Austria Affirmed At 'AA+/A-1+'; Outlook Stable

  • We believe that Austria's prosperous economy is well positioned to weather upcoming challenges stemming from softer external demand.
  • Although its GDP growth is set to moderate, debt to GDP should continue to reduce, supported by balanced general government accounts and the wind-down of failed banks.
  • We are therefore affirming our 'AA+/A-1+' ratings on Austria.
  • The outlook is stable.
RATING ACTION
On March 15, 2019, S&P Global Ratings affirmed its 'AA+/A-1+' long- and 
short-term foreign and local currency sovereign credit ratings on Austria. The 
outlook is stable.

At the same time, we affirmed our 'AA+' long-term and 'A-1+' short-term issue 
ratings on Austria's senior unsecured debt. We also affirmed our 'AA+' 
long-term local currency issue rating on the sovereign-guaranteed bond 
(XS0863484035) of subordinated debt issued by Heta Asset Resolution AG.

OUTLOOK
The stable outlook reflects our expectation that Austria will maintain sound 
public finances, despite lower economic growth. We believe that proposed 
fiscal measures like the upcoming tax reform will not hinder the steady 
decline in public-sector debt.

We could raise the ratings if ongoing reforms result from more consensus-based 
policymaking, which we would see as confirmation of a stable and efficient 
institutional framework. A track record of more sustainable decision-making 
would give uplift to the ratings.

We could take a negative rating action if we observed a substantial 
deterioration in Austria's economic development prospects, which could arise 
from a significant external shock to Austria's open economy. We could also 
take a negative rating action if we observed a substantial deterioration in 
Austria's fiscal performance, particularly if we also concluded that an 
erosion of Austria's institutional strength and predictability of policymaking 
was the cause.
RATIONALE
The ratings on Austria are supported by its strong political system, with 
established checks and balances. Although some government officials have 
recently made unorthodox policy proposals that question the rule of law, we 
still view Austria's policymaking as a credit strength. The ratings also 
reflect our view of its prosperous, competitive, and export-oriented economy, 
the country's strong external position with sustained current account 
surpluses, and contained fiscal deficits. As a eurozone member, Austria 
benefits from the European Central Bank's (ECB's) monetary policy credibility 
and access to deep capital markets.
 
The ratings are constrained by Austria's relatively high public debt. The 
government has proposed a tax reform, with steps to be implemented over the 
next few years. That said, some details of the reform's financial impact are 
still unclear, reducing the predictability of Austria's fiscal path.

Institutional and Economic Profile: Consensus-based decision-making may become 
more challenging if economic growth abates
  • Recent unorthodox policy proposals might make consensus-based decision-making more difficult.
  • The Austrian government has confirmed its pro-EU stance, despite the generally critical sentiment of one coalition partner.
  • Austria's economic growth may have peaked in 2018.
Austria has a strong legal system, with unbiased enforcement of contracts and 
independent courts. Although some government officials have recently made 
unorthodox policy proposals that question the rule of law and the European 
Convention on Human Rights, we still view policymaking in Austria as a credit 
strength. The government presented an ambitious reform program to be 
implemented over the next few years, and has already amended laws governing 
daily working hours and made changes to social security provision by merging 
public health care providers, among other reforms. As some of the laws require 
a constitutional majority in parliament, consensus is needed to facilitate 
major structural reforms. 

We believe that Austria's recent heterodox approach to policymaking indicates 
that it may be departing from making decisions based on consensual agreements 
between all stakeholders, including social partners and states. This could 
destabilize the country's policy–setting process, weakening our currently 
strong institutional assessment. In addition, upcoming elections for the 
European parliament and in some Austrian states might put pressure on the 
generally pro-EU government and increase the likelihood of potentially costly 
populist measures. As was the case in previous electoral cycles, some fiscal 
relaxation is occurring in the last parliamentary session before elections.

The government's current financial plan does not incorporate a number of major 
reform initiatives that could have substantial fiscal impact. These include 
the proposed tax reform, an increase in the compensatory allowance for 
low-income pensioners, and the abolition of bracket creep (the process by 
which inflation pushes wages and salaries into higher tax brackets) in 2022. 
Given that the financing of these measures is rather vague, we see uncertainty 
around their financial impact.

Nevertheless, Austria's economy continues to prosper. Its GDP per capita is 
one of the highest in the EU, and GDP growth reached 2.7% in 2018, supported 
in particular by exports. That said, we believe GDP growth has peaked and will 
slow to about 1.6% over the next few years, with strong domestic demand 
mitigating dampening exports from a weaker external environment, possibly 
amplified by global trade tensions. 

We expect real consumption growth will stabilize at 1.6% from 2019, slightly 
higher than in 2018, since annual tax cuts of €1.5 billion starting in 2019 
will boost disposable income. At the same time, we expect that investment 
growth will turn from replacement to expansion, supported by the pick-up in 
domestic credit. We assess Austria's potential GDP growth rate at 1.0%-1.5%, 
and believe it should be able to meet this level in the next few years. 
Generally, Austria's economy is largely synchronized with that of the monetary 
union, and most trade is with eurozone member states.

Austria's economic growth per capita is somewhat subdued, because the 
population is also increasing from net immigration inflows (workers and 
refugees). After peaking at 6% in 2016, unemployment has been declining thanks 
to improved economic conditions. The unemployment rate reduced to 4.9% in 
2018, and we forecast it will hover around this level through 2022. We 
estimate that employment will continue to increase by 1.0% on average, 
slightly lower than in our previous forecast. The lion's share of the jobs 
created have been filled with commuters.

Flexibility and Performance Profile: Strong external performance outweighs 
high public-sector debt
  • Austria's external profile is a rating strength.
  • Net government debt is high, but declining.
  • Austria's plan to run a fiscal surplus in 2019 might prove challenging to execute.
Austria's external indicators are highly favorable. The current account has 
been in surplus since 2002, supported by a sound surplus in the services 
balance and roughly balanced trade balance. We forecast that current account 
surpluses will hover around 2% of GDP in 2018-2021. Export demand, including 
services and tourism, peaked in 2018, and we expect exports will continue to 
contribute to economic growth, although at considerably lower levels over our 
forecast horizon though 2021. Austria has found niche markets in the goods and 
services sector, and has identified differentiated offerings that are 
attracting new tourist groups, both for winter sports and city travel. The 
current account has been primarily hampered by net transfer payments, implying 
that the country as a whole pays higher transfers than it receives. 

Continuous current account surpluses helped Austria become a net external 
creditor in 2013, as measured by its international investment position. 
External assets exceed liabilities by about 10% of current account receipts 
(equivalent to about 4%-5% of GDP in 2018), and are set to increase, further 
improving Austria's net external asset position. 

We expect that narrow net external debt will stabilize at levels above 100% of 
current account receipts, since we do not expect external deleveraging will 
continue at the pace observed in recent years. Austria is in a net asset 
position, with funds invested abroad exceeding its external liabilities. 
Domestic credit--both of the corporate and household sector--is increasing at 
rates exceeding the eurozone average, indicating some potential for asset 
bubbles. The share of credit at variable rates to households declined to 50% 
of all credit granted in 2018. Foreign exchange-related risks are negligible, 
with foreign currency-denominated loans making up about 10% for nonfinancial 
corporations and less than 2% for private households. 

The federal government plans to achieve the first fiscal surplus in years in 
2019, but we consider this may be challenging to execute given possible 
spending pressure from reform proposals and less favorable economic tailwinds. 
While some expenditure items were incorporated in the budget in detail, 
several cost-saving measures could be smaller than budgeted, given the usual 
discrepancy between planned and actual savings. As such, we expect slightly 
weaker fiscal performance than the federal government targets, and project 
balanced accounts on average over the next four years.

Sizable and fiscally substantial reform projects--for instance, an increase in 
compensatory allowance for low-income pensioners and the abolition of bracket 
creep in 2022--are not included in the current financial plan. We therefore 
consider that there is still uncertainty with regard to Austria's future 
budgetary performance. Nevertheless, we understand that the government is 
committed to ongoing fiscal consolidation. In longer term, public finances 
could be pressured by age-related expenditure, which will gradually increase 
to 5.1% of GDP in 2021 from 4.9% in 2018. In our view, heightened fiscal 
pressures on age-related expenditure, currently not reflected in the financial 
plan, could emerge, with long-lasting structural repercussions. 

We expect a reduction in Austria's general public debt, backed by the 
reduction in the balance sheet size of bailed-out banks and roughly balanced 
general government accounts through 2022. We expect public debt will decline, 
backed by a nominal GDP increase, while new borrowing will be contained. In 
addition, the remaining wind-down of previously bailed-out banks should help 
reduce net general government debt to GDP to 58.0% by 2022 from 67.6% in 2018. 
Austria has been taking advantage of loose monetary conditions to improve its 
debt profile, reduce its interest bill, and extend its debt maturities. 
According to our estimates, the share of interest expenditures to general 
government revenue will remain well below 5%.

Fiscal contingent liabilities are low, because most government-related 
entities are already included in general government debt. Therefore, we assess 
the contingent liabilities from remaining government companies at less than 5% 
of GDP. We do not take into account export and export-financing guarantees of 
€26 billion and €24 billion, respectively, since we have deemed these 
guarantees as bearing low risk with very limited claims since 1950.

Austria's eurozone membership is a credit strength, in our view, since it 
provides unfettered access to deep and liquid capital markets with minimal 
exchange rate risk. In addition, the euro is a reserve currency. The ECB 
maintains what we consider to be a highly credible and effective monetary 
policy, thanks to its operational independence, significant monetary 
flexibility, and overall longer-term track record on inflation compared with 
other monetary authorities.

In our view, the Austrian banking system has improved on the back of several 
material developments in recent years, including the derisking in Central, 
Eastern, and southeastern Europe (CESEE). The composition of risks has 
particularly shifted toward countries with lower risks in CESEE. Another 
prominent improvement relates to better capitalization at Austrian banks. 
Together with strong provisioning of about 60% of total loans on average, this 
provides a buffer for unexpected losses and increases the banking system's 
stability. 

The Austrian banking industry benefits from a high share of core customer 
deposits, which limits dependence on external borrowing. We believe that most 
Austrian banks still have much work to do to improve profitability, since we 
continue to see moderate overcapacity in their domestic operations