DBRS Confirms Austria 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 and its Short-Term Foreign and Local Currency – Issuer Ratings at R-1 (high). The trend on all ratings remains Stable.

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

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

Austria’s ratings benefit from its wealthy economy, with a GDP per capita that is 24% higher than the eurozone average, and from an unemployment rate that at 5.4% in July 2017 is one of the lowest in Europe. Following a period of disappointing growth, economic activity has been accelerating since the beginning of 2016 on the back of the 2015 tax reform and with solid performance in investment driven by exports and housing demand. While GDP growth could likely achieve 2.8% both this year and in 2018, compared with 1.5% last year, it is expected to moderate going forward, with the effects of the tax reform gradually dissipating and investment receding. In DBRS’s view, the stronger performance is in part cyclical, as potential growth remains constrained by strict regulation in the service sector and the high tax wedge.

The Austrian government’s commitment to fiscal consolidation is strong. Prudent fiscal policy, thanks to a mix of spending cuts and tax measures, has translated into small deficits over the last two years. Some fiscal relaxation in the run up to the snap election, scheduled for 15 October 2017, has increased the risk of fiscal slippage but DBRS believes that higher growth could result in the headline deficit declining to 1.0% of GDP this year from 1.6% in 2016 and that fiscal discipline will remain strong going forward. However, DBRS acknowledges that uncertainty on the budget neutrality of potential future measures, including a new tax reform, has risen. In addition, negotiations following the outcome of the elections could prove difficult and delay policies, especially if coalition parties struggle to find a shared view on contentious issues such as immigration and tax reform.

Austria also enjoys a favourable public debt profile. The average maturity of government debt will be close to ten years as at the end of 2017. 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, which stood at 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 light of the likely reduction in the European Central Bank’s (ECB) accommodative monetary policy in the future, even if long-term interest rates were to rise markedly from current levels, the long maturity profile of the public debt ensures a gradual rise in the interest burden.

In addition, household debt remains moderate at 52.3% of GDP in Q1 2017. This lowers the country’s vulnerability to potential shocks. The economy also benefits from a sound external sector, as evidenced by its current account, which has remained in surplus since 2002, and a positive and increasing net international investment position (NIIP) of 7.3% of GDP.

Despite these strengths, the Austrian economy faces several challenges. Since the financial crisis, support to the banking sector has resulted in a sharp increase in the country’s debt-to-GDP ratio, which peaked at a relatively high level of 84.3% in 2015. However, Austria’s debt is now on a downward trajectory, with the debt-to-GDP ratio projected to decline substantially to 80.8% of GDP this year. Stronger economic expansion, fiscal consolidation and the gradual disposal of distressed bank assets are the main drivers of this decline. 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 (BRRD) 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 material 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 significant deleveraging in both Austria and CESEE, the exposure to foreign currency still poses a concern. In addition, in Austria, the high share of variable interest loans-to-total new lending implies a considerable risk factor for households.

Austria continues to face pressure from its ageing population. According to the United Nations projection, the old-age dependency ratio will increase to 40.8% in 2030 from 28.1% in 2015, putting pressure on Austrian public finances. In this context, several measures to slow the growth of health-care spending and raise the effective retirement age have been implemented over the last few years, including stricter eligibility criteria for early pensions. The latter has brought some progress toward an increase in actual retirement age, and it is likely to reduce sustainability risks. It is worth noting, however, that according to the European Commission, despite the fiscal equalisation law in 2017 that put into place more-stringent expenditure ceilings, health-care spending remains a challenge.

RATING DRIVERS
Austria’s ratings could come under downward pressure if a new government departs significantly from the current fiscal consolidation trajectory, 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 Statistics Austria, OeNB, Austrian Ministry of Finance, AMECO, IMF, OeBFA, UNDP, WIFO, Neuwal.com, Eurostat, 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 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 and US regulations only.

Lead Analyst: Carlo Capuano, Assistant Vice President, Global Sovereign Ratings
Rating Committee Chair: Thomas R. Torgerson, Senior Vice President, Global Sovereign Ratings
Initial Rating Date: 21 June 2011
Last Rating Date: 21 April 2017

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