Home Ratingové hodnotenia a Výskum Aktuálne platné ERA affirms AA+ rating to Austria, outlook Stable
ERA affirms AA+ rating to Austria, outlook Stable
Piatok, 26 Apríl 2019

Affirmation of the unsolicited credit rating AA+ assigned to Austria stems from improved public finances, very strong governance indicators, and low imbalances in the private and external sectors. The rating is restricted by a high government debt load.

Rating components

Macroeconomic factors

Economic factors

High

Debt and current account sustainability factors

Moderate

Public finance factors

High

Private finance factors

Very High

Foreign exchange stability factors

Very high

Liquidity factors

Very high

Final assessment

High

Forward-looking factors

Political and economic stability

Very high

Efficiency and reforms potential

Very high

Final assessment

Very high

Overall score

Very high

Final rating

AA+


Macroeconomic factors of rating assessment

Solid economic growth, along with fiscal consolidation supported by a set of fiscal rules, has led to a strong decline in the debt-to-GDP ratio in recent years. ERA expects this trend to continue in a slower growth environment. Austria's private sector finances and external position are in sound shape and therefore pose only limited risks to the country's public finances.


External factors weigh on the economic outlook:

Austria experienced above average growth rates in 2016-2018. Economic activity was driven by solid household consumption supported by decreasing unemployment, by robust private investment activity due to replacement and expansion needs as a result of very high utilization rates, and by high export growth. In 2018, the economy grew by 2.7%, the most since 2011.

In 2019, the growth is expected to moderate due to a slowdown in the major export markets, mainly as result of international trade tensions. Export growth has been slowing in recent months, while confidence in manufacturing fell to a 4-year low, indicating lower growth in investment. However, household sector data suggest a continuation in strong private consumption supported by solid labor market conditions and high consumer confidence.

Against this background, ERA expects GDP growth to decline to 1.5–2.0% in 2019 with a potential for acceleration in 2020. However, the risks are rather tilted to the downside and are mainly related to tensions in international trade. The threat to the relatively highly open Austrian economy (with exports share on GDP at 54.5% in 2018) is not just the indirect effects of the tensions between the US and China, but also the effects of a hard Brexit and the threat of introducing tariffs on car imports from the EU to the US. The potential impact of an external demand shock is, however, mitigated by Austria's high level of export diversification in terms products.

In ERA's view, the medium-term growth potential for the Austrian economy is solid by western standards. Our estimate of the medium-term potential GDP growth around 2% is supported by high investment levels (by EU standards) along with very high R&D expenditures (3.11% in 2017 according to Statistics Austria, the second-highest in the EU. In 2018, the ratio increased to 3.17% according to preliminary figures). The negative impact of Austria's ageing population is somewhat mitigated by improving demographic indicators. The average population growth over the last five years has been close to 0.9%, the most in decades. While the major contributing factor has been migration, there has also been a pick-up in the rate of fertility. In 2016 and 2017, it stood slightly above 1.5%, the highest since the early 1980s.


R&D expenditure (% of GDP) in Austria and the EU


1

Source: Eurostat


Public finances are in surplus for the first time since the 1970s:

After a period of stagnation above 80% of GDP, government debt started to decrease significantly in 2017. This decrease was mainly driven by higher nominal GDP growth and by the tightening of public finances. In 2018, the budget was in surplus (+0.1%) for the first time since 1974 and the general government debt fell below 74% of GDP. The two-year change of the public debt-to-GDP ratio (2018/2016) was the second highest in the EU (after Malta), according to IMF data.


General government balance and debt (% of GDP)

2

Source: Eurostat, OENB

The country's fiscal framework is an important factor behind the declining debt. Austria's fiscal rules (fully in force since 2017) call for the structural deficit of the general government to be no more than 0.45% of GDP (0.35% for the general government and 0.1% for sub-sovereign entities), a convergence of debt-to GDP to 60% by 1/20 of the exceeding percentage points per year, and for expenditure growth of no more than the estimated medium-term potential growth.

In light of the strong compliance with the fiscal rules in the last two years, ERA expects the solid decline of the debt-to-GDP ratio to continue, despite the slowdown in nominal GDP growth (in 2019, the ratio is set to fall below 72%). This set of fiscal rules is adequate to prevent the debt-to-GDP ratio from increasing to less-sustainable levels in the future, for instance as a result of ageing related costs. However, these rules are not embedded in the constitution and are therefore somewhat easier to modify.

Tax-to-GDP ratio is one of the highest in the EU. In 2017, it stood at 42.4%, the sixth-highest in the EU. This is much higher than the unweighted EU-average of 37.2% and constitutes a constraining factor for the public finance assessment as it limits the government's ability to increase its revenues.


Relatively low private sector debt:

Austria's private sector finances are in sound condition. The investment to GDP ratio above 25% is one the highest in the EU and is fully covered by domestic savings. For 2018, IMF estimates Austria's domestic savings-to-GDP ratio at almost 28%, the highest in a decade. Private non-financial sector debt is low by western standards (139% of GDP in Q3 2018), with both household (50%) and non-financial corporation (89%) debt-to-GDP ratios below the unweighted EU average and well below the unweighted averages for western EU countries.


Private sector debt (% of GDP) in Austria and the EU

3

Source: Eurostat

Banking sector statistics are mixed. While the capitalization of the banking sector has increased substantially in recent years, the CET1 ratio, which stood at 14.8% in Q3 2018, is still well below the EU unweighted average of 17.4%. Profitability ratios are close to the EU-average (also due to lower risk provisions), while asset quality continues to improve. The NPL ratio fell to 2.5% in Q3 2018 (well below the unweighted EU-average of 5.4%), the lowest since the financial crisis.

Favorable economic conditions along with record low ECB rates have contributed to a considerable increase in housing prices. Over the past three years, housing prices grew on average by 6.2% year-on-year, which has amplified their overvaluation. Both the Austrian national bank and the European Commission estimate the overvaluation of housing prices relative to fundamentals above 10%. Nevertheless, risks to the banking sector stemming from the development of the housing market are contained, in ERA's view, due to relatively low household sector debt, the low homeownership rate (55% in 2017, the second lowest in the EU), and a significantly negative credit-to-GDP gap (-10.7% in Q3 2018 according to BIS).

On the cross-border level, the foreign exposure of the banking sector is concentrated on former Eastern Bloc members of the EU (mainly the Czech Republic, Slovakia, and Romania) and Germany. These economies are currently experiencing high growth rates and have below average economic imbalances.


Stable and moderate current account surpluses:

Austria's external position is healthy and its current account balance has been in surplus since the early 2000s, reflecting solid economic competitiveness. As a result of stable and moderate surpluses in the current account, the net international investment position rose from -21% of GDP in 2001 to 3.8% in 2018. Foreign reserve coverage ratios are very low by standard metrics (around 1.2 month of imports in 2018). However, this is not a source of concern as the euro has reserve currency status. Therefore, Eurozone countries tend to hold much lower foreign exchange reserves compared to most of the world.


Current account balance and net international investment position (% GDP)

4

Source: IMF, Eurostat

Forward-looking factors of rating assessment

Despite a slightly declining trend, Austria's governance indicators remain one of the highest in the world, led by the rule of law indicator.


Very strong governance indicators:

The quality of institutions in Austria is among the best in the world. This implies the high quality of government institutions and a very supportive environment for the allocation of resources in the economy, and therefore for future potential growth. The country scores very high especially in the rule of law category. This score is underpinned by high level of perceived judicial independence, which is the third-highest in the EU according to the latest EU Justice Scoreboard. The score for regulatory quality is somewhat constrained by the labor code. Restrictive labor regulations were identified as the most problematic factor for doing business in the 2017-2018 World Economic Forum survey (by 23.2% of respondents).


Selected World governance indicators for Austria vs EU average (ERA score 1-10):

5

Source: World Bank, ERA

From a historical perspective, Austria has experienced a slight decline in governance indicators in recent years. In 2016, the average scores of the five World Governance indicators fell to their lowest points on record since 1996. In 2017, these scores improved very slightly, but remain low by historical standards. The government efficiency indicator was the lowest on record in 2017 as inefficient government bureaucracy was identified as the second most problematic factor for doing business in the 2017-2018 World Economic Forum survey. Despite the decline, the governance indicators remain at very high levels by global and EU standards. Therefore, ERA does not consider them to be a risk factor for future economic growth.


Outlook: Stable

The outlook has been assigned based on expectations of a soft landing of the global economy, political stability in the Eurozone, and the government’s adherence to its fiscal rules. The Stable outlook assumes that the rating will most likely stay unchanged within the 12-month horizon.


Key assumptions

  • Government's adherence to the fiscal rules;
  • Political stability in the Eurozone;
  • Soft landing of the global economy.


Potential outlook and/or rating change factors

A positive rating action may be prompted by:

• Substantial decline in debt-to-GDP ratio to below 60%.

A negative rating action may be prompted by:

• Substantial deviations from the fiscal rule causing the deficits to grow above 3% of GDP and/or putting the debt-to-GDP ratio on an upward trajectory;

• Material decline in exports above 15% year on year.


Appendix 1. Peer-analysis materials. Stance among the peer-group sovereigns

General government debt/GDP (%); 2018

6

Source: Eurostat


General government balance (% GDP); 2018

7

Source: Eurostat

Appendix 2. Major sovereign indicators

Indicators

2014

2015

2016

2017

2018_E

2019_F

GDP, bln EUR

333.1

344.3

356.2

369.9

386.1

400

GDP growth rate, %

0.7

1.1

2.0

2.6

2.7

1.7

GDP per capita, ‘000 EUR

39.0

39.9

40.8

42.1

43.7

44.9

Population, mln

8.5

8.6

8.7

8.8

8.9

9.0

Unemployment, %

5.6

5.7

6.0

5.5

4.9

4.9

Consumer inflation, year-average, %

1.5

0.8

1.0

2.2

2.1

1.7

External debt to GDP, year-end %

183

172

165

154

146

140

Public debt to GDP, %

84.0

84.7

83.0

78.3

73.8

71.5

Gross Domestic Investment to GDP, %

23.5

23.8

24.3

25.1

25.5

25.6

International reserves, bln EUR

20.5

20.4

22.2

18.0

20.3

21.0

Trade balance, bln EUR

10.9

12.5

12.7

11.0

14.8

13

Exports, bln EUR

177.8

182.4

186.1

198.5

214.6

220

Imports, bln EUR

166.9

169.9

173.5

187.4

199.8

207

Current account to GDP, %

2.5

1.7

2.5

2.0

2.3

2.1


Appendix 3. List of material data sources

International Monetary Fund

World Bank

Eurostat

The Bank for International Settlements

Eurostat

European Commission

Oesterreichische Nationalbank

European Central Bank

Statistics Austria

Regulatory disclosure

The unsolicited credit rating and outlook were issued in accordance with ERA methodology for sovereign entities in the version from July 4, 2018 (available at www.euroratings.co.uk, section Methodology). In the same section is a rating scale including an explanation of the importance of each rating category and a default definition. Information on the rate of historical failure is available at www.cerep.esma.europa.eu, and the explanatory statement of the meaning of those default rates is available at www.euroratings.co.uk (Regulatory Framework/Disclosure). This rating is issued as an unsolicited rating, i.e. was not initiated by the rated entity or a related third party. The rated entity did not participate in the rating process and the information and documentation for its development was obtained from publicly available sources in accordance with ERA methodology. ERA did not have access to the rated entity’s internal documents. ERA, in the context of routine care, verified all sources entering the rating process. ERA considers the scope and quality of the information entering the analytical process to be sufficient to assign a credit rating. The disclosure of the unsolicited rating and outlook was preceded by the approval of the Rating Committee. No actual or potential conflicts of interest have arisen. Since July 30, 2012, ERA has been a registered credit rating agency according to Regulation (EC) No 1060/2009 of the European Parliament and of the Council of September 16, 2009, on credit rating agencies. The rated entity was notified on April 24, 2019, and after the notification there were no changes or amendments in the rating. The rating was first released for distribution on October 26, 2018.


Download pdf:

Austria affirmation_26.04.2019.pdf



Approved by the Rating Committee:

Zuzana Hrebičková, Acting

Head of credit rating analysts

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