Scope Ratings AG today confirms the Republic of Austria’s long-term local-currency issuer rating at AAA, following the release of its revised sovereign rating methodology, and converts its status from subscription to public. The agency also assigns a long-term foreign-currency issuer rating of AAA, along with a short-term issuer rating of S-1+ in both local and foreign currency. The sovereign’s senior unsecured debt in both local and foreign currency was also rated at AAA. All Outlooks are Stable.

Rating drivers

Austria’s AAA ratings are underpinned by its wealthy, well-diversified and service-oriented economy with no major macroeconomic imbalances. Austria’s GDP growth rate is expected to strengthen to 1.7% in 2017 and 2018 leaving behind an almost four-year period of economic stagnation from 2012 to 2015. This growth rate is in line with the eurozone average, but slightly below the EU average.

The economic recovery will be supported by strong domestic demand from the private sector, boosted by a recent tax reform, net exports, benefiting from the economic rebound experienced by its main trade partners, and a neutral fiscal stance.

The ratings are also supported by Austria’s strong external position. The country’s current account, consistently in surplus since 2002, has not only improved but has contributed to a positive balance for its net international investment position, making Austria a net creditor and further underscoring the country’s economic resilience. In addition, with healthy private-sector balance sheets – debt of Austrian households was slightly higher than 50% of GDP in 2016 – and a vigorous labour market, the domestic economy is on track to support growth as the external environment improves. The unemployment rate in 2016 was 6%, one of the lowest in the European Union, despite labour market pressures exerted by the influx of refugees.

The government’s consistent efforts to adhere to its fiscal consolidation path and strengthened fiscal framework have also driven the ratings. Over the past years, Austria’s structural fiscal deficit declined from 3.4% of GDP in 2010 to 0.8% in 2016. The government was able to curb its normally inflexible social welfare spending, which makes up a substantial portion of its budget, even during the recent economic slowdown, underscoring its ability to keep spending under control. The headline deficit has been below the Maastricht ‘3% of GDP’ threshold for most of the last 15 years, with a few exceptions. According to the 2017 Stability Programme, Austria intends to gradually decrease its budget deficit and keep it at 1% or below, largely due to economic expansion, the low funding cost environment and a curb on some medical care-related expenses.

Austria also benefits from a favourable public debt profile. Scope considers refinancing risk levels for the Austrian sovereign to be extremely low, thanks to some of the lowest funding costs in the Eurozone, long debt maturities averaging 8.8 years and a wide range of funding options at its disposal. Its debt affordability metrics are very strong: at slightly above 2% of GDP in 2016, interest payments are expected to decline to around 1.6% benefiting from the low interest rate environment and investor flight to quality. The bulk of Austrian government debt – 85% of government debt in 2016- is held by investors domiciled in Europe, who perceive it as a ‘safe haven’ investment.

Even with these strong fundamentals, some challenges have influenced the ratings. Scope notes that risks associated with the banking sector, which have triggered the crystallisation of a sizeable portion of liabilities on the sovereign balance sheet in the past, have receded but not disappeared. While the capitalisation of Austrian banks continues to improve, their profitability is strained by low interest rates and low margins. Though diminished, exposure to volatile markets in central and eastern Europe (CEE) and the economies of Russia and Ukraine remains high at 23% of total assets at the end of 2016.

Austria's high government debt stock represents a further challenge, although this is on a firm track to fall in the coming years. In 2015 the nationalisation of three ‘bad’ banks – HETA (the legal successor of Hypo Alpe-Adria bank -HAA), KA Finanz AG and Immigon – caused government debt to peak at 85.5% of GDP. At the end of 2016, however, this decreased to 84.6% and is expected to continue its decline in 2017 and 2018 as the banks wind down even further. Scope notes that the government’s assumptions are conservative with regard to the country’s macroeconomic indicators and the pace of divesture of the bad banks’ assets. In addition, in September 2016 creditors representing 98.7% of HETA debt accepted a discounted offer by the region of Carinthia, which guaranteed most of HAA’s debt. Scope believes this substantially reduces the risk of further lawsuits against the government, ensuring the balance sheet exposure to HETA is fully accounted for.

Austria’s public finances are not at a risk in the medium term, in the longer term, however, costs implied by the ageing population could pose a problem and, if not contained, could reverse the downward trend forecast for public-sector debt. Having benefited from economic recovery, Austria’s economy is running close to its potential. Nevertheless, it is constrained by a high tax wedge and overregulation in the service sector, hampering private investment and straining tradeable sectors of the country’s export-oriented economy.

Sovereign rating scorecard (CVS) and qualitative scorecard (QS)

Scope’s Core Variable Scorecard (CVS), which is based on the relative rankings of key sovereign credit fundamentals, provides an indicative (aa) rating range on the long-term foreign-currency issuer rating scale for the Republic of Austria. This indicative rating range can be adjusted by the Qualitative Scorecard (QS) up to three notches depending on the size of relative credit strengths or weaknesses versus peers based on analysis’ qualitative analysis.

For Austria the QS signals relative strengths for the following analytical categories: 1) macroeconomic stability and low imbalances, 2) fiscal performance, 3) debt sustainability, 4) market access and funding sources, 5) current account, 6) external debt sustainability, 7) vulnerability to short-term external risks. Relative credit weakness is signalled for the financial sector performance.

Combined relative credit strengths and weaknesses generate an adjustment and signal a credit rating at AAA sovereign rating for Austria.

A rating committee discussed and confirmed these results.

For further details, please see the Appendix 2 of the rating report.

Outlook and rating-change drivers

The Stable Outlook reflects Scope’s expectation that the government will keep to its fiscal consolidation programme and also continue to place the country’s debt on a firm downward trajectory over the medium term.

The ratings could come under negative pressure if: i) a sharp deterioration in growth prospects were to lead to a materially higher public-debt ratio or ii) further financial sector vulnerabilities were to emerge leading to a worsening in the country’s debt position.

For the detailed research report please click HERE.

Rating committee

The main points discussed during the rating committee were: (1) Austria’s economic outlook, (2) fiscal performance, (3) external position developments, (4) financial sector performance and restructuring, (5) Austrian banks’ exposure to central and eastern Europe and to other currencies, (6) impact of ageing population on public finance and growth potential, (7) political developments, (8) peers consideration.

Methodology

The methodology applicable for this rating and/or rating outlook “Public Finance Sovereign Ratings” is available on www.scoperatings.com.

Historical default rates of Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/governance-and-policies/regulatory/esma-registration. Please also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s definition of default, definitions of rating notations can be found in Scope’s public Credit Rating methodologies on www.scoperatings.com.

The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months. A rating change is, however, not automatically ensured.

Regulatory disclosures

This credit rating and/or rating outlook is issued by Scope Ratings AG.
Rating prepared by Dr Ilona Dmitrieva, Lead Analyst
Person responsible for approval of the rating Dr Stefan Bund, Chief Analytical Officer
The ratings /outlook was first assigned by Scope as subscription rating on January 2003. The subscription ratings/outlooks were last updated on 05.05.2017.
The senior unsecured debt ratings as well as the short term issuer ratings were assigned by Scope for the first time.
As a "sovereign rating" (as defined in EU CRA Regulation 1060/2009 "EU CRA Regulation"), the ratings on Republic of Austria are subject to certain publication restrictions set out in Art 8a of the EU CRA Regulation, including publication in accordance with a pre-established calendar (see "Sovereign Ratings Calendar of 2017" published on 30.06.2017 on www.scoperatings .com). Under the EU CRA Regulation, deviations from the announced calendar are allowed only in limited circumstances and must be accompanied by a detailed explanation of the reasons for the deviation. In this case the deviation was due to the recent revision of Scope’s Sovereign Rating Methodology and the subsequent putting the ratings under review, in order to conclude the review and disclose these ratings in a timely manner, as required by the Article 10(1) of the CRA Regulation¹.

¹Editor's note: The above paragraph was corrected on 17 July 2017 following the publication of the credit rating action on 30 June 2017. The original wording was: Deviation of the publication of sovereign ratings or related rating outlooks from the calendar shall only be possible where necessary for the credit rating agency to comply with its obligations under Article 8(2), Article 10(1) and Article 11(1) and shall be accompanied by a detailed explanation of the reasons for the deviation from the announced calendar. It was replaced with the following: As a "sovereign rating" (as defined in EU CRA Regulation 1060/2009 "EU CRA Regulation"), the ratings on Republic of Austria are subject to certain publication restrictions set out in Art 8a of the EU CRA Regulation, including publication in accordance with a pre-established calendar (see "Sovereign Ratings Calendar of 2017" published on 30.06.2017 on www.scoperatings .com). Under the EU CRA Regulation, deviations from the announced calendar are allowed only in limited circumstances and must be accompanied by a detailed explanation of the reasons for the deviation. In this case the deviation was due to the recent revision of Scope’s Sovereign Rating Methodology and the subsequent putting the ratings under review, in order to conclude the review and disclose these ratings in a timely manner, as required by the Article 10(1) of the CRA Regulation.

Solicitation, key sources and quality of information
The rating was initiated by Scope and was not requested by the rated entity or its agents. The rated entity and/or its agents did not participate in the ratings process. Scope had no access to accounts, management and/or other relevant internal documents for the rated entity or related third party.
The following material sources of information were used to prepare the credit rating: public domain and third parties. Key sources of information for the rating include: the Ministry of Finance, the Austrian Treasury (OeBFA), Oesterreichische Nationalbank (ONB), Statistics Austria, the IMF, the OECD, the European Commission, the European Central Bank and Haver Analytics.
Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.
Prior to publication, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds upon which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.

Conditions of use / exclusion of liability
© 2017 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings AG, Scope Analysis, Scope Investor Services GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope cannot, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided “as is” without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or otherwise damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party, as opinions on relative credit risk and not as a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings AG at Lennéstraße 5 D-10785 Berlin.

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