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Rating Action:

Moody's affirms Austria's Aa1 ratings; maintains stable outlook

25 May 2018

Frankfurt am Main, May 25, 2018 -- Moody's Investors Service ("Moody's") has today affirmed Austria's Aa1 long-term issuer rating. Concurrently, the government's senior unsecured and senior unsecured medium-term note (MTN) programme ratings have also been affirmed at Aa1 and (P)Aa1, respectively. Austria's commercial paper programme rating and the other short-term ratings have been affirmed at Prime-1 and (P)Prime-1, respectively. The outlook remains stable.

The affirmation of Austria's Aa1 ratings is based on the following key rating drivers:

(1) Austria's very high economic strength, supported by a wealthy and highly competitive economy, although its trend growth is lower than the respective median of Aaa-rated sovereigns.

(2) Austria's high fiscal strength, underpinned by favourable debt affordability metrics, despite a still elevated level of general government debt relative to GDP.

(3) Austria's very high institutional strength, supported by significant policy credibility and very high policy effectiveness.

The stable outlook on Austria's Aa1 rating reflects Moody's view that risks to Austria's credit profile are balanced, with favourable trends in key credit metrics that relate to economic and fiscal strength, balanced by lower trend growth and higher debt levels compared to the respective Aaa-medians.

Austria's long-term and short-term foreign-currency bond and deposit ceilings remain unchanged at Aaa and P-1, respectively. Austria's long-term local-currency bond and deposit ceilings also remain unchanged at Aaa.

RATINGS RATIONALE

RATIONALE FOR THE AFFIRMATION OF THE Aa1 RATING

FIRST DRIVER: WEALTHY AND HIGHLY COMPETITIVE ECONOMY

Austria's well diversified and highly competitive economy is supported by its very high wealth level: with GDP per-capita at $49,869 (PPP) in 2017, Austria belonged to the group of the 10% wealthiest countries. In addition, the Austrian economy is well-diversified benefitting from a sizeable, high-value-added industrial base, dominated by small and medium-sized corporations that are integrated into German and Central European supply chains. In addition, the country's significant tourism industry is competitive and expanding. Private households and non-financial corporations are only moderately leveraged, a further credit positive element.

That said, Austria's trend growth is weaker than the median growth of Aaa-rated sovereigns, and the Austrian economy is exposed to external shocks as a consequence of its openness. Moody's acknowledges the strong acceleration of GDP growth to 3.0% in 2017 (from 1.5% in 2016 and an average of 0.6% in the period 2012-2015). Going forward, however, Moody's expects GDP growth to moderate to 1.7% in 2021/2022, which is our estimate of Austria's potential growth rate.

Austria's medium-term growth prospects are constrained by structural impediments, including a high tax burden on labour, a relatively low labour participation rate, a moderation of net migration and population ageing. The announced tax reform of the OeVP-FPOe coalition government which foresees a structural tax reform that could be implemented alongside a reprogramming of the income tax law scheduled for 2020 provides some upside risk to our medium-term forecast. However, the details on the reform are outstanding, including how the reform will be funded.

SECOND DRIVER: FAVORABLE DEBT AFFORDABILITY METRICS BALANCING ELEVATED LEVEL OF GOVERNMENT DEBT

Austria's debt-to-GDP ratio declined to 78.4% at the end of 2017 from a peak of 84.6% at the end of 2015. The decrease was supported by favorable stock-flow adjustments related to the wind-down of bad banks, in particular Heta Asset Resolution AG (Caa3 positive), and strong nominal GDP growth. Moody's expects Austria's debt-to-GDP to continue falling, reaching at around 63% by 2022. The largest drivers for the decrease in the debt-to-GDP ratio will be solid nominal GDP growth, followed by the improving fiscal balance and additional stock-flow adjustments related to the ongoing wind-down of bad banks.

However, the government's debt burden remains elevated compared to peers, and Moody's expects the debt-to-GDP ratio to remain above the 60% Maastricht threshold until 2022. As a result, Austria remains more exposed to adverse economic and financial shocks than most of its peers. Additionally, the ageing of the population will put pressure on the public finances as it dampens economic growth in the medium term and increases social spending through health care and the pension system.

In spite of Austria's elevated indebtedness, debt affordability -- as measured by interest payments as a percentage of either GDP or government revenues -- remains high. Interest rate expenditures to GDP decreased to 1.8% of GDP in 2017 from 2.1% in 2016. Moody's expects the interest rate expenditures to GDP to fall further to 1.5% of GDP in 2018 and to bottom out in 2020 at a level somewhat below 1.5%. Interest rate expenditures to revenue also declined to 3.7% in 2017 from 4.3% in 2016. Moody's expects the ratio to fall to 3.1% in 2018 and to bottom out below 3% in 2020.

THIRD DRIVER: SIGNIFICANT POLICY CREDIBILTIY AND VERY HIGH POLICY EFFECTIVENESS

Moody's assesses Austria's institutional strength as very high, based on the institutions' very high credibility and policy effectiveness. Austria performs above the median for Aa-rated peers with respect to the Worldwide Governance Effectiveness Indicators (WGIs), in particular for rule of law. However, its WGI scores for government effectiveness and control of corruption are lower than the median of Aaa-rated peers as well as the respective scores of its euro area rating peer at the same rating level, Finland (Aa1 stable).

That said, Austria's institutional strength is underpinned by a strong fiscal framework which is expected to be further strengthened by several initiatives. For example, the 2017 fiscal equalization law has simplified the system of transfers between various layers of government. Also in 2017, a new budget law limiting the federal structural deficit (including social insurance) to 0.35% of GDP, and 0.45% at the general government level, has enhanced Austria's fiscal rules. Under the new regulation, there is also a rule on the allowed annual expenditure growth (which cannot exceed the inflation rate) and a rule on ceiling for public guarantees. The fiscal framework is supported by the Austrian Fiscal Advisory Council which has been tasked with monitoring the government's budgetary targets and submitting recommendations to the government if necessary. Austria enjoys a strengthened banking supervision and regulation which is centered in the Single Supervision Mechanism.

However, whilst Moody's assessment of the quality of Austria's institutions is very high, Moody's does not believe that the country's institutional strength is on a par with that of most Aaa-rated sovereigns. Notwithstanding the magnitude of Austria's economic and fiscal challenges, institutional responses have been slow and incremental. The responses have consisted essentially of a series of small positive steps that have been insufficient to overcome comprehensively the country's relatively weak trend growth and regain the full fiscal space lost during the financial crisis. Austria's envisaged policy initiatives -- including the tax reform -- could lead to an acceleration of the reform momentum, although it will take time before the effects of those measures will eventually materialize.

RATIONALE FOR STABLE OUTLOOK

The stable outlook on Austria's Aa1 rating reflects Moody's view that risks to its credit profile are balanced, with expected trends in key credit metrics, in particular with respect to economic and fiscal strength, being despite recent improvements in the areas of economic and fiscal strength overall weaker compared to Aaa-rated peers.

WHAT COULD CHANGE THE RATING UP/DOWN

Austria's Aa1 government bond rating would come under upward pressure in the context of a successful implementation of economic reforms that address the structural constraints identified. Fiscal measures that increase the prospects of a higher-than-expected decline in Austria's debt burden over the medium-term would also be positive for the rating.

Conversely, a material weakening of the medium-term growth prospects would cause downward pressure on the Aa1-ratings; particularly if that should lead Moody's to conclude that the downward trajectory in the government's debt burden was likely to reverse.

GDP per capita (PPP basis, US$): 48,014 (2016 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 3.0% (2017 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 2.3% (2017 Actual)

Gen. Gov. Financial Balance/GDP: -0.7% (2017 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: 1.9% (2017 Actual) (also known as External Balance)

External debt/GDP: [not available]

Level of economic development: Very High level of economic resilience

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 22 May 2018, a rating committee was called to discuss the rating of Austria, Government of. The main points raised during the discussion were: The issuer's fiscal or financial strengths have improved. Its economic strength and institutional strength/ framework have not materially changed. Moreover, the issuer's susceptibility to event risks has not materially changed.

The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Heiko Peters
Asst Vice President - Analyst
Sovereign Risk Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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