DBRS Morningstar Confirms Republic of Austria at AAA, Stable Trend

DBRS Ratings GmbH (DBRS Morningstar) confirmed the Republic of Austria’s (Austria) Long-Term Foreign and Local Currency – Issuer Ratings at AAA. At the same time, DBRS Morningstar confirmed Austria’s Short-Term Foreign and Local Currency – Issuer Ratings at R-1 (high). The trend on all ratings is Stable.

KEY RATING CONSIDERATIONS
The confirmation of the Stable trend reflects DBRS Morningstar’s view that Austria’s government will continue to rebalance its public finances in the medium term. Near term economic slowdown and the temporary fiscal support in response to increasing living costs will not likely weigh materially on the public finance improvement in coming years. Moreover, the economic downturn is expected to be short-lived mitigated by a strong labour market and the country’s reinforced capacity to cope with the ongoing shortage of gas. On the back of dynamic fiscal revenues, sound nominal growth, and the continuation of phasing-out COVID-related expenditures, Austria’s public debt-to-GDP ratio is estimated to have declined to 78.3% in 2022, after a peak of 82.9% of GDP in 2020. It should further fall to 74.8% in 2024 benefitting from a recovery in economic performance next year. Latest estimates from the Austrian Institute of Economic Research (Österreichisches Institut für Wirtschaftsforschung, WIFO) point to GDP growth of 4.7% last year. Going forward, real GDP growth is forecast to slow down to 0.3% and recover to 1.8%, in 2023 and 2024, respectively.

The ratings are underpinned by Austria’s prosperous, diversified, and stable economy, which benefits from a real GDP per capita in purchasing power parity terms that is about 24% higher than the European Union (EU) average, as well as the country’s solid and credible institutions. Moreover, Austria’s historical track record of conservative fiscal policy pre-pandemic should help it rebalance the public finances over the medium term even in a scenario of slow growth. This, along with moderate private sector debt levels despite the Coronavirus Disease (COVID-19) shock, offsets public finance pressures from the cost associated with an ageing population, rather elevated public debt, and some vulnerabilities in the housing market.

RATING DRIVERS
One or a combination of the following factors could lead to a downgrade: (1) Austria’s government commitment to improve its public finances weakens significantly over the medium term; or (2) there is a material weakening in macroeconomic prospects, leading to a persistent and significant increase in the public debt ratio.

RATING RATIONALE

Strong Labour Market and Reinforced Capacity to Withstand the Energy Crisis Will Mitigate the Temporary Economic Slowdown

Austria’s ratings benefit from its high GDP per capita level, relatively low output volatility, and high diversification. Despite its moderate size, the country enjoys a high level of integration in the EU bloc which supports Austria’s external competitiveness. Following the sharp recession in 2020, GDP has recovered rapidly benefitting from the good performance of the important tourism sector, the recovery in trade and the pandemic-related support from the government. After an estimated 4.7% economic growth in 2022, the near-term outlook is clouded due to high energy prices, rising interest rates and lower external demand. GDP growth will likely slow down to 0.3% this year reflecting mainly squeezed real incomes and lower investment. Nevertheless, the downturn is expected to be short-lived and mitigated by a resilient labour market, high government relief and the recovery in trade growth. Economic growth should return to a sound rate of 1.8% in 2024.

Austria’s capacity to withstand the ongoing energy crisis has improved. Elevated energy prices have not prompted rationings and, gas consumption savings, thanks also to favourable weather conditions, are enabling the country to maintain sizeable gas storage levels. Moreover, thanks to government purchases of and private investment in gas reserves, gas storage stands at the sound level of around 86%. With reduced Russian gas deliveries, given its geographical position, Austria is expected to receive more gas through Italy and Germany this year. Nevertheless, this remains also dependent on these countries’ capacity to diversify their supply particularly from LNG, Norway, Africa and Azerbaijan.

Medium-term economic prospects remain partly constrained by restrictive regulations in the services markets; a high part-time employment rate among women, and the high tax wedge, which—although expected to decline—constrains potential GDP. However, with the tax reforms and other measures included in Austria`s Recovery and Resiliency Plan (ARRP), the government aims to mitigate these constraints.

Fiscal Trajectory Should Continue to Improve but Medium-Term Fiscal Pressures Are Rising

The economic rebound along with a gradual withdrawal of the support measures is facilitating public finance repair after the sizeable deterioration in the budget balance in 2020. The deficit peaked at a record level of 8.0% of GDP in 2020 but it declined substantially to 5.9% in 2021 on the back of the economic recovery. It is estimated to have dropped further to 3.5% in 2022, reflecting strong economic performance and the gradual removal of the pandemic-related support measures despite the costly energy related packages and expenditures for gas reserves. The government has recently announced the extension and widening of the energy subsidies for corporates which will likely be partially compensated for by solidarity contributions from electricity and fossil fuel companies. Sound nominal growth should continue to support a positive trend of revenues. This, in tandem with a further drop in COVID-19 support measures will help public finances repair, with the deficit declining to 2.9% of GDP and to 1.9% of GDP, in 2023 and 2024, respectively. Further improvements are likely dependent on new measures offsetting the impact of the abolition of the bracket creep which has been in effect since 2023 and will put increasing pressure on the deficit in coming years.

In DBRS Morningstar’s view, Austria’s additional fiscal vulnerabilities relate more to the long term because of the expected rise in the cost of age-related expenditures. In particular, according to the government, health and long-term care expenditure will increase to 8.5% and 3.1% of GDP in 2060 from 7.1% and 1.3% of GDP in 2019, respectively. At the same time, the cost of gross public pensions at 13.4% of GDP in 2019 was one of the highest in the EU and is expected to continue to rise, peaking in 2035 at 15.5%, reflecting a declining working age population, and relatively low participation rates among older workers. However, some measures envisaged in the ARRP should contribute to improving the fiscal sustainability of the pension system.

Prudent Fiscal Policy and Sound Debt Affordability Mitigate Against the Significant Rise in Yields

The historical track record of prudent fiscal policy pre-pandemic supports DBRS Morningstar’s expectation of a steady decline in the public debt-to-GDP ratio after the stark increase due to the pandemic. With primary deficits on a downward trend, from the peak of 82.9% in 2020 the debt ratio is estimated to have declined to 78.3% in 2022, before easing to about 73.5% in 2025, in spite of the rise in interest costs. Nevertheless, debt affordability remains sound with the cost of total effective interest payments on the federal debt expected to increase from 0.72% in 2022 to 1.31% of GDP in 2026, a level that if reached would remain below 2017.

Yields have been increasing substantially reflecting the tightening in monetary policy, but Austria’s public debt benefits from one of the longest maturity profiles in the EU, at almost eleven years. This, along with the fact that more than 90% of total outstanding federal government debt is at fixed rates reduces the risk of a rapid increase in the total cost of debt. Nevertheless, the stock of contingent liabilities, estimated at 16.5% of GDP in 2022, is not negligible but it is not expected to weigh significantly on public finances. All these factors contribute to lower the risk of debt sustainability which lend support to DBRS Morningstar’s positive qualitative assessment of the “Debt and Liquidity” building block.

Tourism Recovery Should Mitigate the Impact of the High Energy Bill on Austria’s Current Account Position

Austria’s external position is sound and benefits from a competitive service sector as well as a diversified manufacturing base well integrated into EU value chains. The pandemic-related restrictions have weighed on the tourism sector over the past two years, contributing to a decline in the surplus of the service balance. Nevertheless, as the impact of the pandemic gradually peters out, the tourism sector is recovering quickly. The total number of spent nights by foreign tourists has been on average only around 13% lower than 2019 in the first ten months of 2022, compared with 57% lower in the same period of 2021, and since May 2022 the flow of total nights is in line with pre-pandemic levels. DBRS Morningstar projects tourism flows to remain sustained going forward. This will likely mitigate the negative impact of the high energy bill along with weaker external demand mainly from Germany, Austria’s main trading partner.

The high energy bills weigh on the current account position which is expected to remain broadly in balance in the 2022-24 period, after the small surplus of 0.4% of GDP in 2021, according to the European Commission. Nevertheless, DBRS Morningstar views upside risks to Austrian export performance should tourism continue to recover and energy prices fall. Austria’s ratings benefit from a healthy positive net international investment position which at 20.2% of GDP in Q3 2022 is at a record level. Since Q1 2013 it has shifted to positive reflecting a growing stock of net foreign direct investments as well as an improvement in the negative portfolio investment position over the last years.

New Macroprudential Policies in the Context of Low Household Debt Mitigate Risks to Financial Stability

DBRS Morningstar’s assessment of monetary policy and financial stability is strong. The Austrian banking system is in a sound position and benefits from a moderate private sector indebtedness which partly mitigates rising risks to financial stability stemming from the vulnerabilities in the housing market, high inflation, and the end of the supportive measures implemented during the pandemic. The direct exposure to Russia is elevated by international comparison but the impact on the profitability of Austrian banks is expected to be manageable. Nevertheless, there is a high uncertainty over second-round implications as well as indirect exposure even though the Austrian banking sector is solid and contingent liability risks for the sovereign appear contained.

The mortgage lending despite the slowdown remains elevated in a context of rising rates and overvalued house prices which contribute the housing market vulnerability. The Oesterreichische Nationalbank (OeNB) estimates that, with residential real estate prices doubling over the last ten years, house prices are overvalued by 39% in Austria and 46% in Vienna in Q2 2022. Moreover, as of November 2022 about 47% of new loans granted are at variable rates, making indebted borrowers more vulnerable. Nevertheless, households tend to display high incomes and wealth by international standards. Their balance sheets are strong, reflecting both a moderate debt in aggregate as a share of gross disposable income, at around 86% over the past five years. Moreover, a relatively high net financial wealth estimated at approximately 128% of GDP as of Q3 2022 provides a buffer for households to absorb potential shocks. Financial stability risk is also mitigated by new macroprudential binding measures adopted since August 2022.

Banks are well equipped to withstand both the systemic risk stemming from the housing market and other risks. An elevated level of capitalisation, a sound liquidity position, and high coverage ratios should also enable the banking system to cope with the consequences of the pandemic, high inflation and the impact stemming from the invasion in Ukraine. Austrian banks’ on-balance exposure to Russia, Ukraine, and Belarus, which makes up around 10% of total assets of Austrian foreign subsidiaries in Central, Eastern, and South Eastern Europe (CESEE), is elevated by international comparison. Nevertheless, its direct impact on the banking system has been contained so far. The sound level of capitalisation with a CET1 ratio of 15.8% as of Q2 2022 mitigates the risk to financial stability.

The Institutional Framework Remains Sound Despite the Frequent Changes in Leaderships Over the Past Few Years

In spite of an unusual period of political uncertainty over the past years leading to changes in government leadership, the institutional framework in Austria is sound. This is reflected in very high scores in the World Bank governance indicators as well as in the intrinsic credibility of Austrian institutions. In DBRS Morningstar’s view, the coalition government comprising the Österreichische Volkspartei (ÖVP) party and the junior partner (Greens) will likely continue until the end of the legislative term in 2024, although some friction is possible.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental, Social, or Governance factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (17 May 2022).

For more information on the Rating Committee decision, please see the Scorecard Indicators and Building Block Assessments: https://www.dbrsmorningstar.com/research/408682.

EURO AREA RISK CATEGORY: LOW

Notes:
All figures are in euros unless otherwise noted. Public finance statistics reported on a general government basis unless specified.

The principal methodology is the Global Methodology for Rating Sovereign Governments https://www.dbrsmorningstar.com/research/401817/global-methodology-for-rating-sovereign-governments (29 August 2022). In addition, DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (17 May 2022) in its consideration of ESG factors.

The sources of information used for this rating include Statistik Austria, OeNB (Financial Stability report – November 2022), Österreichische Bundesfinanzierungsagentur (OeBFA, Investor Presentation – January 2023), Austrian Ministry of Finance (BMF, 2023 Draft Budgetary Plan – October 2022), EC (Autumn forecast 2022 – November 2022, the Digital Economy and Society Index – September 2022), Social Progress Imperative, Transparency International, European Central Bank, WIFO, Eurostat, International Monetary Fund (IMF WEO October 2022, IFS), Organisation for Economic Co-operation and Development (OECD), Weltrisikobericht, World Bank, Bank for International Settlements, Haver Analytics. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

With Rated Entity or Related Third Party Participation: YES
With Access to Internal Documents: YES
With Access to Management: NO

DBRS Morningstar 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.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/408680.

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Carlo Capuano, Senior Vice President, Global Sovereign Ratings
Rating Committee Chair: Nichola James, Managing Director, Co-head of Sovereign Ratings, Global Sovereign Ratings
Initial Rating Date: 21 June 2011
Last Rating Date: 29 July 2022

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