Morningstar DBRS Changes Trends on Republic of Austria to Negative, Confirms Credit Ratings at AAA

DBRS Ratings GmbH (Morningstar DBRS) changed the trends on the Republic of Austria's (Austria) Long-Term Foreign and Local Currency - Issuer Ratings to Negative from Stable and confirmed the ratings at AAA. At the same time, Morningstar DBRS confirmed Austria's Short-Term Foreign and Local Currency - Issuer Ratings at R-1 (high). The trend on all Short-Term ratings remains Stable.

KEY CREDIT RATING CONSIDERATIONS
The trend change to Negative from Stable reflects growing concerns about larger fiscal deficits and a significant increase in public debt amid a challenging macroeconomic and geopolitical environment. Despite the adoption of large fiscal consolidation measures, the Ministry of Finance (MoF) forecasts the general government budget deficit will remain wide at 4.5% of GDP in 2025 and 4.2% in 2026. This comes after a larger-than-budgeted deficit of 4.7% in 2024. Austria's government debt burden, which is already high compared to AAA-rated peers, is projected to rise to 87.0% of GDP in 2028, surpassing the historic peak of 85.6% in 2015. If the fiscal adjustment underdelivers or economic growth underperforms, the debt-to-GDP ratio could climb even higher.

Near-term economic growth prospects remain weak, weighed down by cyclical headwinds and structural factors. The Österreichisches Institut für Wirtschaftsforschung (WIFO) projects a contraction of 0.3% in 2025, the third consecutive year of negative growth, before recovering to 1.2% growth in 2026. Considerable uncertainty remains in relation to the trade and industry outlook, and private consumption will likely recover only gradually. While Austria's economy is set to benefit from higher external demand next year, in part thanks to the announced fiscal stimulus in Germany, the imposition of U.S. tariffs and associated retaliation pose downside risks to the outlook.

The credit ratings are underpinned by Austria's prosperous, diversified, and stable economy. Real GDP per capita in purchasing power terms is 15% higher than the European Union (EU) average. Austria's high institutional quality fosters sound policy management. The country's external position is solid. However, population ageing will weigh on economic prospects and public finances. In addition, increasing defense and climate spending needs will likely add to fiscal pressures over time, making the fiscal rebalancing more challenging.

CREDIT RATING DRIVERS
The credit ratings could be downgraded if government debt metrics continue to deteriorate on the back of sizeable structural deficits. The trend could return to Stable if the government achieves a significant improvement in the fiscal deficit over the next 12 to 18 months that reverses the deterioration in the public debt trajectory.

CREDIT RATING RATIONALE

Larger-Than-Budgeted Deficit in 2024 and Weak Macroeconomic Environment Are Weighing on Fiscal Outlook

After narrowing the fiscal deficit from 8.2% of GDP in 2020 to 2.6% in 2023, the fiscal result sharply deteriorated in 2024. Compared to Euro Area peers, Austria recorded a relatively large fiscal deficit of 4.7% of GDP, well above the budgetary target of 2.7%. The deterioration was driven by rising expenditure due to the delayed effects of inflation on public wages and social benefits, higher interest costs, spending priorities of the previous government, as well as costs related to the September 2024 floods. Revenue growth was relatively resilient despite macroeconomic headwinds thanks to strong increases in wage-related revenues. Total general government expenditure rose by 8.8% in 2024, clearly exceeding the 4.9% increase for government revenues. In general, expenditure levels have increased in recent years with the expenditure-to-GDP ratio standing at a high of 56% in 2024, compared to an average of 51% during 2010-19.

Going forward, the fiscal outlook is set to remain challenging due to fiscal policy measures enacted by the previous government including tax cuts, the partial indexation of tax brackets, and additional spending on health and long-term care under the fiscal equalisation scheme. Furthermore, unfavourable economic growth dynamics will weigh on revenues. A looming excessive deficit procedure (EDP) under EU fiscal rules increased fiscal consolidation pressure. The new government (see section below) presented a dual budget for 2025 and 2026, penciling in deficits of 4.5% of GDP in 2025 and 4.2% in 2026. The new government announced net fiscal consolidation measures amounting to EUR 6.4 billion in 2025 (more than 1% of GDP) and a cumulative EUR 8.7 billion in 2026, which will help gradually reduce the deficit. The measures include the abolishment of the climate bonus and other subsidies as well as windfall taxes on energy companies and banks. With net cumulative consolidation efforts growing to more than EUR 13 billion by 2028, the MoF projects the deficit to fall below 3% of GDP from that year onwards. The European Commission is likely to open an EDP in July 2025.

The country also faces medium-term budgetary pressures stemming from the expected rise in age-related expenditures as well as higher spending on climate-related issues and defence. The government targets only a very gradual increase in total defence spending, reaching 2% of GDP by 2032 (from 0.8% of GDP in 2024). According to the 2025 Fiscal Sustainability Report of the Fiskalrat, the country's fiscal watchdog, ageing cost (incl. gross public pensions, health and long-term care), which are already among the highest in the EU at 23.5% of GDP in 2023, will rise by 2.2 percentage points (pps) by 2030, largely driven by the rising cost of gross public pensions. While Austria has a track record of fiscal consolidation, Morningstar DBRS takes the view that budgetary pressures will likely intensify over the medium-term.

Elevated Stock of Debt Is Projected to Rise but Debt Affordability Benefits from Favourable Debt Profile

As result of the large fiscal deficit and lower growth, the government debt ratio rose to 81.8% of GDP in 2024 from 78.5% in 2023. At that level, it edged closer to its 2020 pandemic peak of 83.2% and is more than 10 pps higher than in 2019. The MoF forecasts the debt ratio will increase to 86.2% of GDP in 2026, surpassing the 2015 historic peak of 85.6%. As the fiscal consolidation advances, the MoF projects the debt burden will stabilise at around 87% of GDP over 2027-29. However, if current fiscal targets are not met or growth prospects weaken, the debt ratios could climb even higher. Debt affordability is supported by the low interest burden and a favourable debt profile, which is slowing the rise in total interest payments. The average effective interest rate on the federal debt portfolio was low at 1.9% in 2024, and the average maturity stands at 11.4 years. But as debt is financed at higher rates, general government interest costs will rise from 1.5% of GDP in 2024 to 2.4% in 2029, according to MoF projections, exceeding the 2010-19 average of 2.3%. The stock of contingent liabilities at 13.8% of GDP in 2024 is on a declining trend, according to government estimates, and is not expected to weigh significantly on public finances. These factors lower debt sustainability risks and lend support to Morningstar DBRS' positive qualitative adjustment in the "Debt and Liquidity" building block assessment.

The Economic Recession is Extending into 2025 and Downside Risks to the Recovery Remain

The Austrian economy is likely to contract again this year. Weak external demand for industrial goods, lower investment and sluggish private consumption, despite higher wages, continue to weigh on activity. Uncertainty around global trade policies is increasing headwinds. On an annual basis, the WIFO projects negative real GDP growth of 0.3% in 2025, following contractions of 1.0% and 1.2% in 2023 and 2024, respectively. The WIFO projects growth of 1.2% and 1.3% in 2026 and 2027. A gradual rebound of private consumption and a moderate expansion of external demand, in part thanks to the announced fiscal stimulus in Germany, are projected to help the Austrian economy return to growth. Due to fiscal consolidation restraining private consumption this year, its recovery is expected to be gradual, supported by rising real disposable incomes and a decline in the savings rate. The unemployment rate is anticipated to peak at 5.3% in 2025 (up from 4.8% in 2022) before falling again. Despite improving financing conditions, investment will likely only pick up again next year, with businesses looking for a sustained recovery of external demand. The key risk to Austria's growth recovery emanates from the external environment, especially if growth in Germany underperforms expectations. A broader trade war with significant increases in U.S. tariffs, associated retaliation, and weaker sentiment would weigh on Austria's open economy. Further risk to the growth outlook stems from additional fiscal consolidation.

On a structural level, Austria's credit ratings benefit from its high GDP per capita, relatively low output volatility, and high diversification. The country enjoys a high level of integration in the EU bloc, which generally supports the country's external competitiveness. However, rising nominal unit labour costs and relatively higher energy prices are weighing on competitiveness and putting energy-intensive export industries at a disadvantage. Medium-term economic prospects are also partly constrained by demographic pressures and structural changes in global automotive industries.

Formation of Centrist Three-Party Coalition Government Coalition Ensures Broad Policy Continuity

Austria's parliamentary election in September 2024 resulted in a change in the governing coalition. A centrist three-party government coalition comprised of the centre-right Österreichische Volkspartei (ÖVP), the centre-left Social Democratic Party of Austria (SPÖ) and the liberal party NEOS took office in March 2025, led by chancellor Christian Stocker (ÖVP). The formation of a new government coalition took five months, longer than any previous government formation, as policy differences across parties impeded coalition negotiations. Talks between the three parties had initially collapsed in early January and only resumed in mid-February after an attempt to form a two-party coalition between the right-wing Freedom Party (FPÖ), the largest party in parliament, and the ÖVP had failed. The three-party coalition's priorities include tightening migration policy, budgetary consolidation, as well as improvements in education, health care and labour market participation. In terms of foreign affairs, the centrist coalition ensures broad policy continuity. The coalition commands a comfortable parliamentary majority, but lasting agreement among the three parties could be difficult in light of persistent budgetary pressures. Austria's institutional quality is a strength of the credit profile. Austria is a strong performer on the World Bank's Governance Indicators, reflecting the rule of law, low levels of corruption, and stable political and economic institutions.

External Finances Benefit from Sound Current Account Position and Growing Net External Asset Position

Austria's external position is sound and benefits from service exports as well as a diversified manufacturing base that is well integrated into EU value chains. The twin pandemic and energy crisis shock only burdened the current account balance temporarily. The sharp increase in energy import prices resulted in a current account deficit at 0.9% of GDP in 2022. As energy prices declined, Austria swung back to a surplus of 1.3% in 2023. With tourism levels now exceeding pre-Covid levels and an improving trade balance in goods due to lower imports, the surplus further widened to 2.4% of GDP in 2024. This is slightly above the 2010-19 average of 1.9%. The IMF forecasts that the surplus will increase to 2.8% in 2026, despite higher unit labour costs. Morningstar DBRS views the risk of a further strong deterioration of Austria's external competitiveness as contained at the moment, as the inflation differential and wage gap with the country's main trading partners is narrowing, which should curtail losses in market shares over the next few years. Austria's credit ratings also benefit from a positive net international investment position (NIIP). The net asset position improved to a record level of 24.2% at the end of 2024. The NIIP shifted from a net liability position to a net asset position in 2013, reflecting a growing stock of foreign direct investment abroad as well as a decline in inward portfolio investment.

Financial Condition of the Banking Sector Is Strong, but Asset Quality Risks are Tilted to the Downside

The overall financial condition of the economy's banking sector is strong despite rising asset quality risks. Austrian banks' sound capital position and profitability should help to cushion the potential deterioration in credit quality, which started in late 2023 with bankruptcies in the construction and commercial real estate (CRE) sector. Asset quality could continue to weaken as a result of weak economic conditions, including expectations of slightly higher unemployment. Pockets of vulnerability might also emerge from banks' comparatively large exposure to CRE. The nonperforming loans (NPL) ratio rose to 2.9% at year-end 2024, with the increase in ailing loans for CRE being even more pronounced, and banks' risk provisioning failing to keep up with the increase. In this context, prudent macroprudential measures with combined capital buffer requirements of 2.5%-5.25% could limit risks, and the Austrian authorities will implement a sectoral risk buffer of 1% for risk-weighted CRE assets starting from July 2025. In light of elevated asset quality risks emanating from CRE exposures, Morningstar DBRS applies a negative qualitative adjustment to the "Monetary Policy and Financial Stability" building block assessment.

Stricter residential real estate (RRE) lending regulation, which will become unbinding mid-2025, have improved lending standards. Together with unwinding price overvaluations, these regulations reduced systemic risks in the RRE market. OeNB's property price overvaluation index stood at 6.7% as of July 2024, down from the 35.4% peak in 2022. Risks from household indebtedness are mitigated by the moderate amount of debt relative to income and sound net financial assets providing a buffer for households to absorb potential shocks. The share of outstanding lending with variable rates continues to remain elevated, but debt affordability is slowly improving with falling interest rates. We expect banks to post sound profitability in 2025, helped by high, albeit declining, interest rates and growing loan volumes. Austrian banks' exposure to Central, Eastern and South-eastern Europe (CESEE) countries is elevated, although it provides a certain degree of diversification. Exposure to Russia, where Austria's second largest bank remains active despite a significant reduction in loans to Russian customers, is also a point of attention.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

There were no Environmental, Social or Governance factors that had a significant or relevant effect on the credit analysis.
 
A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (16 May 2025) https://dbrs.morningstar.com/research/454196.

For more information on the Rating Committee decision, please see the Scorecard Indicators and Building Block Assessments at https://dbrs.morningstar.com/research/455793.

EURO AREA RISK CATEGORY: LOW

Notes:
All figures are in euros unless otherwise noted. Public finance statistics reported on a general government basis unless specified.

The principal methodology is the Global Methodology for Rating Sovereign Governments (15 July 2024) https://dbrs.morningstar.com/research/436000. In addition Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings https://dbrs.morningstar.com/research/454196 in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The sources of information used for these credit ratings include Bundeskanzleramt (Government Programme 2025-2029), Österreichisches Institut für Wirtschaftsforschung (WIFO, Monthly Reports - April 2025), Österreichische Nationalbank (OeNB, Financial Stability Report - November 2024; Interim Economic Outlook for Austria - March 2025), Österreichische Bundesfinanzierungsagentur (OeBFA, Investor Presentation - May 2025), Austrian Ministry of Finance (BMF, Monthly Report December 2024 / Preliminary Results 2024 - January 2025; Draft Budgetary Plan 2025-26 and Federal Financial Framework 2027-29, National Medium-Term Fiscal-Structural Plan 2025-29, Annual Progress Report - May 2025), Fiskalrat (Budget Outlook 2025 and 2026 - April 2025; Fiscal Sustainability Report - April 2025), Ministry of Climate Action and Energy (Austrian Energy Info Portal - May 2025), Financial Market Authority (FMA, Annual Report 2024 - May 2025), Austrian Parliament, Statistik Austria, European Commission (Debt Sustainability Monitor 2024, March 2025; Spring Forecast 2025), European Central Bank, Eurostat, Organisation for Economic Co-operation and Development (OECD), International Monetary Fund (2024 Article IV Consultation - Press Release, Staff Report; and Statement by the Executive Director for Austria; Austria Selected Issues - May 2024; WEO and IFS, April 2025), World Bank, Bank for International Settlements and Macrobond. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

With Rated Entity or Related Third Party Participation: YES
With Access to Internal Documents: NO
With Access to Management: NO

Morningstar DBRS does not audit the information it receives in connection with the credit rating process, and it does not and cannot independently verify that information in every instance.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and credit ratings are under regular surveillance.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://dbrs.morningstar.com/research/455795.

This credit rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Max Dietz, Assistant Vice President, Global Sovereign Ratings
Rating Committee Chair: Michael Heydt, Senior Vice President, Sector Lead, Global Sovereign Ratings
Initial Rating Date: 21 June 2011
Last Rating Date: 10 January 2025

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