Austria’s credit rating downgraded to ’AA’ by Fitch, outlook stable

Investing.com -- Fitch Ratings has reduced Austria’s Long-Term Foreign-Currency Issuer Default Rating (IDR) from ’AA+’ to ’AA’, while maintaining a stable outlook. The downgrade reflects ongoing fiscal and macroeconomic challenges, as well as an increase in government debt.

Austria’s fiscal and macroeconomic outlook has deteriorated since the last review. The fiscal deficit for 2024 was 4.7% of GDP, significantly higher than the predicted 3.7%, due to a worsening economic climate and overspending at the local government and municipal level. Despite the new government’s fiscal consolidation program, government debt as a percentage of GDP is expected to continue to rise in the medium term.

General government deficits are expected to gradually decrease to 4.3% of GDP in 2025 and 3.9% of GDP in 2026. However, these figures are higher than the previously anticipated deficits of 4.0% in 2025 and 3.6% in 2026. They also fall behind the median for ’AA’ rated sovereigns, projected at 2.5% and 1.9% of GDP, respectively.

The government’s consolidation program aims to reverse some of the fiscal loosening measures introduced in recent years. However, sustained economic weakness threatens revenue growth and could undermine these efforts.

At the end of 2024, general government debt was 81.8% of GDP, significantly higher than the 76.6% predicted a year ago. Fitch forecasts that the debt-to-GDP ratio will continue to rise in the medium term and only stabilize between 2027 and 2029 at 86% of GDP.

Austria’s economy contracted by 1.2% in 2024, marking the second consecutive year of contraction. The nation’s economic output is now 3.3% lower than before the Ukraine war, making it the weakest in the EU. While the economy is expected to stagnate in 2025, GDP growth is projected to recover to 1.2% in 2026.

Beyond the forecast horizon, Austria will face increasing fiscal pressure from an aging population and climate-related expenditure. From 2029, the primary balance is projected to deteriorate by 0.7pp of GDP over the following five years due to these challenges.

Despite the downgrade, Austria’s ’AA’ IDRs are supported by a diversified and wealthy economy, strong political and social institutions, and the reserve currency status of the euro. The nation also maintains the longest average maturity of marketable general government debt in the EU, at 11.4 years, which mitigates the effect of rising interest rates on debt servicing costs.

Austria’s external private sector balance sheets remain strong, and the banking sector continues to show resilience despite increased non-performing loans and challenges from commercial real estate. The Austrian banking sector’s robust capitalization and profitability, along with falling interest rates since mid-2024, have improved financing conditions and boosted housing loan demand.

Negative rating action could occur due to a further substantial increase of the government debt-to-GDP ratio beyond current forecasts or a persistent weak growth outlook. Conversely, a clear downward path of the general government debt/GDP over the medium term to significantly lower levels could lead to positive rating action.

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