Austria benefits from high levels of stability and social cohesion. Per capita income is high, unemployment comparatively low (even though higher than previously), social protection systems are strong, and the society is among the most equitable of advanced economies.
The overall outlook is solid, but potential growth is low. Growth picked up in 2016, but is projected to slow gradually toward the medium-term potential rate of just above 1 percent as the output gap closes and fiscal policy turns back to consolidation. Unemployment is set to remain elevated for some time as employment creation just keeps pace with the rising labor force, while inflation is projected to gradually rise to slightly above 2 percent in the medium term.
Risks arise from a number of external factors, but are overall limited. International political fragmentation or slow growth in other advanced economies and/or emerging markets would undermine Austria’s performance, largely through the trade and financial channels. However, with the European Single Market providing a stable economic framework and bank exposure to risks in CESEE declining, the overall vulnerability of the Austrian economy is limited.
Raising the economy’s potential is important to raise living standards further and lower unemployment, as well as to ease the fiscal burden of demographic change. A comprehensive reform package should focus on four key areas: (i) structural reforms to strengthen competition and further reduce firms’ administrative burden; (ii) raising public investment to support private sector productivity and investment; (iii) shifting the tax mix away from labor toward property, pollution, and consumption; and (iv) providing incentives for higher labor force participation among elderly workers, as well as for full-time employment of women.
Long-term fiscal sustainability requires additional reforms. While projections indicate a reduction of the fiscal deficit and debt in the medium term—largely on account of interest savings and restraint in government consumption— fiscal pressures will re-emerge over the longer term as the population ages, and debt will start to rise again. To ensure fiscal sustainability in such an environment, the current window of opportunity should be used to put in place efficiency-boosting expenditure reforms in health, education, and subsidies, as well as further pension reform measures. To be successful, many of these reforms require adjustments in fiscal relations between the federal and subnational governments. The potential for savings is significant, and, in combination with growth-raising reforms, sufficient to ensure long-term fiscal sustainability. Full implementation of these reforms would also allow reducing the labor tax wedge further.
Maintaining financial stability calls for ensuring that banks raise capital as planned and availing regulators with macroprudential tools to address potential risks in the real estate market. Boosting banks’ capital buffers remains important, even though the low-growth, lowinterest rate environment makes this challenging. The authorities’ introduction of a systemic risk capital buffer is welcome—they now need to ensure that banks will meet their capital targets as scheduled. This is all the more important as the environment for banking remains difficult both at home and abroad, and new challenges may arise. Financial stability risks from the real estate markets are currently limited; nonetheless, regulators should be given the legal authority to use macroprudential instruments at their discretion. To preserve Austria’s position as a financial center, the authorities will also need to bolster its AML/CFT framework, notably by enhancing supervision and banks’ compliance.
1. Credit strengths
High GDP per capita
Strong budgetary performance
Favourable public debt profile
Low external risk
Austria’s AAA ratings are underpinned by its wealthy, well-diversified, service oriented economy with no major macroeconomic imbalances.
The government’s consistent efforts to adhere to its fiscal consolidation path and strengthened fiscal framework also drive the ratings. Austria also benefits from a favourable public debt profile. The Stable Outlook reflects Scope’s expectation that the government will keep to its fiscal consolidation plans and continue to place the country’s debt on a firm downward trajectory over the medium term.
2. Sovereign Rating Categories Summary
3. The sectoral structure of the Austrian economy is well balanced
The Austrian economy is solidly based on a well-balanced sectoral structure. The largest share of gross value added (slightly above 30%) is generated by the range of private sector services. In addition, activities classified under “quarrying, manufacturing, electricity and water supply” as well as “trade, transportation and hotels and restaurants” account for more than 20% each. Manufacturing in Austria is characterized by a high diversity of industries.
The construction sector’s contribution to gross value added (some 6.4%) is relatively low by international standards.
4. GDP growth rate is expected to strengthen.
a) Domestic economic risk
According to the European Commission’s Spring 2017 Forecast, Austria’s GDP growth rate is expected to strengthen to 1.7% in 2017 and 2018 following a good performance of 1.5% in 2016 and an almost four-year period of economic stagnation from 2012 to 2015.
b) Public finance risk
According to the 2017 Stability Program, which covers the period up to 2021, Austria intends to gradually decrease its budget deficit and keep it well within the 3% budget- deficit threshold, thus continuing a prudent fiscal policy which the country has been pursuing over the last ten years, with the exceptions of 2009 and 2010. This policy will help to reduce debt from around 84% at YE 2016 to around 73% of GDP at YE 2020, assuming that the GDP growth rate will outpace the budget deficit. Despite significant debt reduction, its level is still above the Maastricht debt threshold of 60%.
c) Prudent fiscal policy is set to continue
Scope expects that economic expansion, the continuation of the low interest rate environment and the ability to curb expenses related to medical care will allow the Austrian government to keep its budget deficit at 1% and below.
5. Investment climate
a) Business environment
Austria is a federal republic. The head of state and bicameral legislature (parliament) are elected. The Ministry of Finance is the country’s highest financial authority. The parliament is responsible for passing laws that are proposed by the government or parliament itself, but a law must be authenticated by the president before it can enter into force.
As in many other developed countries, the Austrian economy has become much more serviceoriented. The tourism industry is particularly important. Austria’s main assets are a skilled labor force, good industrial relations, political stability and its participation in international organizations. The country welcomes foreign investment.
Austria is a European Union (EU) member state and as such is required to comply with all EU directives and regulations and it is bound by EU trade treaties, import regulations, customs duties, agricultural agreements, import quotas, rules of origin and other trade regulations. The EU has a single external tariff and a single market within its external borders. Restrictions on imports and exports apply in areas such as dual-use technology, protected species and some sensitive products from emerging economies. Companies operating in Austria have access to a tariff-free market of consumers through the country’s membership of the EU and free trade with Iceland, Liechtenstein, Norway and Switzerland through other agreements. Trade also is governed by the rules of the World Trade Organization (WTO). Although Austria historically favored price controls and legislation to control prices is still in place, price controls and caps are rarely introduced. Unfair pricing practices may be challenged via the Competition Authority.
b) Austria Taxation and Investment
Austria is part of the Eurozone and uses the Euro (EUR) as its currency
- Banking and financing
The banking industry, regulated by the Banking Act, is well developed. The basic terms and conditions under which banks and financial institutions can operate are common to all EU countries, including the automatic right for banks registered in one EU member state to set up in another member state under the “single passport” system. Such banks remain subject to home country control. As a result of deregulation and a common EU approach to banking, distinctions between different types of bank (with respect to their shareholding structures rather than the rules under which they operate) have largely disappeared and savings, mutual and cooperative banks operate as commercial banks.The banking system is supervised by an independent Financial Market Authority (FMA), which is the regulator for all financial institutions, including financial conglomerates. This agency also oversees mergers and takeovers in the financial sector. EU rules apply, thus making it easier for financial institutions recognized in another European Economic Area (EEA) country to operate in Austria, irrespective of their country of origin.
The National bank (central bank) is responsible for the stability of the financial system. It is part of the European System of Central Banks (ESCB), which has at its hub the European Central Bank (ECB) in Frankfurt. The central bank also is part of the Euro system, the smaller group of central banks within the ESCB that have adopted the Euro. The ECB is responsible for monetary policy, exchange rate policy and reserve management for the Euro area, as well as for TARGET, the Trans-European Automated Real-time Gross settlement Express Transfer system for cross-border payments in Euro.
Austria’s capital, Vienna, is the main financial center.
Austria is open to foreign investment. Austria’s position as a springboard to central and Eastern Europe should be emphasized, as well as its suitability as a location for R&D and the incentives available for research-intensive industries, its qualified and motivated labor force and the country’s good labor relations.
Direct investment in Austria generally does not require government approval. However, there are some restrictions on the acquisition of real estate, which vary by region and apply principally to residential and rural property and to non-EEA citizens. As a general rule, a company setting up in an established business district or industrial area should not encounter problems.
There are no limits on foreign equity investment.
Foreign companies are subject to the same rules as domestic firms in terms of planning permission, licensing of certain activities and environmental permits, including rules on site clean-up and carbon dioxide emissions quotas. Planning permission to build factories or offices is obtained from the local land-use authority. The broad principles applied for operating in regulated industries and for environmental permits are those of the EU as a whole.
Foreign direct investment that involves a substantial transfer of important technology and leads to job creation may be eligible for investment incentives and R&D subsidies, although these must conform to EU policies on regional investment and state aid.
Austria largely relies on its low corporate tax rate to attract foreign investors but also offers a tax incentive for R&D. Taxpayers may claim a subsidy in the form of a cash tax premium equal to 12% of qualifying R&D expenses. Social security costs may be reduced or training funds may be available for certain categories of worker who find it difficult to obtain employment or need to improve their skills.
Austria has no exchange controls and its ability to introduce controls is constrained by its membership of the EU and the Eurozone. Reporting and client identification requirements apply to significant transactions and for the purposes of anti-money laundering rules. Reporting requirements also apply for balance-of-payment collection purposes. Banks handle reporting of transfers but foreign investments must be reported directly to the central bank. The following main thresholds have applied since 2015: EUR 500,000 for inbound and outbound direct investments; EUR 5 million for portfolio investments held with a foreign custodian; EUR 5 million for certain transactions with foreign partners; EUR 10 million for foreign lending and borrowing (the same applies for trade receivables and liabilities); EUR 1 million for incoming and outgoing payments relating to derivatives and EUR 5 million for derivative holdings; EUR 100,000 for real estate transactions; EUR 500,000 for the export and import of services and EUR 750,000 for the import and export of goods from and to other EU countries.
Financial institutions must provide the central bank with statistical data for balance-ofpayment and money-laundering purposes.