Home Ratings and Research Currently valid ACRA Europe affirms unsolicited credit ratings of AA+ to Austria, outlook Stable
ACRA Europe affirms unsolicited credit ratings of AA+ to Austria, outlook Stable
Friday, 24 April 2020

The Republic of Austria (hereinafter, Austria, or the country) has been assigned the following ratings:

  • Long-term foreign currency credit rating at AA+ and local currency credit rating at AA+;
  • Short-term foreign currency credit rating at S1+ and local currency credit rating at S1+.

The outlook on the long-term foreign currency credit rating is Stable and local currency credit rating is Stable.


The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.

The COVID-19 crisis will cause a deep recession and place a heavy burden on the country’s public finances. Nevertheless, ACRA Europe expects the country to retain its low borrowing costs during this crisis due to the European Central Bank’s ultra-low interest rate policy and the safe-asset status of Austrian government bonds. In ACRA Europe’s view, these factors will make the crisis and the subsequent return to sound fiscal policies more manageable for Austria.


Credit rating rationale

Positive rating assessment factors

  • Highly developed economy with strong competitiveness.
  • Tight pre-COVID-19 fiscal policies supported by a solid fiscal framework.
  • Strong decline in debt servicing costs.
  • Very stable current account balance with moderate surpluses.
  • Stable and developed public institutions.

Negative rating assessment factors

  • Relatively low geographic diversification of exports.
  • Relatively high public debt load.
  • High external debt in the government sector.

Potential rating upgrade factors

  • Substantial decline in government debt load after the fading of the COVID-19 crisis.
  • Decline in public and private sector external liabilities.

Potential rating downgrade factors

  • Long-lasting impact of the COVID-19 crisis on the country’s growth potential and public finances.
  • Severe financial shock resulting in a costly bailout of the banking system.
  • Severe risk of Eurozone break-up.


Sovereign model results  

Block

Indicative credit rating for the block

Modifier

Score

Modifier corrections to the indicative credit rating

Final credit rating for the block

Macroeconomic position

AAA

Potential economic growth

-1

+1

AAA

Sustainability of economic growth

+1

Efficiency of structural, economic and monetary policies

+1

Public finance

BBB

Contingent liabilities and risk of them materializing on the sovereign balance sheet

0

+1

BBB+

Fiscal policy framework and fiscal flexibility

+1

Market access and sources of funding

+2

Debt sustainability

0

External position

AAA

Balance of payments vulnerabilities

+1

+1

AAA

External debt sustainability

+1

Stability of currency regime

0

Institutional framework

AAA

Willingness to pay

0

0

AAA

Default history

0

Political instability and recent political decisions

0

Involvement in geopolitical conflicts, exposure to geopolitical risks

0



Assigned credit rating

Indicative credit rating

AA

Modifier corrections to the indicative credit rating

+1

Final credit rating

AA+

Assigned credit rating

AA+


MACROECONOMIC SITUATION AND ECONOMIC POTENTIAL

Austria has an advanced economy with very high living standards. In 2019, GDP per capita (in purchasing power standards) stood at 52,300 international dollars. Austria has one of the smaller economies in Western Europe, which tend to have higher trade openness. In 2019, exports accounted for 56% of GDP. In terms of products, exports are highly diversified and do not rely on a small number of sectors. The country’s main merchandise exports are high value-added industrial machinery, electrical equipment, automotive products, and pharmaceuticals. In contrast, the geographical diversification is skewed toward Germany, which accounts for around 30% of the country’s total exports.

Austria’s economy performed solidly prior to the COVID-19 crisis. Between 2016 and 2018, GDP growth averaged 2.3% (the best three-year performance since 2006–2008) on the back of robust private investment and solid household consumption. In 2019, growth slowed to 1.6% as net exports were hit by the weakening external environment.

The IMF expects the economy to contract by 7% in 2020.

The economic prospects are grim for 2020 due to the COVID-19 pandemic. Austria’s economy will suffer amid the coronavirus-induced shutdown of a significant portion of the economy and a poor external environment. The IMF expects the economy to decline by 7% in its baseline scenario, which assumes that the pandemic will retreat in the second half of 2020 and thus allow for a gradual lifting of the containment measures. For 2021, the IMF expects a V-shaped rebound with real GDP increasing by 4.5%.


Figure 1. Austria’s GDP growth, including the IMF’s 2020–2021 forecasts

1

Sources: Eurostat, IMF


Gradual lifting of COVID-19 related restrictions is easing the economic pain.

With a declining number of daily identified COVID-19 cases, Austria has already started to gradually lift its economic restrictions. The government has allowed the re-opening of small retail stores along with larger do-it-yourself and gardening retail stores. If the number of daily new cases remains contained, there are plans to re-open all the remaining stores, along with hairdressers’ saloons at the beginning of May, and then gradually re-open restaurants, hotels, and other remaining service operations starting from mid-May. Should the re-opening of the economy continue as planned, the IMF baseline scenario is realistic in ACRA Europe’s view.

Long-term growth prospects are supported by high R&D expenditures.

From a long-term perspective, the country’s growth potential is supported by solid competitiveness (Austria ranked 21st in the World Economic Forum’s 2019 Global Competitiveness Report) and strong innovative capacity (in 2018, Austria spent 3.17% of GDP on R&D, the second highest percentage in the EU). Unlike for the majority of EU countries, demographic developments in Austria are expected to be only a mild constraining factor for the country’s growth potential. This is to a large extent attributable to positive net migration. According to Eurostat’s baseline projections, the working-age population is expected to shrink by only 4.5% by 2060.


PUBLIC FINANCE  

To counter the negative impact of the COVID-19 pandemic, Austria has adopted a fiscal package worth EUR 38 bln (9.5% of 2019 GDP). The package consists of:

  • Immediate support programs aimed mainly at supporting small businesses and fighting the pandemic (up to EUR 4 bln).
  • Emergency support programs for the most hit sectors in the form of direct subsidies and liquidity support, a portion of which can be later transformed into a direct subsidy (up to EUR 15 bln).
  • Tax deferrals (up to EUR 10 bln).
  • Guarantees for exporting firms, small and medium-sized enterprises and the tourism industry (up to EUR 9 bln).

Strong demand for the short-term working scheme is likely to increase the fiscal burden on top of the adopted package.

On top of this package, the government will also finance a short-time working scheme, under which the government covers up to 90% of the net missing wage for employees with shortened working hours due to the temporary loss of employers’ revenues. A portion of such support can be also financed from the budget for immediate support programs. Demand for this scheme has exceeded initial expectations by far. The government has already increased the ceiling for the short-time work support budget three times from the initial EUR 0.4 bln to EUR 5 bln (1.3% of 2019 GDP) and is likely to do so again. According to the latest data (April 17), the number of applications for the short-time working scheme concerns 871,000 jobs (more than 20% of the employed workforce).


The debt-to-GDP ratio may exceed 80%.

The direct impact of this package on government expenditure is subject to significant uncertainty, as it contains a significant portion of contingent borrowing. The initial budget anticipated net borrowing of EUR 0.6 bln on a cash basis (0.15% of 2019 GDP). The IMF expects the general government deficit to exceed 7% of 2020 GDP (the Austrian Fiscal Council is slightly more optimistic with expectations of 6.1–6.6% GDP). In such a scenario, the debt to GDP ratio would increase from 70.4% of GDP in 2019 to 80–85% of GDP in 2020 and start declining to 75–80% in 2021 as the need for emergency support fades and revenues recover. In ACRA Europe’s view, the risk for the debt outcome is tilted to the upside and is predominately related to uncertainty about the duration of the pandemic, both domestically and abroad. After the COVID-19 crisis is over, ACRA Europe expects Austria to gradually return to fiscally sound policies governed by fiscal rules stipulating a structural deficit of the general government of no more than 0.45% of GDP, convergence of the debt to GDP ratio towards 60%, and expenditure growth of no more than the estimated medium-term potential growth.

Austria retains strong market access despite recent turmoil.

On top of the expected deficit, Austria will have to refinance EUR 28 bln (roughly 7% of GDP) in the next 12 months. ACRA Europe sees a very low risk of Austria having trouble funding its financial needs. Market conditions remain favorable for the country, even during these harsh times. The 10-year government bond yields around 0% on the secondary market at the time of publishing this report. The ECB has taken aggressive steps to support government bond markets, most notably the Pandemic Emergency Purchase Programme aimed at purchasing mostly government bonds in the amount of EUR 750 bln until the end of the year. Therefore, Austria’s increased borrowing is unlikely to lead to a significant increase in interest expenditure, which stood at 1.4% of GDP in 2019.

Strong market access is also facilitated by the features of the country’s debt. 98% of it is denominated in euros, which holds a reserve currency status (20.5% of total allocated reserves). Austrian bonds are held for reserve purposes; according to the IMF’s Coordinated Portfolio Investment Survey, Austrian bonds accounted for 1.0% of global sovereign bond reserves in Q2 2019. Considering the size of Austria’s economy and debt market, this figure implies strong demand for Austria’s debt as a safe foreign asset. Therefore, the high share of external debt in total government debt (66.5% in 2018) is not a risk factor given the strong external demand for Austrian bonds for reserve purposes.

Contingent liabilities of the general government remain low by Western European standards even after the introduction of the COVID-19 fiscal package. According to Eurostat’s data for 2018, they stood at 40% of GDP in 2018 (the second-lowest among the EU-15 countries), with approximately 40% attributable to government guarantees and the remaining 60% to the liabilities of state-owned enterprises (half of them to the liabilities of financial institutions). Even when considering the latest measures, which might increase contingent liabilities by up to EUR 20 bln (5% of 2019 GDP), Austria’s contingent liabilities remain at the lower end among its Western European peers.

Private sector indebtedness is one of the lowest among the Western EU countries.

Likewise, the risk of large-scale assistance to the banking sector is at the lower end among the country’s peers. Total credit to the private non-financial sector stood at approximately 140% of GDP in Q3 2019 (with 50% GDP attributable to households and 90% to non-financial corporations), the fourth-lowest among the EU-15 countries. At the same time, the credit-to-GDP gap is deeply negative, which implies a low risk of credit bubbles. The quality of banking sector assets is solid, the NPL-ratio declined slightly below 2% in Q3 2019.


Figure 2. Credit to private non-financial sector debt (% of GDP) in the EU-15

2

Sources: Eurostat, ACRA Europe, Q3 2019


The current account balance volatility is very low by global standards.


EXTERNAL RISKS

Austria’s external position is strong. The country has stable moderate current account surpluses and lower external debt than most of its Western European peers. The current account balance is very stable. Austria has recorded surpluses of between 1.5 and 2.9% of GDP since 2009. These surpluses were driven mainly by the balance of services (tourism and business services) with stable annual net inflows of slightly above EUR 10 bln (2.6% of GDP in 2019). In 2019, the current account recorded a surplus of 2.6% GDP. The surplus is expected to decline in 2020 (the IMF forecasts a slowdown to 1.9% of GDP) as the COVID-19 related travel restrictions will have a negative impact on net tourism exports.

Gross external debt to GDP has fallen substantially since the beginning of the decade. This ratio has declined from over 210% in 2010 to 153% in 2019, lower than most of Austria’s Western European peers. Two factors have played a role in this decline: firstly, foreign banking sector liabilities have declined, and secondly, nominal GDP is substantially higher. 45% of external debt can be attributed to sectors that are more prone to refinancing risks (banks and the non-financial sector). Nevertheless, the risk is mitigated primarily by the fact that most external debt is denominated in euros. The country’s net international investment position is slightly positive; it stood at 9.6% in 2019.


INSTITUTIONAL FACTORS

Austria’s rule of law is very strong, even by EU standards.

Worldwide Governance Indicators are very high by global standards. This indicates that Austria’s government institutions are high quality and that the environment is very supportive for the allocation of economic resources, and therefore for potential growth. The country scores very highly, especially in the Rule of Law category. This score is underpinned by a high level of perceived judicial independence by the general public, which is the third-highest in the EU according to the latest EU Justice Scoreboard.

For a more detailed assessment of the creditworthiness of Austria, see our autumn report.

Appendix 1. Comparative analysis of Austria and the sample group

Comparison of macroeconomic and institutional indicators

 

Austria

Netherlands

Belgium

Denmark

Sweden

Finland

Macroeconomics

GDP per capita (1,000 USD, PPP)

53.3

58.3

50.0

55.0

54.7

2019 E

Real GDP growth (% y-o-y)

1.6

1.8

1.4

2.4

1.2

2019

HICP inflation (% y-o-y average)

1.5

2.7

1.2

0.7

1.7

2019

Openness of economy (% of GDP)

108

154

163

105

91

2019

Unemployment

4.3

3.4

5.2

5.1

6.8

2019 Q4

Public finance

Consolidated government debt (% of GDP)

70.4

48.6

98.6

33.2

35.1

2019

External consolidated government debt (% of GDP)

49.1

20.9

52.7

9.2

8.7

2018

Consolidated government budget balance (% of GDP)

0.7

1.7

-1.9

3.7

0.5

2019

Interest payments (% of GDP)

1.4

0.8

2.0

0.7

0.4

2019

External position

Current account (% of GDP)

2.6

10.2

-1.2

7.9

3.9

2019

Net international investment position (% of GDP)

9.6

89.2

47.2

78.1

20.9

2019

External debt position (% of GDP)

153

459

248

142

166

2019

Short-term external debt to total external debt (%) *

27.9

35.8

44.9

35.1

40.8

2019

Export diversification index **

0.34

0.31

0.39

0.43

0.36

2018

Institutional framework ***

Political stability and absence of violence

0.92

0.87

0.41

0.96

0.91

2018

Government effectiveness

1.45

1.85

1.17

1.87

1.83

2018

Rule of law

1.88

1.82

1.37

1.83

1.90

2018

* At original maturity, excluding direct investments.

** Indicates the extent of differences between the country’s trade structure and the average world indicator and ranges approximately from 0 (weak differences) to 1 (strong differences).

*** Assessment of effectiveness ranges from approximately -2.5 (weak) to 2.5 (strong).

Sources:  Eurostat, ECB, IMF, UNCTAD, World Bank


Appendix 2. List of material data sources

International Monetary Fund

World Bank

Eurostat

The Bank for International Settlements

European Commission

Organisation for Economic Co-operation and Development

European Central Bank

Oesterreichische Nationalbank

Statistics Austria

Appendix 3. Key indicators

 

Balance of payments, EUR bln

 

2015

2016

2017

2018

2019

Balance of trade

2.3

2.6

1.5

3.6

3.8

Exports

129.2

131.5

140.6

151.6

153.2

Imports

126.9

128.9

139.1

148.0

149.5

Balance of services

10.2

10.6

10.3

10.3

10.4

Exports

53.2

55.6

59.3

63.3

67.1

Imports

43.0

45.0

49.0

53.0

56.8

Balance of income

-6.5

-3.5

-6.0

-4.9

-3.7

Income receivable

20.7

33.2

29.8

33.9

33.5

Income payable

27.2

36.7

35.8

38.8

37.2

Current account 

5.9

9.7

5.7

9.0

10.5

Current account, % of GDP 

1.7

2.7

1.6

2.3

2.6

International reserves at the end of the period

20.4

22.2

18.0

20.3

21.0

Sources: ECB, Eurostat

 

External position (assets and liabilities), EUR bln

 

2015

2016

2017

2018

2019

External debt

591.9

588.5

571.8

572.6

609.0

long-term *

411.3

405.1

383.3

374.9

395.6

short-term (up to 1 year) *

138.3

135.5

140.8

151.3

153.4

External liabilities

591.9

588.5

571.8

572.6

609.0

Sovereign issuer, including

273.7

273.5

275.3

267.5

276.7

monetary authorities

35.9

38.6

52.7

53.3

55.1

consolidated government

237.8

234.8

222.6

214.2

221.5

Banks

195.5

176.3

154.8

162.3

177.4

Other sectors

122.7

138.7

141.7

142.8

154.9

including intra-corporate loans

42.3

47.9

47.7

46.5

59.9

External assets, excluding shares

525.4

516.3

505.3

514.1

541.8

Sovereign issuer, including

75.4

71.9

70.3

66.6

68.9

international reserves

20.4

22.2

18.0

20.3

21.0

other external assets

54.9

49.7

52.3

46.3

47.9

Banks

223.2

207.2

191.1

199.1

211.9

Other sectors

226.8

237.2

243.9

248.3

260.9

Net debt

66.5

72.2

66.5

58.5

67.2

Sovereign issuer

198.3

201.6

205.0

200.9

207.7

Banks

-27.7

-30.9

-36.3

-36.8

-34.6

Other sectors *

-104.1

-98.5

-101.2

-105.5

-106.0

International investment position (net),% of GDP

2.2

4.1

2.8

3.7

9.6

External debt, % of GDP

171.9

164.7

154.4

148.4

152.8

* Excluding direct investment

Sources: Oesterreichische Nationalbank, Eurostat


Budget indicators, % of GDP

Consolidated government

2015

2016

2017

2018

2019

Income

50.1

48.6

48.4

48.8

49.0

Expenses

51.1

50.1

49.2

48.7

48.2

including debt servicing expenses

2.3

2.1

1.8

1.6

1.4

Primary budget balance

1.3

0.5

1.0

1.8

2.2

Overall budget balance

-1.0

-1.5

-0.8

0.2

0.7

Consolidated government debt

84.9

82.9

78.3

74.0

70.4

% of income

169

171

162

151

144

Central government

 

 

 

 

 

Income

33.0

31.8

31.3

31.4

31.4

Expenses

34.2

33.1

32.2

31.5

30.9

including debt servicing expenses

2.2

2.0

1.8

1.6

1.4

Primary budget balance

1.0

0.7

0.8

1.4

1.8

Overall budget balance

-1.2

-1.2

-0.9

-0.1

0.5

Central government debt

77.9

76.0

72.0

67.9

64.8

% of income

236

239

230

216

206

Note: nominal GDP, EUR bln

344.3

357.3

370.3

385.7

398.5

Source: Eurostat


Rating history

The rating was first released for distribution on October 26, 2018, with the last review on October 25, 2019.

Regulatory disclosure

The sovereign credit ratings have been assigned to Austria under the Methodology to assess Sovereign entities, applicable from October 4, 2019. An explanation of the importance of each rating category and a default definition is included on the ACRA Europe website. Information on the rate of historical failure is available at cerep.esma.europa.eu. The default rate means a percentage of ratings that were changed to default from the overall number of ratings, for each rating category and given period. The disclosure of the unsolicited rating and outlook was preceded by the approval of the Rating Committee. Since July 30, 2012, ACRA Europe 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 sovereign credit ratings and their outlook are expected to be revised within 6 months following the publication date of this press release as per the Calendar of planned sovereign credit rating revisions and publications.

The credit rating was issued as unsolicited. The rated entity did not participate in the credit rating assignment. ACRA Europe did not have access to the rated entity’s internal documents or management. ACRA Europe, in the context of routine care, verified all sources entering the rating process and considers the scope and quality of the information entering the analytical process to be sufficient to assign a credit rating. The rated entity was notified on April 22, 2020, and after the notification there were no changes or amendments in the rating.

ACRA Europe provided no additional services to the Austrian government. No conflicts of interest were discovered in the course of the sovereign credit rating assignment.

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