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Rating action

Scope Ratings GmbH (Scope) has today affirmed the Republic of Austria’s AAA long-term issuer and senior unsecured local-currency and foreign-currency ratings, along with its short-term issuer rating of S-1+ in both local and foreign currency. All Outlooks remain Stable.

Summary and Outlook

Scope’s affirmation of Austria’s AAA ratings reflects: i) a wealthy, resilient and diversified economy, with Scope’s expectation of robust growth prospects during the recovery phase of the Covid-19 crisis and despite the negative impact from the Ukraine conflict; ii) a strong external position with low private sector indebtedness; iii) a sound banking sector; and iv) a favourable public debt profile with low financing costs and a 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, which also weigh 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 weakened substantially due, for example, to a decline in international competitiveness; ii) the fiscal outlook worsened materially; and/or iii) risks in the banking sector re-emerged, increasing financial stability concerns and possibly creating the need for government intervention.

Rating rationale

Austria’s AAA ratings are supported by the country’s wealthy, highly diversified economy, which displayed a track record of strong real growth rates in the period leading up to the pandemic, averaging 1.9% between 2015 and 2019. Throughout this period, Austria benefitted from a favourable external environment, providing a significant uplift to its very open economy. It also benefitted from structural improvements, including a steady increase in labour force participation and employment levels. Moreover, Austria ranks 10th globally in the Observatory for Economic Complexity’s economic complexity index, up from 11th in 2010, highlighting the economy’s level of sophistication and diversification.

In 2020, real GDP declined by 6.7%, a larger dip than experienced by peers with AAA ratings, largely due to the country’s reliance on tourism. The economy registered a robust rebound in 2021, with output edging above its pre-pandemic level in Q3 2021. Despite a 0.8% quarter-on-quarter (QoQ) decline in economic activity in the fourth quarter following renewed Covid-19 restrictions, real GDP grew at 4.8% in 2021. The recovery was driven by a strong rebound in private consumption and business investment, boosted by a release of pent-up demand and accommodative fiscal policy, which more than offset the negative contribution from net exports.

Scope expects growth to remain robust in 2022 with real growth of 3.5%, largely owing to positive momentum related to a strong recovery in the tourism sector at the beginning of the year. However, this represents a 0.7 pp downward revision from previous estimates published in February 2022 due to the economic repercussions of the war in Ukraine. Like peers, Austria has experienced accelerating price pressures as a result of rising global energy and food prices, pushing the HICP and producer price indices up by 9.3% and 20.9% year-on-year respectively in July 2022. Household consumption declined by 1.9% (QoQ) in the second quarter of 2022, reflecting the negative impact of rising price pressures on real income. A weaker growth outlook among Austria’s key trading partners, principally Germany (which absorbs 30% of Austria’s exports), will weigh on external demand, while supply chain disruptions and rising producer prices will dampen manufacturing activity. These negative factors will only be partially mitigated by the continued recovery in international tourism receipts and the package of measures rolled out by the government to alleviate the impact of inflation on households and corporates.

Austria’s elevated reliance on Russian energy imports, which cover 80% of the country’s natural gas needs, adds significant downside risk to the growth outlook. Significantly lower gas export volumes from Russia will have significant negative consequences for households and production, with a sudden-stop potentially causing an aggregate GDP loss of around 2% according to IMF estimates¹. To address this vulnerability, the government has worked towards raising the level of available gas reserves. At the time of writing, Austria had built gas reserves equivalent to a little over half its yearly consumption, the second highest level in the EU after Latvia, up from only 18.5% in April 2022.

The AAA ratings are also underpinned by Austria’s strong positive net international investment position, with low private sector indebtedness and a resilient banking system underpinning a favourable overall financial risk profile versus peers. Private sector debt is low at 153% of GDP at YE 2021, having increased by only 11 pp from 2019 and comparing favourably to peers including Finland (183%) and the Netherlands (248%). The increase primarily resulted from non-financial corporate indebtedness expanding to 101% of GDP, up from 93% at YE 2019. This was caused by precautionary borrowing to bolster liquidity during the first phase of the pandemic. Liquid assets held by Austrian companies amounted to 42% of their outstanding debt at YE 2021, up from 35% before the pandemic. Household debt amounted to 51.8% of GDP.

Austria’s external debt is moderate at about 156% of GDP over the four quarters to Q1 2022. This is below most peers, including Germany (169%), Finland (225%) and the Netherlands (406%). The structure of external debt is favourable, with a high share of long-term debt (71% as of 2022 Q1) and a low share of banking sector liabilities (28%). External deleveraging and recurrent current account surpluses averaging 2.0% of GDP over the 2000-19 period led Austria’s net international investment position into positive territory in 2013. That figure increased to 18% of GDP in the four quarters to Q1 2022, representing a key rating strength.

Additionally, the Austrian banking sector continues to display resilience, having weathered the Covid-19 crisis well. The ratio of non-performing loans decreased to 1.8% on a consolidated basis and 2.0% for subsidiaries in Central, Eastern and South-eastern Europe (CESEE). This represents a decline of 0.2 pp and 0.4 pp from 2019 respectively. Financial stability risks from the foreign-currency denominated exposures of CESEE subsidiaries have been significantly curtailed since 2015, and their foreign currency exposure to households decreased to 11.0% of total retail loans in 2021, three quarters of which are denominated in euros.

Commercial ties between Austrian banks and CESEE countries expose the banks to repercussions from the Ukraine war. Austrian banks are among the most exposed foreign lenders in Russia, Ukraine and Belarus, with total direct exposures amounting to EUR 22bn and subsidiaries in these countries accounting for 9% of aggregate sector profits in 2021². Raiffeisen Bank, the country’s second largest banking group, derived about 19% and 35% of total revenue and pre-tax profit respectively from the Russian market before the crisis. Scope expects the fallout from the conflict to weigh on profitability in the medium term due to the impact of sanctions on Russia and Belarus and the slowdown in CESEE economies. At the same time subsidiaries of Austrian entities in the most affected countries benefit from a solid local funding base, with loan-to-deposit ratios of 65% in Ukraine and Belarus and 80% in Russia. As a result, parent companies are partially shielded from the shock. The Austrian banking sector's strong capital and liquidity buffers should help manage the shock, supporting our view that the conflict will not impair financial stability in Austria.

Credit growth has picked up markedly in recent months, with loans to households and non-financial corporates growing by more than 7% per month on average since the beginning of the year. The rise in corporate lending has been largely driven by inventories and working capital needs, reflecting the impacts of a tight labour market and high energy prices. The acceleration of growth in household lending was driven by mortgage loans in the context of rising residential real estate prices and low interest rates. This dynamic should moderate in the medium term due to a gradual tightening of credit conditions and the introduction of legally binding standards by the government from 1 August 2022 following recommendations from the Financial Market Stability Board.

Finally, Austria’s AAA ratings reflect the favourable structure of public debt and low funding costs, 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 accommodative monetary policy stance adopted by the ECB during the pandemic, Austria financed its deficits and redemptions in 2020 and 2021 at very favourable, negative average rates and long maturities. Austria’s central government debt carried an average maturity of 10.6 years at the end of 2021, the longest in the eurozone. Interest rates have increased in recent months in the context of rising inflation and monetary policy tightening, with the Austrian 10-year yield averaging 2.1% in June 2022 (up from 0% a year before), while remaining moderate compared to eurozone peers. In May 2022, the Austrian government issued its first green bond with a long tenor of 27 years (second longest of all euro-denominated sovereign green bonds). The issuance met with strong demand, reflecting continued excellent market access.

Despite these considerable credit strengths, Austria faces several challenges.

First, Austria’s ratings are constrained by an elevated public debt stock relative to its peer average. General government debt amounted to 82.8% of GDP at YE 2021, up 12 pp from 2019 due to automatic stabilisers and discretionary spending undertaken during the Covid-19 pandemic. Scope expects the debt-to-GDP ratio to recede to 78.9% this year due to robust nominal GDP growth and some fiscal improvements as most pandemic-related expenditures phase out and tax revenues increase. Preliminary budgetary figures for the central government display a marked improvement in the budgetary balance in 2022 H1 compared to the previous year. Net borrowings nearly halved over the first six months of the year to EUR 6.8bn, thanks to a parallel decline in Covid-19 related expenditures (-43%) and recovery in cash inflows (+12%).

However, this positive momentum will be partially counterbalanced in coming months by rising spending pressures relating to gas purchases to boost gas storage levels and to anti-inflation measures rolled out by the government. Overall, the general government fiscal deficit is expected to be 3.9% of GDP after 5.9% in 2021. The deficit should decline further to around 0.5% of GDP over the medium term.

The Austrian government has implemented a set of measures aimed at alleviating the impact of rising price pressures on households and corporates. Totalling EUR 32.7bn (7.5% of GDP) over the 2022-26 period³, the measures comprise one-time payments to vulnerable groups, subsidies for energy-intensive companies and a delay in the implementation of the CO2 tax. The most recently announced package also includes structural changes, such as the abolition of ‘bracket creep’ in personal income tax collection by indexing tax brackets to price dynamics and the indexation of some social benefits to inflation. These policies will support growth in the medium term by limiting the deterioration of purchasing power, but they will also have a durable negative impact on the government budget balance. Additional expenditures could stem from the current governing coalition’s recent agreement to impose an electricity price cap from autumn 2022, the conditions of which would be developed by late August.

Scope projects Austria’s debt-to-GDP ratio will trend down over the medium term to below 70% of GDP by 2027. This would reverse the shocks of 2020-22 and reduce the gap between Austria and its peer group. The main driver of the reduction is projected robust nominal growth averaging 4.2% between 2022 and 2027. This is based on expectations of limited long-term pandemic-related scarring due to effective policy action, which help keep potential real GDP growth at about 1.6% per year. Moreover, despite the increase in the debt stock and the recent rise in interest rates, Scope expects interest payments relative to GDP to remain very low at around 1% over the forecast horizon. These effects will counterbalance budget deficits until the end of the projection horizon. Still, these projections involve significant downwards risks, most notably those relating to a potential escalation in geopolitical tension tied to Russia’s military conflict with Ukraine, sanctions and countersanctions, and prices for energy and raw materials.

Second, Austria’s ageing society alongside limited momentum on the reform front poses fiscal and growth challenges in the medium term. The old-age-dependency ratio (the ratio of persons aged 65 and older to persons aged 20-64) is projected to increase from 30.7% in 2019 to 40.3% in 2030 according to the European Commission’s 2021 Ageing Report⁴. This is largely in line with the ratio for highly rated peers but more favourable than Germany’s 46.4% and Finland’s 46.8% (for the same time frame). This will lead to an increase in age-related spending from an already high level of 26.7% of GDP in 2019 to 29.1% in 2030, according to the baseline scenario in the 2021 Ageing Report. This is above levels for the EU and peers, such as Finland (28%), Germany (25%) and the Netherlands (23%), although all these economies face broadly similar increases by 2030.

Key drivers are high pension and healthcare expenditures, including for inpatient care in hospitals, with the number of hospital beds per 1,000 inhabitants of 7.2 in 2019 being well above the OECD average of 4.4. While this was an asset during the 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 as per the 2021 Ageing Report’s baseline scenario. At the same time, Scope acknowledges target control and cost containment measures, such as nominal expenditure growth ceilings for public health expenditure.

Still, overall cost efficiency for the provision of public services such as healthcare could be improved via reform to Austria’s complex federal fiscal framework. Austrian subnational governments have a rigid revenue and expenditure structure, and there is a significant misalignment between tax raising and spending powers, which disincentivises more cost efficiency. In 2021 and based on provisional figures, subnational governments raised 2.3% of GDP in tax revenues while their total expenditure amounted to about 18.9% of GDP. The IMF⁵ previously estimated that a more comprehensive reform to the federal fiscal system could entail cost savings of up to 2.5%-3% of GDP each year. While the issue remains on the political agenda, disruptions by the Covid-19 crisis have postponed negotiations on the next intergovernmental fiscal relations act, now set to be implemented from 2024.

On the pension front, after previous measures increased pension expenditure slightly, other measures were implemented to reduce pension expenditure and increase the effective average retirement age. These included abolishing deduction-free early retirement after 45 years of employment. Austria continues to run one of the most generous pension systems in the EU, with a gross replacement rate of 74.1% of pre-retirement earnings in 2020 for men versus an EU-27 average of 54.3%. In addition, the effective retirement age is low at 61.6 for men and 59.5 for women.

Finally, 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 0.25% on average each year between 2022 and 2026. This will weigh on labour inputs to Austria’s potential growth. It is therefore crucial to increase participation rates for people aged 55-64 and women, which stood at 57% and 72% respectively and lower than the peer group average. Other ageing-related challenges concern the digital skills gap in the Austrian labour market that is exacerbated by an ageing workforce, and 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 ‘aaa’ for Austria, including an adjustment for reserve currency under Scope’s methodology. The methodology allows the qualitative scorecard (QS) to adjust a ‘aaa’ indicative rating by up to three notches depending on the size of relative qualitative credit strengths or weaknesses compared to 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 results in a one-notch positive adjustment for Austria. This indicates a sovereign credit rating of AAA 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 its rating process via the sovereign methodology’s standalone ESG sovereign risk pillar. It has a 20% weighting under the quantitative model (CVS) and the methodology’s qualitative overlay (QS).

Under governance-related factors captured in Scope’s core variable scorecard (quantitative model), Austria has a very high score in a composite index of six World Bank Worldwide Governance Indicators. Furthermore, Scope’s qualitative scorecard evaluation of ‘institutional and political risks’ indicates Austria is in line with its ‘aa+’ indicative sovereign peer group. Austria has a robust track record of a stable political environment despite a recent increase in political turnover. Karl Nehammer became Austria’s fifth chancellor in four years in December 2021 following the resignation of Sebastian Kurz amid a corruption probe. The ruling coalition currently comprises chancellor Nehammer’s conservative Austrian People’s Party (ÖVP) and The Greens as a junior partner. The next election is scheduled for 2024.

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. This includes 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, and which weighs on growth prospects and has adverse fiscal implications, with total age-related costs estimated by 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.

In 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 disaster vulnerability and the ecological footprint of consumption relative to available biocapacity. Austria’s ambitious target of reducing greenhouse gas emissions 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 to climate objectives should facilitate the green transition, especially by focusing on cutting greenhouse gas 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’ vs indicative peers.

Rating committee
The main points discussed by the rating committee were: i) domestic economic risk, including growth potential and resilience; ii) public finances risk; iii) external risk; iv) financial stability risk, including housing market and household debt; v) ESG considerations; and vi) peer developments.

Rating driver references
1. IMF, Natural Gas in Europe: The Potential Impact of Disruptions to Supply, July 2022
2. OeNB, Financial Stability Report, June 2022
3. Austrian Ministry of Finance, Measures to cushion the high energy costs
4. European Commission 2021 Ageing Report
5. 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, 8 October 2021), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. 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-governance/definitions-and-scales. 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://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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 Zimmerman, Senior 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 3 September 2021.

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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