Rating action

Scope Ratings GmbH (Scope) has today downgraded Austria’s long-term issuer and senior unsecured debt ratings to AA+ from AAA in local and foreign currency and revised the Outlooks to Stable from Negative. The short-term issuer ratings have been affirmed at S-1+ in both local and foreign currency, with Stable Outlooks.

The downgrade of Austria’s long-term ratings reflects the growing divergence of the country’s fiscal metrics relative to those of other highly-rated sovereign peers following the Covid-19 and energy crises. The country’s fiscal performance faces sustained pressures, primarily from recent structural policy changes and an ageing population. These challenges are expected to maintain the country’s structural fiscal deficit at an elevated level and prevent a firm reduction in the debt-to-GDP ratio over coming years. The downgrade also accounts for challenges impacting the country’s macro-economic outlook, including the protracted effects of above-euro area inflation on consumption, vulnerabilities associated with a persistent dependence on Russian gas imports, and medium-to-long-term pressures on labour supply.

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Key rating drivers

Structural deterioration in fiscal metrics. The first driver of the downgrade reflects the structural deterioration of Austria’s fiscal balance, which is expected to result in a durable divergence in the country’s debt metrics relative to AAA-rated sovereigns. After narrowing to 2.7% of GDP in 2023, down 0.6 percentage points (pps) from the previous year, Scope expects the fiscal deficit to stay broadly unchanged at 2.8% of GDP in 2024 and improve only moderately to 2.6% of GDP in 2025. The Austrian Federal Ministry of Finance projects a deficit of 2.9% of GDP for 2024 and 2.8% of GDP for 2025, while the Fiscal Advisory Council expects deficits of 3.4% of GDP this year and 3.2% of GDP next year. Scope expects fiscal deficits for 2024-25 to be moderately smaller than those projected by the authorities due to moderately higher expected real GDP growth in 2024. A slow economic recovery, the extension of select support measures, including the electricity price brake for households and a reduction of the energy tax to the EU minimum level, and the roll out of a stimulus package for the construction sector (with earmarked funds totalling EUR 2.5bn, i.e. 0.5% of 2023 GDP, over 2024-27¹) will weigh on the fiscal balance over the near term.

A set of measures adopted in recent years will have a structural, lasting impact on the government’s primary fiscal balance and prevent a swifter recovery in its fiscal buffers. The abolition of the bracket creep, effective since 2023, will limit increases in revenue from personal income tax. In addition, the indexation of social benefits to inflation will create significant spending pressures over the medium-term, given the delayed effect to the inflation shock on expenditure items. These policy changes will prevent a substantial improvement in fiscal buffers over the medium-term. Moreover, the recent agreement on a reform of the Intergovernmental Fiscal Relations Act (Finanzausgleichsgesetz 2024), concluded in November 2023, will lead to additional transfers of around EUR 12.9bn over 2024-27 (2.7% of 2023 GDP) from the central government to regional and local authorities.

Further fiscal headwinds stem from adverse demographic trends. The old-age dependency ratio (the ratio of persons aged 65 and older to persons aged 20-64) is projected to increase from 32.0% in 2022 to 39.5% by 2030 according to the European Commission forecasts². In its latest long-term budgetary forecasts, the Austrian Federal Ministry of Finance expects ageing-related expenditures (pensions, health and long-term care) to rise from an already-elevated 21.8% of GDP in 2019 to 24.2% by 2030 and 26.1% by 2050³. In the Medium-Term Expenditure Framework 2024-2027, federal government expenditures on pensions are projected to increase from EUR 23.4bn in 2022 to EUR 35.2bn in 2027. Similarly, the European Commission estimates Austria’s total cost of ageing to increase by 1.4% of GDP (0.8% of GDP on average for AAA-rated EU sovereigns) to 29.1% (25%), the second highest in the euro area after France (AA/Negative).

In line with peers, Scope expects net interest payments to rise to 2.6% of general government revenue by 2029, up from 1.6% in 2023. While this increase is moderate and debt affordability will remain very strong, also owing to Austria’s proactive debt management and very resilient public debt profile with a long average maturity of outstanding debt, this additional expenditure is unavoidable, curbing fiscal space for other policy priorities.

Over the medium term, Scope expects the general government fiscal balance to stabilise at around -2.3% of GDP. While this deficit level is in line with Maastricht criteria, it is significantly wider than for AAA-rated sovereigns, which average a fiscal surplus of 1.1% of GDP over 2024-28. Scope thus expects Austria’s general government fiscal balance to be on average 3.6pps of GDP lower than that of AAA-rated sovereigns. Scope expects Austria’s general government debt-to-GDP ratio to stay broadly stable at around 77% until 2029, from 77.8% at YE 2023, and thus diverge durably from the firm downward trend expected prior to the dual shocks of recent years. Scope thus expects Austria’s debt ratio to stay above its pre-pandemic level of 70.6% and the 60% Maastricht threshold over coming years. As a result of relatively wider fiscal deficits, the differential between Austria’s debt-to-GDP ratio and the average of AAA-rated sovereigns is expected to widen to around 39pps by 2028, from 31pps in 2019, without a meaningful prospect of reversal.

Weak medium-term economic outlook. The second driver of the downgrade to AA+ relates to Austria’s constrained medium-term economic outlook. The Austrian economy experienced one of the sharpest economic contractions in the euro area last year, with a 0.8% decline in real GDP. This contraction resulted from a dip in investment, most severe in the residential construction sector, as well as from declining private consumption and weak services exports, amid tight financing conditions, elevated price pressures (HICP inflation averaged at 7.8% in 2023) and weak external demand. Scope expects the economic momentum to remain subdued in the near term and the economic recovery to start gathering pace only in the second half of 2024. Real growth is expected to improve marginally to 0.5% this year, before rebounding to 1.6% in 2025. These forecasts assume a slow recovery in Austria’s key export markets (in particular Germany), as well as progressive improvements in household consumption and business investment, supported by moderating price pressures, recovering real wages and improving borrowing conditions.

Real growth should gradually converge to its medium-run potential in subsequent years, which Scope estimates at about 1.2% annually, also given a constrained labour supply. The labour participation rate remains comparatively low in some key demographic segments, in particular, among women (73.6% as of Q4 2023, 9pps below men). Moderate, positive effects on women’s labour participation are expected with the increase in women’s statutory retirement age to 65 by 2033 from 60 at YE 2023. The female part-time employment rate is also one of the highest in the EU, at 50.4%, which weighs on total labour supply given fewer total hours worked. If unaddressed, labour supply constraints will compound with Austria’s ageing population and weigh on potential growth. The country’s working-age population is expected to decline by about 3% over 2022-30, as positive net migration flows are gradually outweighed by an ageing population, as highlighted by the European Commission². This contrasts with expected growth of the working age population of 2.5%, on average, for AAA-rated sovereigns over the same time period.

Further, high HICP inflation, standing around 2.3pps above the euro area level in 2023, has led to sizeable second-round effects on wages, which rose by 7.6% in 2023, according to Statistics Austria. This has led to some international competitiveness pressures as wage rises outpaced increases in labour productivity, weighing on unit labour costs. Still, to safeguard international price competitiveness, exporting firms seem to accept lower profit margins. Together with the economy’s high level of sophistication and diversification this should mitigate pressures in the medium-term.

Finally, the Austrian economy remains highly reliant on Russian energy imports, which covered 88% of monthly gas imports in the six months to February 2024 on average⁴. While energy supply risks are presently assessed as low - due to high levels of gas storage maintained by Austria, gas demand reductions, and gas transit capacities secured by the partly state-owned utility OMV including for gas from Norway and imports via LNG terminals - the continued dependence on Russian gas adds uncertainty to the medium-term economic (especially inflationary) and fiscal outlooks.

Uncertainty persists around Austria’s ability to import Russian natural gas from January 2025 onwards, once the gas transit contract between Ukrainian utility Naftogas and Gazprom expires. Austrian households and manufacturing sectors thus remain more vulnerable to potential sharp increases in energy costs compared to peers.

Achieving independence from Russian natural gas would require the cancellation of a contract between Gazprom and OMV, which is set to run until 2040. The potential fiscal costs of such a decision are presently unclear.

Rating strengths: wealthy and diversified economy; strong debt management and resilient debt structure; and a robust external position. Austria’s credit ratings are supported by: 1) a wealthy and highly sophisticated economy, as reflected in high GDP per capita levels (EUR 52,780 in 2023) and strong marks in economic diversification indicators (such as the latest Observatory for Economic Complexity, where Austria ranked 8th globally for trade, 3rd for technology and 16th for research), which underpins the Austrian economy’s resilience to external shocks; 2) a very resilient structure of public debt, including exceptionally long average maturity (11.5 years as of end-February 2024) and low share of variable rate debt (4.2% of total); and 3) a strong external position, with low external debt (135% of GDP as of end-2023) and a positive net international investment position (17% of GDP), supported by a track record of comfortable current account surpluses averaging 1.9% of GDP over 2010-19, which are expected to remain at similar levels over 2024-29.

Outlook and rating sensitivities

The Stable Outlook reflects Scope’s view that risks to the ratings are balanced over the coming 12 to 18 months.

Upside scenarios for the ratings and Outlooks are (individually or collectively):

1. The fiscal outlook improved materially, for example, via structural improvements in the government budget balance and a steady decline in the debt-to-GDP ratio;
    
2. Medium-term growth prospects strengthened substantially.

Downside scenarios for the rating and Outlooks are (individually or collectively):

1. The fiscal outlook worsened, leading to a rising debt-to-GDP ratio;
    
2. The growth outlook weakened, for example, due to losses in international competitiveness;
    
3. Financial stability risks emerged, with significant negative implications for the economic and/or public finance outlook.

Sovereign Quantitative Model (SQM) and Qualitative Scorecard (QS)

Scope’s SQM, which assesses core sovereign credit fundamentals, signals a first indicative credit rating of ‘aa-’ for Austria. Under Scope’s methodology, the indicative rating receives 1) a one-notch positive adjustment from the methodological reserve-currency adjustment; and 2) no negative adjustment from the methodological political-risk quantitative adjustment. On this basis, a final SQM quantitative rating of ‘aa’ is reviewed by the Qualitative Scorecard (QS) and can be changed by up to three notches depending on the size of Austria’s qualitative credit strengths or weaknesses compared against a peer group of sovereign states.

Scope identified the following QS relative credit strengths for Austria: 1) debt profile and market access; 2) external debt structure; and 3) financial imbalances. Conversely, no credit weakness has been identified in the QS. On aggregate, the QS generates a one-notch positive adjustment for Austria’s credit ratings, resulting in final AA+ long-term ratings. A rating committee has discussed and confirmed these results.

Environment, social and governance (ESG) factors

Scope explicitly factors in ESG issues in its ratings process vis-à-vis the sovereign-rating methodology’s stand-alone ESG sovereign-risk pillar, which holds a significant 25% weighting under the quantitative model (SQM) and 20% weight under the methodology’s qualitative overlay (QS).

In the sovereign ESG pillar’s environmental risk subcategory, Austria scores comparatively well on the SQM vis-à-vis euro area peers and broadly in line with its indicative peer group on the economy’s carbon emissions per unit of GDP, natural disaster vulnerability and the ecological footprint of consumption relative to available biocapacity, while receiving comparatively poor marks for its level of greenhouse gas emissions per capita. Despite covering a relatively high share of its energy needs through renewable sources (about a third of its energy mix), 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 levels still needs significant policy action and investment. The government’s plan to allocate 59% of EU Recovery and Resilience Facility monies to climate objectives should facilitate the green transition, especially by focusing on cutting greenhouse gas emissions in the transport and housing sectors. Additionally, the country’s reliance on its tourism sector (which contributes about 7-8% of annual GDP) makes it vulnerable to climate change, primarily due to the negative impact of rising global temperatures on winter tourism. Austria’s green transition policies are considered under the QS assessment of environmental factors, which is assessed at ‘neutral’ versus its indicative peer group.

As regards social risk factors, the SQM points particularly to the country’s ageing society, i.e., an elevated and increasing old-age dependency ratio, in line with peers. Income inequality in Austria is low under an international comparison and broadly comparable to levels for indicative sovereign peers. In addition, labour-force participation of around 77.6% of the active labour force compares favourably to the euro area average. The complementary QS assessment of social risks is assessed at ‘neutral’, indicating that social outcomes are strong and in line with peers. This includes a low rate of people at risk of poverty or social exclusion of 17.5%. Challenges relate to a comparatively low labour-force participation rate of 60.3% of those aged 55-64 (vs. 67.9% in the euro area) and 73.6% for women (70.9%). Other medium-term challenges relate to an ageing society weighing on growth and fiscal prospects.

Finally, under governance factors captured in Scope’s SQM, Austria performs very strongly as measured by the World Bank’s Worldwide Governance Indicators. Austria has a robust track record of a stable political environment despite a recent increase in political turnover. The current ruling coalition currently comprises the conservative Austrian People’s Party (ÖVP) and the Green party as a junior partner. The next general elections are scheduled to be held by autumn 2024.

Rating committee
The main points discussed by the rating committee were: i) public finance risks and budgetary outlook; ii) domestic economic risk, medium-term growth prospects; iii) external risk; iv) financial stability risk; v) ESG factors; and vi) peer developments.

Rating driver references
1. Analyse des Budgetdienstes 2024 - Konjunkturpaket für den Wohnbau
2. European Commission - 2024 Ageing Report. Underlying Assumptions and Projection Methodologies
3. Federal Ministry for Finance - Long-term budget forecast 2022
4. Federal Ministry for Climate Protection, Environment, Energy, Mobility, Innovation and Technology - Import of Russian gas
 
Methodology
The methodology used for these Credit Ratings and/or Outlooks, (Sovereign Rating Methodology, 29 January 2024), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for these Credit Ratings and/or Outlooks is (Sovereign Quantitative Model Version 3.0), available in Scope Ratings’ list of models, published under 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    YES
With access to internal documents                                  YES
With access to management                                            YES
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity.
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 and/or Outlooks 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, Associate Director
Person responsible for approval of the rating: Alvise Lennkh-Yunus, Managing Director
The Credit Ratings/Outlooks were first released by Scope in January 2003. The Ratings/Outlooks were last updated on 7 July 2023.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings.
 
Conditions of use / exclusion of liability
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