Morningstar DBRS Confirms Republic of Austria at AAA, Stable Trend

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

KEY CREDIT RATING CONSIDERATIONS
The confirmation of the Stable trend reflects the view that the Austrian economy has shown resilience during the recent crises and a new government in the Autumn is likely to address the country's medium-term fiscal consolidation needs. According to recently published forecasts by Österreichisches Institut für Wirtschaftsforschung (WIFO), real GDP will stagnate this year, an improvement from a contraction of 0.8% in 2023, and then increase by 1.5% in 2025. While considerable uncertainty remains in relation to the trade and industry outlook, private consumption will likely continue to be supported by strong real wage growth. The country remains exposed to risks stemming from its still high reliance on Russian gas imports and the sluggish economic growth of Austria's main trading partners, especially Germany. On a current policy basis, the Austrian central bank forecasts the general government budget deficit will widen modestly from 2.7% of GDP in 2023 to 3.1% in 2024 and 3.3% in 2025. However, Morningstar DBRS takes the view that the reinstatement of EU fiscal rules will likely raise pressure on the new government to step up fiscal consolidation efforts.

The credit ratings are underpinned by Austria's prosperous, diversified, and stable economy. The country benefits from a real GDP per capita in purchasing power terms that is estimated at about 24% higher than the European Union (EU) average, solid and credible institutions, and a sound external position. Moreover, an overall conservative fiscal approach is expected to offset fiscal pressures from a variety of costs associated with an ageing population, defense and climate measures.

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

CREDIT RATING RATIONALE

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

Despite an unusual period of political uncertainty over the past few years, which included frequent changes in government leadership, the institutional framework in Austria is sound. This is reflected in very high scores in the Worldwide Governance Indicators. The coalition government, comprising of the Österreichische Volkspartei (ÖVP) party and the junior partner (Greens), will likely continue in government until the end of the legislative term, with elections due in September. The right wing Freedom Party is leading in opinion polls and its potential role in government would bring more attention to immigration and security issues. A key challenge for the new government will be alignment with the European Union's (EU) new economic governance framework that includes gradual fiscal consolidation and reforms and investments.

The Austrian Economy Continues to Stagnate, But Employment is Growing and the Outlook Seems More Promising

Austria's credit ratings benefit from its high GDP per capita, relatively low output volatility, and high diversification. The country enjoys a high level of integration in the EU bloc, which generally supports Austria's external competitiveness even though the country has relatively high inflation. Consumer prices have been growing at a higher pace than the euro zone average since mid-2022, which has weighed on consumption. However, more recently, real wage growth has been strong, supported by collective bargaining agreements. Weaker external demand and high interest rates are constraining investment, particularly in the construction sector. After posting strong growth of 4.8% in 2022, the economy contracted by 0.8% in 2023 and is expected to stagnate this year before a stronger recovery in 2025. Although gas storage levels are high, Austria remains dependent on Russian gas, which makes the economy relatively more vulnerable than other European countries to geopolitical risk from the conflict in Ukraine.

Medium-term economic prospects are partly constrained by demographic pressures, restrictive regulations in the services markets, a high part-time employment rate among women, and a high tax wedge. However, with the tax reforms and other measures included in Austria's Recovery and Resiliency Plan (ARRP), the government aims to ease these constraints and lift GDP potential.

Fiscal Trajectory to Remain Broadly Stable, But Fiscal Consolidation is Needed in the Medium Term

A sizeable deterioration in the budget balance occurred in 2020. The general government deficit peaked at a record level of 8.0% of GDP in 2020 and then declined substantially to 3.3% in 2022 and to 2.7% in 2023, despite the costly energy- and cost-of-living packages. The government aims to wind down support and this, combined with the fall in energy prices, is likely to result in a lower take-up of energy subsidies. On a current policy basis, the Austrian central bank forecasts the general government budget deficit to widen modestly to 3.1% in 2024 and 3.3% in 2025. However, the government projects the fiscal deficit to rise to just 2.9% of GDP this year and to 2.8% in 2025. The wider deficit relates to the delayed effects of inflation on public wages and social benefits, other spending increases, and the recently adopted housing and construction package. Coming years are also likely to see higher military spending and social benefits that will challenge the fiscal accounts. Austria will need to take steps to align with the new EU fiscal rules.

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

Stock of Debt is Elevated but Debt Affordability Benefits from Favourable Debt Profile

The government debt ratio is projected to remain broadly stable on a current policy basis. After peaking at 83.0% of GDP in 2020, the general government debt ratio decreased to 78.4% in 2022 and to 77.8% in 2023. The government foresees a decrease to 77.5% by the end of this year and to 77.4% in 2025. The Austrian central bank forecasts general government debt to rise modestly to 78.2% of GDP by 2026. While government borrowing yields have increased substantially, reflecting tighter monetary policy, debt affordability remains sound thanks to a favourable debt profile. As debt is expected to be refinanced at a higher rate, total interest payments on the federal debt are projected to rise from 0.8% of GDP in 2023 to 1.2% in 2026, a level that if reached would still remain below that of 2017. The long maturity profile and the fact that almost all federal government debt is at fixed rates reduces the risk of a rapid increase in the interest bill. The stock of contingent liabilities, estimated by the government, declined from 15.2% of GDP in 2022 to 14% in 2023, but it is not expected to weigh significantly on public finances. All of these factors contribute to lowering debt sustainability risks and lend support to Morningstar DBRS' positive qualitative adjustment in the "Debt and Liquidity" building block assessment.

Current Account Position is Strong Despite the Terms of Trade Shock

Austria's external position is sound and benefits from service exports as well as a diversified manufacturing base that is well integrated into EU value chains. Despite the pandemic-related restrictions from 2020 to early 2022, and the deterioration in terms of trade associated with the energy shock, Austria's external performance has remained resilient. The rapid recovery in tourism flows mitigated the impact of the rise in energy bills. The current account is estimated to have shifted from a deficit of 0.3% of GDP in 2022 to a surplus of 2.7% last year, an amount slightly higher than the average in the 2009-19 period (2.0%). Österreichische Nationalbank (OeNB) foresees a slight strengthening to 2.8% this year and to 2.9% next year. On the other hand, if the trend in strong wage growth is sustained, increasing unit labour costs could negatively affect external competitiveness. Morningstar DBRS views this risk as contained at the moment, as wage growth should moderate reflecting a decline in inflation, and the inflation differential with Austria's main trading partners should narrow.

Austria's credit ratings benefit also from a healthy positive net international investment position (NIIP). At 16.5% of GDP in 2023, the NIIP is lower but not far off from the record level of 21.1% of GDP registered in Q3 2022. Since March 2013, NIIP has shifted to a net asset position, reflecting a growing stock of foreign direct investment abroad as well as a decline in inward portfolio investment.

Sound Banking System, Moderate Household Debt, and Macroprudential Measures Mitigate Risks to Financial Stability

Risks to financial stability remain contained in Austria thanks to the elevated level of capitalisation in the banking system and the introduction of stricter lending standards in the real estate lending process. Austrian banks' sound capital position and profitability should help withstand the expected deterioration in credit quality as a result of high inflation, the tightening in financial conditions, and the phase-out of the pandemic and cost-of-living support measures. Austrian banks' exposure to Central, Eastern and South-eastern Europe (CESEE) countries remains elevated, although it provides a certain degree of diversification. The banking sector's exposure to Russia remains a point of attention in light of the conflict in Ukraine and possible sanctions and counter-sanctions. Furthermore, pockets of vulnerability might emerge from banks' comparatively large exposure to commercial real estate.

The real estate market is stabilising after years of increasing overvaluation. This, together with binding lending standards, bode well for financial stability. Furthermore, the worsening in household debt affordability due to rising rates is mitigated by the moderate amount of debt. According to OeNB, after seven quarters of annual growth of more than 10%, residential real estate prices have decelerated since the end of 2022 and declined by a further 2.6% on an annual basis in the first quarter of 2024, reflecting the impact of tighter monetary policy. According to OeNB, this contributed to a decline in property price overvaluation, which stood at 21.7% in Austria and at 31.8% in Vienna in April 2023, compared with 36% and 42%, respectively, in April 2022. However, according to OeNB, household debt affordability is deteriorating as a result of the monetary tightening and the large share of mortgages at variable rates. Nevertheless, households tend to display high incomes and wealth by international standards. Their balance sheets are strong, reflecting moderate debt in aggregate as a share of gross disposable income. Moreover, a relatively high net financial worth, estimated at approximately 129% of GDP as of Q4 2023, provides a buffer for households to absorb potential shocks. Macroprudential binding measures adopted since August 2022 further mitigate risks stemming from risky borrowers. Nonetheless, in view of the financial risks, including the high share of mortgages at variable rates, Morningstar DBRS applies a negative qualitative adjustment to the "Monetary Policy and Financial Stability" building block assessment.

ENVIRONMENTAL, SOCIAL, AND 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 Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024) https://dbrs.morningstar.com/research/427030.

For more information on the Rating Committee decision, please see the Scorecard Indicators and Building Block Assessments: https://dbrs.morningstar.com/research/436092.

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 (6 October 2023) https://dbrs.morningstar.com/research/421590. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://dbrs.morningstar.com/research/427030 in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The sources of information used for these credit ratings include Statistik Austria, Österreichische Nationalbank OeNB (Financial Stability report - June 2024, Austria's Economic Outlook - June 2024), Österreichische Bundesfinanzierungsagentur (OeBFA, Investor Presentation -June 2024), Austrian Ministry of Finance (BMF, Economic Developments and Public Finances 2023-2027 - April 2024), FISKALRAT - Public Finance Report December 2023, European Commission (Spring forecast 2024; Commission Opinion on Draft Budgetary Plan of Austria - November 2023; 2024 Country Report - Austria, June 2024; Council Recommendation on the economic, social, employment, structural and budgetary policies ofAustria, June 2024), International Monetary Fund (2024 Article IV Consultation - Press Release; Staff Report; and Statement by the Executive Director for Austria, Austria Selected Issues, May 2024), Social Progress Imperative, Entsog, Transparency International, European Central Bank, WIFO, Eurostat, International Monetary Fund (IMF WEO April 2024, IFS), Organisation for Economic Co-operation and Development (OECD), Weltrisikobericht, World Bank, Bank for International Settlements, Haver Analytics, Politico Poll of Polls. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings 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: NO
With Access to Management: NO

Morningstar DBRS does not audit the information it receives in connection with the credit 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. Morningstar DBRS' outlooks and credit ratings are under regular surveillance.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://dbrs.morningstar.com/research/436093.

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Nichola James, Managing Director, Global Sovereign Ratings
Rating Committee Chair: Michael Heydt, Senior Vice President, Sector Lead, Global Sovereign Ratings
Initial Rating Date: June 21, 2011
Last Rating Date: 12 January 2024

DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main Deutschland
Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

For more information on this credit or on this industry, visit dbrs.morningstar.com.