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Rating action

Scope Ratings GmbH (Scope) has today affirmed the Republic of Austria’s long-term local- and foreign-currency issuer and senior unsecured debt ratings at AAA and maintained the Stable Outlook. The Agency has also affirmed the short-term issuer ratings at S-1+ with Outlooks remaining Stable in local and foreign currency.

Summary and Outlook

The affirmation of Austria’s AAA rating reflects the country’s: i) wealthy, resilient and diversified economy, with Scope’s expectation of robust growth prospects entering the recovery phase of the Covid-19 crisis; ii) strong external position with low private-sector indebtedness; iii) a sound banking sector; and iv) favourable public debt profile with low financing costs and long average maturity, mitigating risks from an elevated public debt stock and aiding medium-term fiscal consolidation. The rating is constrained by: i) a high public debt stock relative to peer levels; and ii) long-term spending pressures arising from high pension and healthcare costs and an ageing society that also weighs on growth prospects in the absence of structural reforms.

The Stable Outlook reflects Scope’s view that the risks Austria faces over the next 12 to 18 months are well balanced.

The ratings/Outlooks could be downgraded if, individually or collectively: i) growth prospects weaken substantially, for example, due to an erosion of international competitiveness; ii) the fiscal outlook deteriorates, leading to the general government debt-to-GDP ratio deviating persistently and materially from a medium-term downward trend; and/or iii) risks in the banking sector re-emerge, increasing financial stability concerns and possibly raising the need for government intervention.

Rating rationale

The first rating driver to affirm Austria’s AAA ratings reflects the highly diversified and wealthy economy, for which Scope expects robust growth prospects from 2021 as well as limited long-term economic scarring from the Covid-19 crisis. Before the pandemic, the Austrian economic performance was strong, averaging real growth rates of 1.9% between 2015 and 2019. This was on the back of a favourable external environment benefiting the very open economy but also structural improvements such as increased labour force participation of 77% by 2020 from 75% at the beginning of 2015, and an increase in total employment of 5% between the end of 2015 and 2019. Moreover, Austria ranked 9th globally in the Observatory for Economic Complexity’s economic complexity index in 2019, up from 11th in 2010, highlighting the economy’s level of sophistication and diversification.

In 2020, real GDP declined by 6.3% which was in line with the euro area average, but significantly worse than for other AAA-rated countries. This was mostly due to Austria’s reliance on winter tourism: in the six months to March 2021, receipts were down by around 90% on average against 2019 levels. Other sectors, particularly manufacturing, continued to expand in the second half of 2020. After real growth of negative 1.1% QoQ in the first quarter of 2021, the economy rebounded with 4.3% QoQ growth in the second quarter, the second strongest expansion of euro area countries with available data. Scope expects the robust recovery to continue in the second half of 2021, to end the year at 4% against the 2020 level in real terms. The recovery also continues to be supported by government measures, first and foremost with the extension of the short-time work scheme until the second half of 2022, grants to heavily affected businesses and tax holidays. Overall, the Ministry of Finance¹ reports discretionary measures related to fighting the adverse effects of the Covid-19 crisis amounted to EUR 24.7bn as of 15 July 2021, or 6.6% of 2020 GDP. High vaccination rates of 57% of the population having received their second dose as of 29 August, will continue to support private demand, although downside risks persist due to the increased transmissibility of the Delta variant. The recovery in 2022 should be equally robust, with real growth of 4.2%, and Scope expects a return of the Austrian economy to pre-pandemic levels (i.e. Q4 2019) in the first half of 2022.

Over the medium term, growth will also be supported by longer-lasting measures adopted during the crisis, such as investment premia, more favourable depreciation rules for investments and lower income tax for the first tax bracket (25% to 20%). Further, the country’s Recovery and Resilience Plan², in line with the 2021 National Reform Programme³ and 2021 Stability Programme⁴, is providing a comprehensive set of 32 growth-enhancing investment measures and 27 reforms, in the context the EU’s Next Generation EU programme. The European Commission anticipates that Next Generation EU has the potential to lift GDP in Austria by 0.7% by 2026⁵, mostly due to spill-over effects from large beneficiary countries, such as those in the Central and Eastern European region, which are important trading partners of Austria, as well as Italy. The direct effects of the plan are expected to be more modest, due to the relatively limited size of EUR 4.5bn in relation to GDP in 2020 of 1.2%, but structural reforms included in the plan offer significant potential to enhance economic growth.

The second driver supporting Austria’s AAA rating is the country’s strong net international investment position with low private sector indebtedness and a stable banking system, which underpin an overall favourable financial risk profile against that of peers. Private sector debt amounted to 153% of GDP at the end of 2020, up from 140% at the end of 2019. This was mostly due to non-financial corporate debt increasing by 9pp of GDP, caused by precautionary borrowing to bolster liquidity in the first phase of the pandemic, as indicated by non-financial corporate overnight bank deposits increasing markedly in 2020. Household debt increased more modestly, from 48.8% of GDP in 2019 to 53.2% at the end of 2020. The increase in private indebtedness was similarly observed in 2020 in other peer countries, and Austria continues to compare favourably to peers such as Finland (192% of GDP) and the Netherlands (257%). In addition, external debt is low, at 167% of GDP over the last four quarters at the end of Q1 2021, in line with Germany (170%) and well below levels observed in peer countries such as Finland (249%) and the Netherlands (448%). The maturity profile of external debt is also favourable, with around one quarter falling due within one year, increasing external resilience. External deleveraging and recurrent current account surpluses have led Austria’s net international investment position to turn positive in 2013, which further improved to 13.4% of GDP over the last four quarters at the end March 2021, a key credit strength.

Moreover, the banking system continues to become more resilient and has weathered the Covid-19 crisis well so far. Capitalisation and asset quality strengthened in 2020. The CET 1 ratio reached 16.1% in March 2021, from 15.6% in December 2019, and the ratio of non-performing loans decreased to 1.9% on a consolidated basis and 2.2% for subsidiaries in Central Eastern and South-Eastern European (CESEE) countries. Financial stability risks of foreign-currency denominated exposures of CESEE subsidiaries have been significantly curtailed since 2015, and their foreign-currency exposure to households has decreased to 12.7% of total lending at the end of 2020, three quarters of which are denominated in euro. Finally, despite the recent increase in house prices, mortgage lending and overall lending growth of domestic banks to households remains broadly in line with 2019 annual growth at around 3.5% in the twelve months to February 2021.

Finally, Austria’s AAA rating is supported by the favourable structure of public debt and very low borrowing rates, mitigating the risks of a relatively higher stock of debt vis-à-vis AAA-rated peers. Supported by euro area membership, deep European capital markets and the ECB’s accommodative monetary policy stance adopted in the crisis, Austria financed its deficit in 2020 and 2021 at very favourable rates and long maturities, which lengthened the average maturity of public debt to 11 years at the end of July 2021, the longest in the eurozone. Favourable borrowing costs led to the average effective interest rate reducing to 1.4% by the end of July 2021. Scope thus expects interest payments as a percentage of GDP to decrease to well below 1% by 2026. This substantially increases the sustainability of the additional debt taken on due to the Covid-19 crisis, aids fiscal consolidation efforts and makes the debt stock less sensitive to increasing interest rates in the coming years.

Despite these credit strengths, Austria’s ratings face the following medium-term challenges:

First, Austria’s ratings are constrained by an elevated public debt stock relative to its peer average. At the end of 2020, general government debt amounted to 83.9% of GDP, up from 70.5% in 2019 due to automatic stabilisers and discretionary spending undertaken during the Covid-19 pandemic, leading to a fiscal deficit of 8.9% of GDP. In 2020, the country’s public debt burden was almost double the median of AAA-rated countries of 43% of GDP, highlighting the sharp real GDP contraction for Austria against peers and the generous support implemented by the government. Scope expects the debt-to-GDP ratio to peak in 2021 at 86.5% of GDP, driven by a fiscal deficit of 7.7% of GDP due to most emergency measures being extended into 2021 in response to weak growth in the first quarter and renewed containment measures in the first half of the year.

Importantly, Scope projects Austria’s debt ratio to trend down over the medium-term to around 78% of GDP in 2026, thus partly reversing the shock in 2021/22 and reducing the gap to the peer group. The main driver for the reduction is projected robust nominal growth of an average 4.6% between 2021 and 2026 based on expectations of limited long-term scarring due to effective policy action, which help maintain potential real GDP growth at about 1.6% per year. Moreover, despite the increase in the debt stock, Scope expects interest payments relative to GDP to continue to decline, from 1.5% in 2017 to 0.6% in 2026. These effects will counterbalance budget deficits until the end of the projection horizon, which Scope expects to gradually decline from 3.8% of GDP in 2022 to about 1% in 2026. Still, adverse scenarios involving weaker-than-expected growth rates remain a risk, highlighting the need for a return to balanced budgets to re-build fiscal space after the crisis. The government has reiterated its commitment to placing the debt ratio on a downward trend after the crisis effects have subsided.

Second, Austria’s ageing society poses fiscal and growth challenges in the medium-term. Until 2030, the ratio of persons aged 65 or over to persons aged 20-64, i.e. the old-age-dependency ratio, is projected in the European Commission 2021 Ageing Report⁶ to increase from 30.7% in 2019 to 40.3% in 2030. This is largely in line with the ratio for highly rated peers, but still more favourable than Germany’s 46.4% by 2030 and Finland’s 46.8%. This will lead to an increase in old-age related spending from its already high level in 2019 of 26.7% of GDP to 29.1% in 2030, according to the baseline scenario in the 2021 Ageing Report, above levels in the EU and for peers, such as Finland (28%), Germany (25%) and the Netherlands (23%), although all these economies face broadly similar increases until 2030.

Key drivers are high pension and healthcare expenditures, including for in-patient care in hospitals, with the number of acute-care beds per 1000 inhabitants 46% above the EU average in 2017. While this has been an asset in the Covid-19 pandemic, it presents medium-term spending pressures, with healthcare spending projected to increase from 6.9% of GDP in 2019 to 7.4% in 2030 in the 2021 Ageing Report baseline scenario. Overall cost-efficiency for the provision of public services such as healthcare could still be improved, via reform to Austria’s still-complex federal fiscal framework. Austrian subnational governments have a rigid revenue and expenditure structure and there is a significant misalignment of tax raising and spending powers which disincentivises more cost-efficiency. In 2018, subnational governments raised 2.4% of GDP in tax revenues while total expenditure amounted to about 19% of GDP. The latest reform to the federal fiscal system introduced several measures, such as decreasing the number of social insurance institutions from 21 to five and benchmarking, among others. However, implementation of these measures remains mixed and realisation of cost savings unclear. The IMF⁷ previously estimated that a more comprehensive reform to the federal fiscal system could entail cost savings of up to 2.5-3% of GDP yearly. While the issue remains on the political agenda, a planned renewal of the system has been postponed due to the pandemic, making structural improvements unlikely in the near-term.

On the pension front, after previous measures increased pension expenditure slightly, measures were more recently implemented to reduce pension expenditure and increase the effective average retirement age, such as the abolishment of deduction-free early retirement after 45 years of employment. However, Austria still has a pension system with a high gross replacement rate, at 76.5% of pre-retirement earnings in 2018 for men, vs the EU-28 average of 52%, and a low effective retirement age of 61.3 for men and 59.5 for women in 2019.

Moreover, population ageing will weigh on Austria’s potential growth over the medium-to-long-term. Based on Eurostat projections, the working age population, i.e. persons aged 15-64, is estimated to shrink by 0.2% on average each year between 2021 and 2025, which will weigh on labour inputs to Austria’s potential growth. It is therefore crucial to increase participation rates for the population aged 55-64 and for women, which stood at 57% and 72% respectively, lower than the peer-group average. Other ageing-related challenges relate to the digital skills gap in the Austrian labour market that is exacerbated by an ageing workforce, as well as a large cohort of managers retiring in the coming years.

Core Variable 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 rating of ‘aa’ for the Republic of Austria. Austria receives a one-notch positive adjustment for the euro’s status as a global reserve currency under the reserve currency adjustment. The resulting ‘aa+’ indicative rating can be adjusted by the Qualitative Scorecard (QS) by up to three notches depending on the size of relative qualitative credit strengths or weaknesses against a peer group of countries.

For Austria, external debt structure and financial imbalances have been identified as relative credit strengths. No relative credit weaknesses have been identified.

The QS generates a one-notch upward adjustment and indicates AAA long-term ratings for Austria.

A rating committee has discussed and confirmed these results.

Factoring of Environment, Social and Governance (ESG)

Scope explicitly factors in ESG sustainability issues during the ratings process via the sovereign methodology’s stand-alone ESG sovereign risk pillar, with 20% weights under the methodology’s quantitative model (CVS) and qualitative scorecard (QS).

Under governance-related factors captured in Scope’s Core Variable Scorecard (quantitative model), Austria has a very high score on a composite index of six World Bank Worldwide Governance Indicators. Furthermore, Scope’s Qualitative Scorecard evaluation on ‘institutional and political risks’ indicates Austria as being in line with its ‘aa+’ indicative sovereign peer group, reflecting the stable political environment. However, the government’s ability of implementing structural reforms remains relatively untested.

Regarding social-risk factors, the CVS points particularly to the country’s ageing society, i.e. an elevated and increasing old-age dependency ratio, in line with indicative peers. Income inequality in Austria is low in an international comparison and broadly comparable to the indicative peer group level. In addition, labour force participation of around 77% of the active labour force is above the euro area average, but below the indicative peer group average. The complementary QS assessment of ‘social risks’ is assessed at ‘neutral’, indicating that social outcomes are strong and in line with the indicative peer group, such as a low rate of people at risk of poverty or social exclusion of 17.5%. Challenges relate to a low labour force participation rate via-a-vis indicative peers among the labour force aged 55-64 and among women, at 57% and 72% respectively. Other medium-term challenges relate to Austria’s ageing society, which has adverse fiscal implications, with total age-related costs estimated in the European Commission’s 2021 Ageing Report to increase from an aggregate 26.7% of GDP in 2019 to 29.1% of GDP in 2030, and which weighs on growth prospects.

On the sovereign ESG pillar’s environmental risk sub-category, Austria scores comparatively well on the CVS vis-à-vis euro area peers and broadly in line with the indicative peer group on the economy’s carbon emissions intensity, natural disasters vulnerabilities and the ecological footprint of consumption relative to available biocapacity. Austria’s ambitious target of reducing greenhouse gas (GHG) emission not covered by the EU’s Emissions Trading System by 36% by 2030 compared to 2005 still needs significant further policy action and investment. The government’s plan to allocate 59% of EU recovery and resilience funds towards climate objectives should facilitate the green transition, especially by focusing on cutting GHG emissions in the transport and housing sectors. Austria’s policies for a green transition are considered under the QS assessment of ‘environmental risks’, which is assessed as ‘neutral’ against indicative peers.

Rating committee
The main points discussed by the rating committee were: i) economic growth outlook, labour market and demographics; ii) fiscal outlook and debt sustainability; iii) external sector risks; iv) financial stability risks; v) Austria’s federal fiscal framework; vi) reform programme; and vii) peer comparison.

Rating driver references
1. Austrian Ministry of Finance, Monthly Report June 2021
2. Austrian Recovery and Resilience Plan
3. Austrian National Reform Programme 2021
4. Austrian Stability Programme (Update for the period 2020 to 2024)
5. European Commission Staff Working Document: Analysis of the recovery and resilience plan for Austria
6. European Commission 2021 Ageing Report
7. 2016 Article IV Consultation-Press Release; and Staff Report for Austria

Methodology
The methodology used for these Credit Ratings and/or Outlooks, (Rating Methodology: Sovereign Ratings, 9 October 2020), is available on https://www.scoperatings.com/#!methodology/list.
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. 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 Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Credit Ratings were not requested by the Rated Entity or its Related Third Parties. The Credit Rating process was conducted:
With Rated Entity or Related Third Party Participation NO
With Access to Internal Documents                              NO
With Access to Management                                        NO
The following substantially material sources of information were used to prepare the Credit Ratings: public domain.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Julian Zimmermann, Analyst
Person responsible for approval of the Credit Ratings: Dr Giacomo Barisone, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on January 2003. The Credit Ratings/Outlooks were last updated on 8 March 2019.

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.

Conditions of use / exclusion of liability
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