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, 23 October 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 caused a deep recession and placed a heavy burden on the country’s public finances. Nevertheless, Austria was able to retain negative borrowing costs during most of the 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, strong market access along with high competitiveness and effective automatic stabilizers 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.

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.

Substantial increase in the 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

0

+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

* Based on ACRA Europe’s 2020 baseline scenario.


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 58,800 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.

The economy is expected to contract between 6 and 7% in 2020.

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 1.4% as net exports were hit by the weakening external environment.

The Austrian economy is currently recovering from the COVID-19 shock, which caused an 8.7% year-on-year contraction in the in the first half of 2020. This contraction was close to the rate of the contraction of the whole EU 27 (-8.3%). With the high-frequency indicators showing a solid recovery, ACRA Europe expects a full-year contraction between 6 and 7% followed by 4%–5% growth in 2021.

The recovery is led by private consumption (retail sales were up 4.9% year-on-year in August) supported by the country’s government-sponsored furlough scheme, which allows workers to keep a significant portion of their income despite reduced working hours. At the height of the crisis, more than 30% of the employed population took advantage of this scheme. By the end of September, this figure had dropped to approximately 7%. The government has extended the scheme until March 2021. Furthermore, it has indicated that it is prepared to extend it further for certain sectors, if necessary. ACRA Europe believes that the country’s robust furlough scheme along with the government’s support for the business sector will mitigate the impact of the second wave on the economy and facilitate the economic recovery.

Figure 1. Year-on-year change of selected high-frequency indicators in Austria

1

Source: Eurostat


The government is introducing new restrictions to counter the second wave of the pandemic.

However, the outlook remains uncertain. The daily number of new COVID-19 cases is increasing rapidly, both domestically and in the EU. So far, Austria has only introduced light restrictions in the second wave, inter alia earlier closing hours for bars and restaurants and a cap on the number of people attending mass events. Yet, given the increasing number of new cases, some other previous measures are likely to be re-introduced. Moreover, a premature phasing-out of government support measures, both domestically and abroad constitutes another source of risk for the recovery.

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 3.12% of GDP on R&D, the second highest percentage in the EU). Demographic trends are expected to constrain the country’s long-term growth potential. On the positive side, the working age population is expected to shrink at a much slower pace than for the whole EU, which 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 7.2% by 2050. For the whole EU, this figure stands at -13%.


PUBLIC FINANCE

The stimulus package has been increased to EUR 50 bln.

To counter the negative economic impact of the COVID-19 pandemic, the government has introduced a EUR 50 bln (12.6% of 2019 GDP) stimulus package for 2020 and 2021. It includes, inter alia, support for the business sector, financing for the furlough scheme, an investment package, and tax deferrals or loan guarantees. According to the 2021 budget proposal, the general government deficit should reach 9.5% of GDP in 2020 before declining to 6.3% in 2021. The general government debt should increase to 84% in 2020 and to 84.8% in 2021, just shy of the 2015 peak of 84.9%. In its baseline scenario, ACRA Europe expects the debt to GDP ratio to peak in 2020/2021 and a gradual return to sound fiscal policies governed by the country’s fiscal rules.


Figure 2. Dynamics of debt to GDP and interest to GDP ratios

2

Sources: Eurostat, Austrian Federal Ministry of Finance


Austrian government bonds benefit from external demand for reserve purposes.

Despite the massive increase of the country’s debt load, interest expenditures are expected to remain low at 1.4% of GDP in 2020. The country benefits from the ECB’s negative interest rate policies and bond purchasing facilities (at the time of publishing this report, the 10y government bond yielded -0.4% on the secondary market), along with external demand for its government bonds for reserve purposes. According to the IMF’s Coordinated Portfolio Investment Survey, Austrian bonds accounted for 0.9% of global sovereign bond reserves in 2019. As the ECB’s monetary stance is unlikely to change in the medium-term, interest expenditures in proportion to GDP are expected to decline further.

The share of external debt in the total general government debt is high. In 2019, the ratio stood at 66.5%. However, given the strong external demand for Austrian bonds for reserve purposes and a virtually currency risk free sovereign bond market within the Eurozone, ACRA Europe interprets this figure as a sign of quality of the country’s debt rather than over-reliance on external funding. Moreover, the share of the FX debt is negligible, in 2019 it stood at below 1%.


The stimulus package has only resulted in a small increase in the government’s contingent liabilities so far.

Contingent liabilities of the general government remain low by Western European standards even after the introduction of the COVID-19 stimulus package. According to Eurostat’s data for 2018, they stood at approximately 40% of GDP (the EU-15 unweighted average stood at 65%), with approximately 40% attributable to government guarantees and the remaining 60% to the liabilities of state-owned enterprises (half of them are attributable to the liabilities of financial institutions). Even when considering the latest measures from the stimulus package, which have increased the government guarantees by EUR 6.7 bln (1.7% of 2019 GDP) by the end of September, Austria’s contingent liabilities remain at the lower end among its Western European peers.

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 149% of GDP in Q2 2020 (with 51% of GDP attributable to households and 98% 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 pre-COVID credit bubbles. The quality of banking sector assets is solid, and the NPL-ratio declined slightly below 2% in 2019.


EXTERNAL RISKS


The current account surplus remains stable despite the COVID-19 shock.

Austria’s external position is very 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 around EUR 10 bln (2.5% of GDP in 2019). ACRA Europe expects that the current account surplus is very likely to remain within these boundaries in 2020.

The COVID-19 crisis has increased the country’s external debt, which has increased from 154% of GDP in 2019 to 167% in Q2 2020, mainly on the back of an increase in the general government’s external debt and a decline in nominal GDP. Nevertheless, the country’s external debt position is more solid compared to most of its Western European peers. The structure of external debt is solid, with only 25% of external debt (excluding direct investments) maturing within one year. 44% 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 12.1% of GDP in 2019.


INSTITUTIONAL FACTORS


The strong governance assessment is driven by the rule of law indicator.

The country’s 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 second highest in the EU according to the latest EU Justice Scoreboard.


Appendix 1. Comparative analysis of Austria and the sample group

Comparison of macroeconomic and institutional indicators

 

Austria

Belgium

Denmark

Netherlands

Sweden

Period

Macroeconomics

GDP per capita (1,000 USD, PPP)

58.8

54.0

59.7

59.7

55.3

2019

Real GDP growth (% y-o-y)

1.4

1.7

2.8

1.7

1.3

2019

HICP inflation (% y-o-y average)

1.5

1.2

0.7

2.7

1.7

2019

Openness of economy (% of GDP)

108

163

109

156

91

2019

Unemployment

5.6

4.9

5.4

3.8

8.4

Q2 2020

Public finance

Consolidated government debt (% of GDP)

70.5

98.1

33.3

48.7

35.1

2019

External consolidated government debt (% of GDP)

46.9

54.7

8.5

19.5

6.9

2019

Consolidated government budget balance (% of GDP)

0.7

-1.9

3.7

1.7

0.5

2019

Interest payments (% of GDP)

1.4

2.0

0.7

0.8

0.4

2019

External position

Current account (% of GDP)

2.8

0.4

9.0

9.9

4.2

2019

Net international investment position (% of GDP)

12.7

44.7

66.7

102.6

17.5

Q2 2020

External debt position (% of GDP)

167

271

159

487

172

Q2 2020

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

25

33

36

26

31

Q2 2020

Export diversification index **

0.34

0.39

0.44

0.32

0.36

2019

Institutional framework ***

Political stability and absence of violence

0.98

0.48

1.01

0.86

1.05

2019

Government effectiveness

1.49

1.03

1.94

1.80

1.83

2019

Rule of law

1.88

1.36

1.90

1.81

1.91

2019

* 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 goods

2.3

2.6

1.1

2.1

3.0

Exports

129.2

131.5

140.1

150.3

152.5

Imports

126.9

128.9

139.0

148.2

149.6

Balance of services

10.2

10.6

10.1

10.0

9.8

Exports

53.2

55.6

59.4

64.1

68.2

Imports

43.0

45.0

49.3

54.2

58.4

Balance of income

-6.5

-3.5

-6.1

-7.2

-1.5

Income receivable

20.7

33.2

29.8

30.6

35.7

Income payable

27.2

36.7

35.9

37.8

37.2

Current account

5.9

9.7

5.1

4.8

11.3

Current account, % of GDP

1.7

2.7

1.4

1.3

2.8

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

572.4

577.4

611.0

long-term *

411.3

405.1

383.8

377.6

395.8

short-term (up to 1 year) *

138.3

135.5

140.9

151.2

154.4

 

 

 

 

 

 

Sovereign issuer, including

273.7

273.5

275.6

267.6

277.3

monetary authorities

35.9

38.6

52.7

53.4

55.0

consolidated government

237.8

234.8

222.8

214.3

222.3

Banks

195.5

176.3

154.8

162.1

177.4

Other sectors

122.7

138.7

142.0

147.6

156.4

including intra-corporate loans

42.3

47.9

47.7

48.6

60.9

External assets, excluding shares

525.4

516.3

506.4

514.9

544.6

Sovereign issuer, including

75.4

71.9

70.3

66.6

68.9

monetary authorities

56.5

55.4

50.0

49.4

54.5

consolidated government

18.9

16.5

20.3

17.2

14.4

Banks

223.2

207.2

191.1

198.9

211.8

Other sectors

226.8

237.2

245.0

249.3

263.9

Net debt

66.5

72.2

66.0

62.5

66.4

Sovereign issuer

198.3

201.6

205.3

201.1

208.4

Banks

-27.7

-30.9

-36.3

-36.8

-34.4

Other sectors *

-104.1

-98.5

-103.0

101.7

-107.5

International investment position (net),% of GDP

2.2

4.1

4.3

5.3

12.1

External debt, % of GDP

172

165

155

150

154


Budget indicators, % of GDP

Consolidated government

2015

2016

2017

2018

2019

Income

50.1

48.5

48.5

48.9

49.1

Expenses

51.1

50.1

49.3

48.7

48.4

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

2.1

Overall budget balance

-1.0

-1.5

-0.8

0.2

0.7

Consolidated government debt

84.9

82.8

78.5

74.0

70.5

% of income

169

171

162

151

144

Central government

 

 

 

 

 

Income

33.0

31.8

31.4

31.4

31.5

Expenses

34.2

33.1

32.3

31.6

31.1

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

0.4

Central government debt

77.9

75.9

72.2

68.0

65.0

% of income

236

239

230

216

206

Note: nominal GDP, EUR bln

344.3

357.6

369.3

385.4

397.6

Source: Eurostat


Rating history

The rating was first released for distribution on October 26, 2018, with the last review on April 24, 2020.

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 October 21, 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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