Country Report Austria
In 2012, economic growth slowed down thanks to weakening external demand and waning confidence. The growth outlook for 2013 remains weak. The fiscal position is relatively strong, the government implemented a debt brake rule that in normal economic conditions will lead to a sustainable and downward debt trajectory. The government though has large contingent liabilities due to rising non-performing loans of Austrian banks in the Central and Eastern European countries. The domestic risks for the banking sector include the very high amount of variable rate loans offered to the private sector. Moreover, a quarter of the loans outstanding are foreign currency-denominated, which is subject to exchange rate risk.
After the 3.1% y-o-y growth in 2011, economic growth slowed down in 2012 to just 0.8%. Ffourth quarter growth even dipped below zero (-0.2% q-o-q). Net exports were still the main driver of growth, with growth in domestic demand (consumption and investment) turning negative, despite the robust labour market. Unemployment is below European average at 4.4% and real wage growth is positive. Business and consumer confidence deteriorated in the second half of the year, dampening the growth outlook for 2013.
Fiscal consolidation plans
The budget deficit amounted to 3% of GDP in 2012, which was partially due to the costs of banking sector support (0.7%-GDP). For 2013, the European Commission expects the budget deficit to be 2.5% of GDP. The structural deficit is expected to decrease markedly (from -2.5% in 2012 to -1.9% in 2013) thanks to the consolidation measures introduced by the Austrian government.
Even though Austria will probably have a budget deficit in the coming years, its fiscal position is strong and is expected to remain so. A ‘debt brake’ rule was introduced, which limits the public sector’s ability to borrow and will force the government reach a balanced budget by 2017 and to reduce the public debt level to 60% of GDP by 2020. Unlike a similar law introduced in Germany, the ‘debt brake’ is implemented in regular legislation instead of in the constitution. Therefore, it is easier to undo this legislation in times of economic stress and it is not binding for the federal states. The states and municipalities are, however, bound by bilateral agreements with the central government. Given Austria’s strong track record in keeping sustainable public finances, we remain positive on the consolidation plans. The upcoming elections in the autumn of 2013 are not expected to change this outlook, since the need for government retrenchment is broadly supported across the political spectrum.
The fiscal position has some major downside risks stemming from the European debt crisis. The government has contingent liabilities in the form of rescue packages provided to the peripheral European countries. Were the debt crisis to worsen and one or more countries to default on their loans, which is still only a tail risk, this would increase the public debt of Austria. Moreover, such a scenario would lead to lower and possibly negative economic growth number both in Austria and its main trading partners (Germany, Italy and Central- and Eastern Europe). This could increase the amount of non-performing loans of Austria’s banking sector, and especially of its subsidiaries in Eastern Europe. Currently the government has EUR 19.8bn (about 6.6% of GDP) at risk because of capital injections and guarantees given to the banking sector. In 2012, the Austrian government partially nationalized Oesterreichische Volksbanken. Further state aid to the banking sector cannot be excluded.
The banking sector has a high exposure to the Central, Eastern and South-eastern European (CESEE) countries (EUR 215.5bn in June 2012). These operations generate the major part of the profits of Austrian banks, but are also subject to a higher credit risk, against which higher loan loss provisions are taken. Moreover, local lending by these subsidiaries is often refinanced through intra-group transfers (i.e. funded by the Austrian banking group. An indicator of the increased use of these liquidity facilities is the buildup of net liabilities in the Target2 system, which doubled since the global financial crisis, but recently stabilized at EUR 40bn (about 13.3% of GDP). In order to reduce the risks to the Austrian banking system stemming from foreign operations, new guidelines were introduced in 2012 by the regulators. Banks have to increase their capital buffers and attract more local funding for their subsidiaries. Banks also have to prepare recovery and resolution plans. The operations in the CESEE countries still have high NPL ratios. Whereas the domestic NPL was 4.6% in June 2012, the NPL-ratio of the subsidiaries was 15.9%, mainly driven by problems in foreign-currency denominated loans provided by the subsidiaries in the CESEE countries (NPL ratio of 19.7%). The current difficulties in many of these countries (e.g. Hungary and Slovenia) will probably lead to more non-performing loans going forward. The subsidiaries increased their loan loss provisions (to 10.6% of total outstanding loans) to cover future losses. Whether this will be enough is still to be seen.
The Austrian banking system is also facing some domestic-related risks. The sector is characterized by its high number of banks, branches and bank employees per capita, leading to a high degree of competition, higher costs and, therefore, low profit margins in the domestic market. Whereas household debt is relatively low (87% of disposable income at mid-2012) compared to the European average (106% in the first quarter of 2012), it has some risky characteristics. Household debt consists mainly of variable rate loans (initial rate fixation less than 1 year). In 2012, 86% of new loans had variable rates. Moreover, a relatively large share of the debt is denominated in a foreign currency and is often not hedged. In the period from 1995 up to 2008 a major part of Austrian mortgages were denominated in Swiss francs, since then the amount of foreign-currency loans is gradually declining due to a ban on these products for households without income in the same currency. Summarized, the main risks for the Austrian banking sector are related to their foreign subsidiaries, but the domestic market also bears some risks. Further reform measures and higher capital buffers are necessary to make the sector more resilient to downside risks.