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Fitch Affirms Austria at 'AA+'; Outlook Stable
February 3, 2017 / 9:09 PM / 10 months ago

Fitch Affirms Austria at 'AA+'; Outlook Stable

(The following statement was released by the rating agency) LONDON, February 03 (Fitch) Fitch Ratings has affirmed Austria's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'AA+' with Stable Outlooks. The issue ratings on Austria's senior unsecured foreign and local currency bonds have also been affirmed at 'AA+'. The Country Ceiling has been affirmed at 'AAA' and the Short-Term Foreign Currency and Local Currency IDRs at 'F1+'. The issue on Austria's Short-Term local currency debt has been affirmed at 'F1+'. KEY RATING DRIVERS Austria's IDRs and Stable Outlook reflect the following main factors: Fitch expects the headline budget deficit to widen to 1.4% in 2016 compared with 1% in 2015, due to weak revenues following the implementation of tax relief measures, unwinding of windfalls from taxes on capital gains and increased refugee related-spending. Improved revenues due to an expected rise in employment, good performance of corporate income tax, and lower interest payments should help reduce the deficit to 1.3% of GDP in 2017. Fitch forecasts Austria's gross general government debt (GGGD) will decrease to 84% of GDP in 2016 and 82.6% in 2017, after peaking at 85.5% in 2015. The acceptance by HETA creditors in October 2016 of a discounted offer for their bonds covered by Carinthia's guarantee will moderately improve Austria's government debt/GDP ratio and lessen the uncertainties created by the bad bank's resolution. Nationalised bad banks, including KA Finanz AG and immigon are being wound down, and liquidation of their assets will likely improve the debt trajectory as liabilities of these deficiency structures are included in the general government balance sheet. The ongoing buy-back of HETA's debt will reduce recorded GGGD by the same amount as the haircut incurred by senior and subordinated creditors, which Fitch estimates at up to 0.4% of GDP. HETA's creditors can settle the offer by cash or by exchanging their debt for zero-coupon bonds to be issued by the Carinthian compensation fund (KAF) and guaranteed by Austria. These bonds can then be sold back to KAF with a net present value of 90% for senior debt and 45% for subordinated debt. The cost of settling the deal, of approximately EUR9.3bn (2.7% of GDP), is largely being met by the Austrian federal government, which is providing the funds to KAF. The steady economic recovery in Austria was confirmed in 1H16, with real GDP growing by 0.7%. We expect the economy to grow by 1.5% in 2017-2018. Although the effect of the fiscal stimulus will ease, we believe private consumption will remain dynamic due to good performance in the labour market, and solid population growth, including refugees' inflow and continuous strong immigration from the EU. Investment in construction will remain solid due to the sustained rise in house prices, and equipment and machinery investment is likely to continue its recovery due to high current utilisation rates and solid external demand, notably from the main European trading partners including Germany. Risks are still embedded in the Austrian banking sector despite substantial improvements. Capitalisation has increased since 2015 but remain below the average of international peers. Net profits have recovered due to lower credit provisions and improved profitability in Central, Eastern and South Eastern Europe (CESEE). However, the reduced presence in CEE following restructurings is likely to put pressure on profitability, given the Austrian market's low growth potential and low-margin nature. Non-performing loans remain high at 9.9% in CESEE, although decreasing. Legacy issues also remain a risk. The proportion of FX loans accounts for 14.8% of loans to households as of September 2016, while the share of variable rate loans was above 60% and still amounts to 83% of new loans for households and nonfinancial corporations. Residential property prices rose sharply in 1H16. The European Systemic Risk Board issued a warning in 2016 highlighting the vulnerabilities of the sector, but the Central Bank stresses that prices are in line with fundamentals and we believe mitigating factors remain strong. These include a comparatively low level of household indebtedness, initially low level of Austrian prices, and of mortgage loans relative to GDP and as a share of bank's core capital. New macro-prudential measures were also introduced in September and regulatory limits are likely to be implemented on loan-to-value ratio, debt-to-income and debt-service-to-income ratios following the Financial Market Stability Board recommendations. Austria has a rich, diversified, high value-added economy with strong political and social institutions. It benefits from low private-sector indebtedness and a high household savings rate. The unemployment rate is among the lowest in the EU at around 6%, but it has been increasing over the past few years. Fitch considers the government's financing risk to be low, reflecting an average debt maturity of close to nine years, low borrowing costs and strong financing flexibility. SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns Austria a score equivalent to a rating of AA on the Long-Term FC IDR scale. Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to rated peers, as follows: -Public Finances: +1 notch, to reflect our expectation that the downward path of Austria's GGGD will continue beyond the SRM forecast horizon and that upside risks stemming from further disposal of the bad banks' assets could decrease debt/GDP ratio further than expected. Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM. RATING SENSITIVITIES Future developments that could individually or collectively, result in positive rating action include: -A declining trend in the public debt to GDP ratio from its peak to a level that provides the sovereign with greater fiscal flexibility. -A stronger recovery of the Austrian economy and greater confidence in medium-term growth prospects, particularly if supported by the effective implementation of structural reforms. Future developments that could individually or collectively, result in negative rating action include: -Weaker nominal GDP growth or failure to place public debt on a downward trajectory over the medium term, for example because of significant slippage from fiscal consolidation targets. - Material costs from the financial sector that worsens the government debt profile. KEY ASSUMPTIONS The next legislative elections are to be held by October 2018 and we do not expect grand coalition parties to trigger an earlier election. In the event of an early election, we do not expect any outcome would lead to a change of Austria's commitment to the EU project. Our base case is for Austria to remain a core member of the EU and the eurozone. Contact: Primary Analyst Marina Stefani Associate Director +44 20 3530 1809 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Federico Barriga Salazar Director +44 20 3530 1242 Committee Chairperson James McCormack Managing Director +44 20 3530 1286 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Country Ceilings (pub. 16 Aug 2016) here Sovereign Rating Criteria (pub. 18 Jul 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1018585 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. 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