public sector banking support.

Austrian banks’ foreign exposure to Central, Eastern and South-eastern Europe (CESEE) remains large despite the significant decline following Unicredit Bank Austria AG’s restructuring, with the shift of many assets to the parent company in Italy last year. 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 to foreign currency still poses a concern. In particular, in Austria, the high share of foreign currency loans to total lending implies a considerable risk factor for households. In addition, the high share of household variable interest rate loans to total lending is a concern were a shock to significantly increase interest rates.

DBRS assessed the October 2016 resolution of creditor claims on HETA Asset Resolution AG (HETA) positively. The acceptance from senior and subordinated bondholders 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 is expected to have a positive effect on debt metrics going forward, given that all of HETA’s liabilities were 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 progress toward an increase in actual retirement age, and they are likely to reduce sustainability risks, to some extent, if they are accompanied by linking the statutory retirement age to life expectancy and further improvements in labour market conditions that allow older workers to stay employed longer. At the same time, according to the European Commission, the 2013 health-care reform and the 2017 financial equalisation law, despite putting some limits on the expenditure, appear not sufficient to ensure the sustainability of the health-care system.

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 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, United Nation, Eurostat, OeBFA, Bloomberg, OECD, AMECO, ECB, IMF and Haver Analytics. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

This is an unsolicited 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 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, Global Sovereign Ratings
Rating Committee Chair: Thomas Torgerson, Senior Vice President, Global Sovereign Ratings
Initial Rating Date: 21 June 2011
Last Rating Date: 11 November 2016

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