Home Assigned ratings Currently valid ERA rates Austria AA+, outlook Stable
ERA rates Austria AA+, outlook Stable
Friday, 26 October 2018

ERA issues the following unsolicited credit rating for Austria.

Long term unsolicited credit rating at level AA+.  The agency expects a stable outlook for the following 12 months. The rated entity was notified on October 24, 2018, about the rating and after the notification there were no changes or amendments in the rating. This is the first release of the rating for distribution.

The credit rating assigned to Austria is due to a strong economy, tight fiscal rule which calls for very low deficits, strong private sector finances and high forward looking indicators, including governance indicators and R&D spending. The rating is restricted by high government debt load.

Rating components

Macroeconomic factors

Economic factors

Very high

Debt and current account sustainability factors

Moderate

Public finance factors

Moderate

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

The Austrian economy is growing above its potential, government debt is declining, but it still remains well above the Eurozone debt limit. Public and private sectors are strong enough to tackle possible headwinds.

Above average growth rates:

Austria has experienced above average growth rates in the recent quarters. Economic activity is driven by solid household consumption supported by low unemployment, by robust private investment activity due to replacement and expansion needs as a result of very high utilization rates, and also by high export growth. ERA expects a moderation in private investment activity and export dynamics in the coming years and, thus, a slowdown in the economic growth (which is expected to be slightly below 3% in 2018) close to the medium-term potential output growth estimated at about 2%.

Demographic indicators have strengthened in recent years. The average population growth over the last three years has been above 1%, 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, it stood at 1.53%, the highest since the early 1980s. We expect net immigration to decline in 2018 and remain at lower levels in the coming years. Higher fertility rates should, however, persist in the medium-term, and thus have a positive impact on the potential GDP growth.

Population growth and fertility rate (%)

Fig_11

Source: World Bank, Eurostat, ERA

Debt is declining, but well above Eurozone the limit:

After a period of stagnation above 80% of GDP, government debt started to decrease in 2017. This decrease was mainly driven by higher nominal GDP growth. Additional impact came from a lower budget deficit, which fell to 0.8% in 2017. The government is on track to achieve a balanced budget in 2019, for the first time since 1954. Its finances are restrained by fiscal rule which calls for the structural deficit of the general government to be no more than 0.45% of GDP starting from 2017.

We estimate that a balanced budget together with solid growth of nominal GDP should contribute to the decline of the government debt to GDP ratio below 72% of GDP in 2019. However, it will still be well above the Eurozone fiscal limit of 60%. Therefore, tight fiscal policy is expected to continue in the coming years and will somewhat dampen economic growth.

General government debt (% of GDP) and Eurozone debt limit

 Fig_2

Source: Eurostat, ERA

Strong private sector finances:

Private sector finances are in good condition. The investment to GDP ratio above 25% is the second highest in the EU and the savings to GDP ratio above 27% is well above the EU average. While the capitalization of the banking sector has increased substantially in recent years, the CET1 ratio (12.98% in Q1 2018) for banks supervised by the European Central Bank remains below the Eurozone average of 14,05%. However, the risk to financial stability is low in our view. On the domestic level, the private sector indebtedness is one of the lowest among western EU countries. On the cross-border level, the foreign exposure of the banking sector is concentrated to 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. Finally, the ECB provides significant support to the banks in the form of ample liquidity.

Risks are mainly external:

With low deficits, declining public debt, strong private finances and ECB support, the risks for the growth outlook are mainly external. This is amplified by the fact that exports account for more than 50% of GDP. We expect only minor direct impact from the current wave of protectionism due to the low share of goods threatened by tariffs on exports. Stability in the Eurozone poses a somewhat greater risk. Currently, the main concern is the sustainability of Italian government debt after the new government’s effort to put an end to fiscal consolidation. However, we estimate that the proposed Italian deficits should lead only to a small increase in the Italian debt to GDP ratio. Thus, the risk is not substantial in the short-term.

Forward-looking factors of rating assessment

Austria has low income inequality and very high R&D spending. Despite their decline in recent years, governance indicators remain very high on the global scale.

One of the EU’s leaders in R&D spending:

Austria is the second biggest spender on R&D in the European Union. In 2016, R&D expenditures accounted for 3.1% of GDP. ERA expects high R&D expenditures to continue in the future and, thus, expects the economy to maintain high innovative potential, which is a positive factor for potential GDP growth.

Low income inequality supports social cohesion:

Austria maintains very low levels of income inequality not only by global standards, but also at the EU level. Low inequality and poverty rates are supported by significant and effective redistribution. The GINI coefficient of equivalised disposable income moved in the range of 27 and 28 in recent years (the EU average is slightly above 30). We expect low income inequality to continue and, thus, support social cohesion and the equality of opportunities.

Governance indicators have worsened somewhat:

Austria has experienced a slight decline in governance indicators in recent years. The average score of the five World Governance indicators followed by ERA fell to its lowest point on record (since 1996) in 2016. In 2017, the average score improved very slightly, but it still remains low by historical standards. The government efficiency indicator was the lowest on record in 2017. Despite the decline, the governance indicators remain at very high levels by global standards and, thus, we currently do not consider them to be a risk factor for future economic growth.

Selected World Governance Indicators (ERA score, 1-10):

 Fig_3

Source: World Bank, ERA

Outlook: Stable

The outlook has been assigned based on expectations of continued government adherence to the fiscal rule and political stability in the Eurozone.

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

Key assumptions

  • Government adherence to the fiscal rule
  • Political stability in the Eurozone
  • Real GDP growth between 1.5-3% in the medium term

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 deviation from fiscal rule causing the deficits to grow above 3% of GDP
  • Material decline in exports, above 15% year on year
  • Increase in economic instability in the Eurozone

Appendix 1. Peer-analysis materials

General government debt/GDP (%)

Fig_4

Source: Eurostat, IMF

 

Private non-financial sector debt/GDP (%)

Fig_5
Source: BIS

 

Appendix 2. Major sovereign indicators

Indicators

2014

2015

2016

2017

2018_F

2019_F

GDP, bln EUR

333.1

344.3

356.2

369.9

387.0

402.0

GDP growth rate, %

0.7

1.1

2.0

2.6

2.8

2.1

GDP per capita, ‘000 EUR

39.0

39.9

40.8

42.1

43.6

44.9

Population, mln

8.5

8.6

8.7

8.8

8.9

8.9

Unemployment, %

5.6

5.7

6.0

5.5

4.9

4.8

Labor force, mln

4.4

4.5

4.5

4.6

4.6

4.7

Personal income, ‘000 EUR (mean equivalised net annual)

26.1

25.9

26.1

27.6

28.3

29.0

Consumer inflation, Dec/Dec, %

0.7

1.0

1.5

2.3

2.0

2.0

Consumer inflation, year-average, %

1.5

0.8

1.0

2.2

2.2

2.0

Public debt to GDP, %

84.0

84.8

83.0

78.3

74.4

71.5

Wider public debt to GDP (incl. quasi-government sector), %

127.1

123.8

118.1

110.8

104.4

100.5

External debt to GDP, %

182.9

171.9

164.6

154.3

151.0

145.0

M2/International Reserves (%, end-year)

13.6

14.3

14.0

18.0

17.6

18.2

Gross Domestic Investment to GDP, %

23.5

23.6

24.1

25.1

25.6

26.0

Loans to economy, bln EUR

545.9

560.8

573.8

599.2

617.0

638.0

National Fund, bln EUR

n/a

n/a

n/a

n/a

n/a

n/a

International reserves, bln EUR

20.5

20.4

22.2

18.0

19.7

20.0

Trade balance, bln EUR

-1.7

-2.0

-4.5

-5.6

-4.5

-4.1

Exports, bln EUR

128.1

131.5

131.1

141.9

151.5

157.4

Imports, bln EUR

129.8

133.5

135.7

147.5

156.0

161.5

Current account to GDP, %

2.5

2.1

2.3

2.3

2.4

2.6

Appendix 3. List of material data sources

International Monetary Fund

World Bank

Bank for International Settlements

Eurostat

European Central Bank

Oesterreichische Nationalbank

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, there 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.

Download pdf:
Austria_Sovereign_Report.pdf

Approved by the Rating Committee:

Natalia Porokhova, Head of credit rating analysts

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