Austria: Risk Assessment


Country Risk Rating

A1 The political and economic situation is very good. A quality business environment has a positive influence on corporate payment behavior. Corporate default probability is very low on average.

Business Climate Rating

A1 The business environment is very good. Corporate financial information is available and reliable. Debt collection is efficient. Institutional quality is very good. Intercompany transactions run smoothly in environments rated A1.

Strengths

  • Central position in Europe and attractive standard of living
  • Industrial and tertiary sector diversification 
  • Non-price competitiveness thanks to family companies and niche products
  • Low household and corporate debt
  • High rate of unemployment and low youth employment (role of apprenticeships and "flexicurity")
  • 30% of energy consumed is renewable
  • Tourism assets 

Weaknesses

  • Dependence on German and central/eastern European economic cycles
  • Banking sector very exposed to countries of central, eastern, and south-eastern Europe
  • Lack of risk capital and insufficient R&D 
  • Multiple levels of government and administration (Federal State, Länder, municipalities)
  • Low employment rate of older people with effective retirement age under 60
  • Low demographic growth with insufficient birth rate

Current Trends

Expand All

Confirmation of the recovery in 2016

While growth is expected to be modest, it will be twice as fast as in 2015. Its main driver will be mostly private consumption and investment. Income tax reform implemented in January 2016 will allow Austrians to save up to 5 billion euro (a relief of around 1000€ per worker or retired), thus consumption will strongly increase in the coming months if individuals do not save their extra income. The increase in other taxes intended to finance this reform is expected to have a weak recessive effect. Besides, refugees and their integration will also give a boost to the domestic demand and in fine to growth. Investment, which has become positive in 2015, is likely to increase slightly again even though this forecast is based on uncertain climate linked to presidential election in October, moderate growth of the euro zone following the Brexit announcement and, eventually, challenges faced by the Austrian banking sector. Public expenditures will continue to increase due to the ongoing banking sector restructuring, although it is evolving along the right path. Exports of industrial equipment, construction machinery, automotive parts and vehicles (these three sectors alone making up 40% of the total), chemicals and agro-food products, but also tourism, IT and financial services are expected to benefit from more robust demand on European markets and from the weak euro, which will offset the sluggishness on distant emerging markets. However, with imports increasing in line with domestic demand, trade's contribution to growth is likely to be zero.

Fiscal consolidation pending

Fiscal policy will be neutral in 2016. The reform of income tax involving the creation of three new tax brackets and the cut in the rate on low incomes will cost the equivalent of a bit more than 1% of GDP. The presence of refugees will result in estimated additional spending between 0.1 and 0.2%. This is expected to be offset by the fight against tax evasion, an increase in the median VAT rate from 10 to 13% on entertainment, hotels and in the tax on capital income from 25 to 27.5%. The objective of achieving structural budgetary equilibrium (i. e. excluding cyclical effects) from 2016 set out in the 2012 fiscal package is in jeopardy, as the expected deficit will nearly reach 1%. However, from 2017, the country will be obliged under its European commitments to make an effort representing annually 1.25% of GDP aimed at bringing its debt down to the 60% threshold over twenty years. Savings on pensions and health insurance (gradual raising of the retirement age, tougher eligibility criteria for incapacity benefits) will be limited. The involvement of the Länder and the many municipalities (1/3 of public spending) could disappoint, given that they draw most of their resources from federal taxation. Nonetheless, subsidies, especially on transport, which represent 4% of GDP, are a potential source of saving. Consolidation will be a major issue for the Grand Coalition of social democrats from the SPÖ and conservatives from the ÖVP until the next elections in 2018. The problem is that neither party is able to agree on how to proceed: the SPÖ are in favor of increasing contributions, while the ÖVP would prefer to cut spending. The restructuring is conditioned by the assumption that the bank rescue program, at the origin of 25% of the debt, is coming to an end. The position of the banks, whose assets in Central and Eastern Europe represent 33% of GDP, has greatly improved. Against a background of a cyclical upturn, their activity in Central and Eastern Europe is again profitable overall. 90% of their outstanding loans are covered by local deposits. Nonetheless, 37% of their regional assets are located in countries classified as speculative. Moreover, while their situation is very favorable in the Czech Republic, Slovakia and Poland, it remains mediocre in Hungary, Rumania, and Croatia and poor in Russia, where they have considerable assets and high levels of non-performing loans.

Robust trade in services surplus and fragile trade surplus in goods

The modest current account surplus covers a robust and significant surplus on trade in services (3% of GDP) and a weak, probably temporary, surplus on trade in goods. In recent years, businesses have been confronted with an erosion of their productivity while labor costs have been rising. Moreover, they are faced with service costs made relatively high by the lack of available labor and competition. This is likely to affect their price competitiveness and result in several German clients, especially in the automotive sector, going to countries in Central and Eastern Europe for their supplies. At the moment, their technological edge, proximity to Germany, low energy and credit costs, as well as the depreciation of the euro is protecting them. This was reflected in a 5% decrease in company insolvencies in 2015, which might slightly level up in 2016 if the trend of the first half rolls on.

Source:

Coface (09/2016)
VERY LOW RISK............ACCEPTABLE RISK............ VERY HIGH RISK


Glossary