Austria
2010 Article IV Consultation: Staff Report; Staff Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Austria
Author:
International Monetary Fund
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Publication Date:
08 Sep 2010
eISBN:
9781455205530
Language:
English
Keywords:
ISCR; CR; CEBS stress tests; staff appraisal; Austria's economic growth; outturn; foreign currency; CESEE country; GDP growth; banking sector; gross investment; Eastern Europe
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Austria’s recession had limited effects on unemployment. Investment declined sharply but consumption helped cushion the recession, supported by tax cuts and various labor market measures together with large increases in real wages. Austria’s fiscal position has weakened significantly in recent years, although to a lesser extent than the euro area average. The authorities’ plan to embark on a decisive fiscal consolidation path is welcomed. They recognized, however, that reducing the share of foreign exchange loans, while providing continued financing to central and southeastern Europe, will be challenging.

Abstract

Austria’s recession had limited effects on unemployment. Investment declined sharply but consumption helped cushion the recession, supported by tax cuts and various labor market measures together with large increases in real wages. Austria’s fiscal position has weakened significantly in recent years, although to a lesser extent than the euro area average. The authorities’ plan to embark on a decisive fiscal consolidation path is welcomed. They recognized, however, that reducing the share of foreign exchange loans, while providing continued financing to central and southeastern Europe, will be challenging.

I. The Context

1. The Austrian economy is recovering from a sharp decline in real GDP in 2009. This 3.9 percent decline was between those experienced by its neighbors Germany and Switzerland, with which Austria shares a number of features—limited indebtedness of corporate and households, and strong contributions of trade to growth in the last decade.

2. Austria is dependent on foreign developments, but is also important for many Central, Eastern, and South Eastern European (CESEE) countries.1 Exports represent more than 50 percent of GDP, with Germany and CESEE countries respectively taking up one third and one fifth of total. Foreign bank claims amount to 140 percent of GDP, half of which are to the CESEE. About 13 percent of the labor force in Austria is foreign-born.

3. The legacy of the crisis is apparent on three fronts:

  • The fiscal deficit and debt of the general government are expected to reach respectively 4¾ percent and 70 percent of GDP in 2010. In addition to the workings of automatic stabilizers, these increases largely reflect permanent tax cuts decided in 2008 and 2009.

  • The financial sector, weakened by the bursting of credit bubbles in some CESEE countries, still faces rising nonperforming loans and will be affected by regulatory changes, while public support schemes are to gradually unwind.

  • Potential growth will be affected in the context of less dynamism in some CESEE countries and an ageing population.

II. Recent Developments and Outlook

A. The Crisis

4. GDP contracted by 3.9 percent in 2009, mainly as a result of a trade shock (Figure 1). Industrial production shrunk by about 12 percent in 2009.

Figure 1.
Figure 1.

Austria: An Overview

Citation: IMF Staff Country Reports 2010, 276; 10.5089/9781455205530.002.A001

Sources: Austrian authorities; IHS; WIFO; ECB; Haver; WEO; REO; BIS, and other IMF staff estimates.
A01ufig01

Austria: Sources of Real GDP Growth

(percentage point contribution)

Citation: IMF Staff Country Reports 2010, 276; 10.5089/9781455205530.002.A001

Source: WIFO, IMF staff calculations.

5. On the demand side, both net exports and investment fell sharply. Net trade contributed about half of the decline in GDP in 2009, while machinery investment contracted by around 14 percent. Credit conditions tightened and larger firms increased their recourse to bond financing (Figure 5). However, the increase in loan spreads to SMEs was in line with past recessions, the drop in credit followed activity, and surveys suggest that investment reacted more to depressed demand than to tighter financing conditions. The authorities, too, saw little evidence of a credit crunch.

Figure 2.
Figure 2.

Austria: The Labor Market

Citation: IMF Staff Country Reports 2010, 276; 10.5089/9781455205530.002.A001

Sources: Austrian National Bank; Eurostat; Haver; OECD, and Fund staff calculations.
Figure 3.
Figure 3.

Austria: Competitiveness and Imbalances

Citation: IMF Staff Country Reports 2010, 276; 10.5089/9781455205530.002.A001

Sources: Austrian National Bank; European Commission; Eurostat; World Integrated Trade System; WEO; and IMF staff calculations.
Figure 4.
Figure 4.

Austria: Legacy Effects From Boom-Bust in CESEE Countries

Citation: IMF Staff Country Reports 2010, 276; 10.5089/9781455205530.002.A001

Sources: Austrian authorities; Eurostat; IHS; WIFO; Haver; WEO; REO; and IMF staff estimates.
Figure 5.
Figure 5.

Austria: Legacy Effects From Boom-Bust in CESEE Countries

Citation: IMF Staff Country Reports 2010, 276; 10.5089/9781455205530.002.A001

Sources: Austrian National Bank; Haver; IMF, IFS; ECB; and Eurostat.1/ Based on bank lending survey data. Minus means tightening/decreased.

6. Consumption held up thanks to relatively comfortable balance sheets, limited wealth effects,2 and still dynamic labor incomes. Part-time and training schemes are estimated to have reduced the increase in unemployment, from 3.8 percent mid-2008 to 5.1 percent mid-2009, by about 1 percentage point.3 The authorities also pointed to the concentration of the shock on capital-intensive industries.

A01ufig02

Labor market developments during the crisis

(Percent of Labor Force)

Citation: IMF Staff Country Reports 2010, 276; 10.5089/9781455205530.002.A001

Source: OeNB and Haver.Note: STW = Short-termworking week. Data on monthly STW before 2009 is unavailable.

B. Recovery and Uncertainties

7. Austria is well equipped to benefit from the pick-up in trade. Wage agreements in Austria are traditionally moderate, and CGER approaches do not point to a misalignment of the real exchange rate (Figure 3). As trade recovers, GDP growth is expected to reach about 1.5 percent in 2010 and 2011. Given the slack in the economy, inflationary pressures should remain limited, in spite of the depreciation of the euro. The authorities broadly shared this view.

8. However, the outlook is fragile. Given its trade and financial openness, Austria is particularly exposed to growth and financial shocks, notably in the euro area and CESEE. While direct financial exposure to Southern euro area countries and Ireland is moderate, renewed tensions in some CESEE countries could bear on funding costs and profitability of Austrian banks, with possible implications for domestic credit supply and growth.

C. Medium-Term Perspectives

9. In the medium run, potential growth is unlikely to return to pre-crisis levels. It will be affected by ongoing weak investment, including as a result of an ageing population and lower growth in some CESEE countries (Box 1, Figure 4). While migration is a mitigating factor, the working age population is slowing down and is expected to start contracting from 2020 onwards. Overall, potential growth is estimated to have diminished from around 2 percent in the years preceding the crisis to 1.7 percent by 2014.

‘Boom-Bust’ in CESEE and Implications for Austria4

In the decade preceding the crisis, Austria was able to seize the opportunities arising from opening up and catching up of CESEE economies. According to empirical studies, EU enlargement increased Austrian GDP growth by 0.4 percentage points each year, with also positive effects on employment.5 (Net) exports, FDI to CESEE, and returns from these investments, including in the financial sector, increased substantially to reach considerable shares of the corresponding aggregates.

Financial and Real Linkages Austria-CESEE

article image
Source: OeNB, WIIW and staff calculations. Note: In the case of CESEE, gross investment income is a good proxy for net investment income.

However, in some CESEE countries, the convergence process degenerated into a credit boom which burst in the context of the global financial crisis. Domestic demand in these countries is anticipated to be well below levels and pace before the crisis, in contrast to the more balanced economies of the region. GDP is also expected to be affected, though to a lesser extent as countries reorient to more export-oriented activities. As a result, Austrian exports and returns on investments could be more subdued than in the past. GDP growth could be lower by about 0.1 to 0.2 percentage points and the current account balance reduced by 0.3-0.5 percent of GDP over the projection period.

10. Staff viewed a better utilization of labor resources a priority. While Austria fares well in research and development, use of labor market resources could be improved in certain segments of the population (Box 2). The authorities saw the gradual introduction of the 2003 pension reforms and measures to improve the health of workers as ways to increase the effective retirement age. While welcoming these reforms, staff noted that their introduction was very gradual and that recent measures have tended to lower participation rates of older workers. Authorities also pointed to the gradual introduction of compulsory and free preschool education for 5-year olds as a way to improve employment conditions for women and the socially disadvantaged.

The Austrian Labor Market: Issues and Challenges

With moderate growth in unit labor costs, high employment and low unemployment rates, overall, the Austrian labor market compares favorably with its European peers (Figure 3). Apart from 2008–09, past collective bargaining agreements have resulted in wage increases comparable with the German ones, and unemployment is well below the EU average.

However, there are significant differences in employment outcomes across subsets of the population. Employment rates are low for older workers (41 percent of workers aged 55-64 employed, while the EU average is 46), and also to some degree for low skilled (below 50 percent relative to 60-65 percent in some other European countries). Unemployment is high for foreign-born workers. An above average share of female employment is part-time.

Policies have a role to play. The effective retirement age is well below legal age due to early and partial retirement schemes, and disability benefits (entered by about a third of the work force, at an average age of 51). The introduction of the 2003 pension reform—which increases incentives for later retirement and extends the accounting period for the pension base—is very gradual. And some recent measures have resulted in opposite effects and have been misused for early retirement—such as those in support of old age part-time work and the extension of a pension scheme for the long-term insured (Hacklerreglung ). High effective labor tax rates weigh on employment of the low-skilled. Also, education may be relying excessively on family support, resulting in one of the largest achievement gap among OECD countries for children with migrant origins. Finally, the gender wage gap is high and more effective female participation is hampered by a variety of factors, including the absence of full-day pre-school child care and schools.

Legal Retirement Age and Effective Age of Exit for the Active Population, 2002-07

article image
Source: OECD estimates derived from national surveys and the European workforce.

11. A strong implementation of EU directives is also needed to boost competition in services. OECD indicators suggested restrictions in some utilities sectors as well as in liberal professions. The authorities pointed at a planned strengthening of the Federal Competition Authority, measures to decrease administrative burdens for businesses, and several ongoing regulatory changes. The law on postal markets will enter into force in January 2011, implying the removal of the remaining monopoly on letters weighting less than 50 grams, while transposition of the EU Services directive is in process. Transposition of the EU directive on nondiscriminatory network access in energy markets should be effective by 2011-12.

III. Fiscal Policy: From Stimulus to Consolidation

12. While deficit and debt levels do not compare unfavorably with the average of the euro area, Austria’s fiscal position has weakened significantly (Figure 6). The general government deficit and debt are set to rise to respectively 4.8 and 70 percent of GDP in 2010, from 0.5 percent and 59 percent in 2007. Discretionary stimulus measures, which totaled almost 2 percent of GDP in cumulative terms in 2010, were mostly designed to be permanent, thus complicating consolidation efforts.

Figure 6.
Figure 6.

Austria: Fiscal Trends 1/

(Percent of GDP)

Citation: IMF Staff Country Reports 2010, 276; 10.5089/9781455205530.002.A001

Sources: IMF, WEO (April 2010); and staff calculations.1/ WEO (April 2010) forecast from 2010 onwards.

Fiscal implications of stimulus packages 2008-13

(Cumulative effect on deficit, in percent of GDP)

article image
Source: Authorities.

Mainly related to pension and family benefits and VAT exemption for pharmaceuticals.

Measures with a focus on business environment and SMEs.

Investment and R&D incentives; mandatory kindergarden year.

Predominantly related to income tax (including family components).

Short-time work package, reduction of unemployment insurance contributions, car scrapping premium, etc.

13. Reducing the deficit to below 3 percent of GDP by 2013 and continuing consolidation in 2014 and beyond would put the debt-to-GDP ratio on a declining path from 2014 onwards. Staff supported the continued fiscal stimulus in 2010 given the fragility of the recovery and lack of evident imbalances. Looking forward, the authorities have planned to reduce the deficit from 2011 onwards and designed a consolidation path until 2014, with annual structural steps of about ½ percent of GDP. Under this scenario, general government debt would increase to around 75 percent of GDP by 2013 before decreasing. Noting that current policies were unsustainable staff saw the planned consolidation path as appropriate, but stressed the need to identify early the measures to achieve consolidation. Moreover, as market pressures had been observed when banks came under stress connected to instability in some CESEE countries, the authorities were advised to stand ready to take additional measures if needed to guarantee achievements of targets, or in case of market pressures.

A01ufig03

Debt dynamics: baseline vs. full adjustment

(debt as percent of GDP)

Citation: IMF Staff Country Reports 2010, 276; 10.5089/9781455205530.002.A001

Source: Staff calculations.

14. The authorities have decided a 60/40 percent split between expenditure and revenue measures. At the central government level, Parliament has approved new medium-term expenditure ceilings, 4 percent lower than previous year’s ceilings, binding for each ministry in 2011. Performance-based budgeting is to be introduced by 2013. While welcoming these actions, staff noted that the envisaged expenditure reductions will need to be underpinned by structural measures to be sustainable. The authorities agreed, indicating that these would be included in the 2011 budget to be transmitted to Parliament in December 2010. In addition, public health insurance companies are expected to save a total of 1.7 billion euro over 2010-13 on medical and related fees, leading to a potential cumulative deficit-reducing impact of some 0.2 percent of GDP. Other measures are yet to be defined, including a bank levy, expected to yield 500 million euro (close to 0.2 percent of GDP).

Austria: Fiscal Developments 2007-15

article image
Source: Eurostat (until 2009); authorities and staff projections.

Assumes implementation of expenditure ceilings at the federal level in 2011.

Stability Programme Jan 2010.

15. Staff recommended a mainly expenditure-based consolidation at all levels of government, noting room for rationalization. Evidence suggests that expenditure based consolidations are more sustainable. Moreover, expenditure levels are elevated in international comparison in Austria, with outcomes not always commensurate to spending (Box 3). In several areas with savings potential, such as health care, responsibilities overlap across government levels. More broadly, the current federal framework suffers from a number of shortcomings (Box 4). Working groups on administrative reforms have been put in place but have not resulted in any decision. An overhaul of fiscal federal arrangements would be desirable to disentangle responsibilities and better align taxing with spending powers. Staff also recommended revisiting Austria’s internal stability pact, to reduce its procyclicality—including by adopting expenditure ceilings also at the Laender level—and to improve compliance through binding sanctions. Finally, as some local governments have been issuing guarantees in excess of their financial abilities, the mission advised setting ceilings. The authorities indicated that discussion between government levels would take place in the fall.

Fiscal Spending and Outcomes

An analysis of current levels of spending and outcome indicators suggests some possible areas for savings and/or efficiency gains.

A01bx3ufig01

Government Expenditure by Function

(2008, percent age points in terms of the percent share of GDP)

Citation: IMF Staff Country Reports 2010, 276; 10.5089/9781455205530.002.A001

Source: Eurostat

  • Subsidies: Subsidies exceed the average, with more than half going to public enterprises (notably railways and hospitals) and the rest being spread on various private recipients. The authorities’ efforts to improve their administration and increase transparency should help identify possible savings.

  • Health: While health spending is higher than the euro area average, life expectancy and healthy-life years are around average. Hospital spending has a particular high share, as Austria ranks among the top two in the EU in terms of hospital beds and hospital visits per inhabitant. Rationalization, which would require increased coordination across Laender, could help reap scale benefits, see OECD Economic Surveys (2005, 2009) and WIFO “Optionen zur Konsolidierung der oeffentlichen Haushalte in Oesterreich” (2010).

  • Social protection: Spending adds up to some 20 percent of GDP. The share of pensions is relatively high (around 2/3 against an average of 60 percent), even though the old-age dependency ratio is close to average.

  • Education: Education spending is roughly in line with the average. However, this is due to low enrollment rates at the tertiary level, while spending per student is consistently higher than average across attainment levels. Results are mixed (evidenced by PISA scores, for example) and efficiency could be increased, see OECD (2009).

Fiscal Federalism and the Austrian Stability Pact

Austria’s federal system consists of the federal government, nine states (Laender), and some 2,350 municipalities.

Intergovernmental fiscal relations are characterized by a strong disconnect between spending and taxing powers, reflecting fragmentation and overlaps in responsibilities across government levels. While the sub-national government levels spend almost one third of general government outlays, their taxing power is very limited-and only exists at municipality level (communal tax based on enterprises payroll and real estate tax). Resources come mostly from transfers, co-financing, and shared taxes (notably personal income and corporate taxes and the value added tax). The complexity of financial flows is augmented by the existence of numerous extra-budgetary entities at all levels. Fiscal relations are regulated in a fiscal equalization law that is periodically re-negotiated, usually in connection with the internal Austrian Stability Pact. The current law is valid for 2008-13 if not renegotiated.

The internal stability pact suffers from design and implementation issues. In 1999, the “Austrian Stability Pact” was instituted to share fiscal consolidation burdens across layers of government. The pact sets annual numerical targets for the headline deficit of central government, Laender, and municipalities. Before the crisis, over-achievement at the federal level had often compensated under-performance at the Laender level. No sanctions were enforced. Nominal deficit targets may furthermore be procyclical, although there is some leeway for temporary deviation. Finally, there seems to be room for improvement in information exchange and coordination among partners. The most recent pact, supposed to be valid from 2008 to 2013, is unsurprisingly off track since 2009.

16. Staff saw little scope for increasing revenues. Austria has one of the highest overall tax-to-GDP ratios and labor-tax wedges in the European Union, but some taxes are low or nonexistent (general wealth, inheritance, and gift taxes). In this context, while advising against large tax increases, staff saw targeted tax increases as possible in complementing the effort on the expenditure side. Raising the real estate tax, set on the basis of outdated valuations and only yielding ¼ percent of GDP (whereas property taxes in the EU-15 yield on average around 2 percent of GDP) would improve municipalities’ taxing power, and there was room for increasing fuel taxes that are lower than in neighboring countries, including most recent EU Member states.

A01ufig04

General Government Revenue

(2009, Percent of GDP)

Citation: IMF Staff Country Reports 2010, 276; 10.5089/9781455205530.002.A001

Source: IMF, WEO.

IV. Financial Sector: Managing Remaining Risks and Strengthening FinancialStability

Financial stability

17. Public support helped reduce market pressures on banks. The global financial crisis and the bursting of credit bubbles in some CESEE countries weakened the Austrian banking sector. Public financial support, together with the EU/IMF-supported programs in some CESEE countries, was instrumental in improving market confidence, as evidenced by declining CDS spreads. In addition to government capital injections, asset guarantees and guarantees on issuances at the national level, banks benefited from increased liquidity from ECB operations—but with their share of the total tender volume remaining comparable with pre-crisis levels. Some banks (notably KommunalKredit and Hypo Group Alpe Adria) had to be nationalized and will be restructured, including on a cross-border basis.

A01ufig05

Utilization of the Austrian Bank Support Package as of June 2010

Citation: IMF Staff Country Reports 2010, 276; 10.5089/9781455205530.002.A001

Source: OeNB
A01ufig06

Austria: Sovereign and Banks’ CDS

(basis points)

Citation: IMF Staff Country Reports 2010, 276; 10.5089/9781455205530.002.A001

Sources: Thomson Financial/DataStream and Bloomberg.

18. Banks broadly maintained their exposures to European Bank Coordination (“Vienna”) Initiative economies, contributing to their stabilization. Exposure was maintained vis-à-vis the countries that acceded the EU in 2004 and 2007 and South Eastern European Countries, but was reduced by more than a third vis-à-vis CIS countries.

19. Capitalization continued to improve on the back of capital increases and deleveraging (Figure 8). While one bank relied solely on intra-group support, the other large banks received public capital injections, for a total of 7.4 billion euro, complemented in some cases by private capital. Their deleveraging has amounted to 13 percent of assets so far. Ratios also improved for the other banks, mostly on the back of private capital. However, while recent stress tests conducted by the OeNB suggest that the banking sector would on the whole be able to withstand a double-dip recession scenario, banks’ capital ratios currently appear to be slightly below peers and there is wide heterogeneity. In this context, the mission recommended to closely monitor the situation of individual banks and take appropriate action to reinforce capital buffers if needed.

Figure 7.
Figure 7.

Austria: Banks’ CESEE Exposure

Citation: IMF Staff Country Reports 2010, 276; 10.5089/9781455205530.002.A001

Sources:Austrian National Bank; BIS; and WEO.
Figure 8.
Figure 8.

Austria: The Banking System 1/

Citation: IMF Staff Country Reports 2010, 276; 10.5089/9781455205530.002.A001

Sources: Austrian National Bank; GFSR.1/ If not specified otherwise, the data refers to the whole Austrian banking system, including foreign owned banks.Peer Group Includes: Austria, Belgium, Denmark, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden.Total CESEE exposures at 12/31/09 is approximately $293 Billion.Cluster 1 Countries: Belarus, Bulgaria, Macedonia, Poland, Slovak Republic, Czech Republic, Slovenia.Cluster 2 Countries:Croatia, Hungary, Serbia, Russia, Albania, Romania. Cluster 3 Countries:Bosnia, Latvia.Cluster 4 Countries:Ukraine, Kazakhstan, Montenegro.
Figure 9.
Figure 9.

Austria: Selected Financial Market Indicators 1/

Citation: IMF Staff Country Reports 2010, 276; 10.5089/9781455205530.002.A001

Sources: Thomson Financial/DataStream and Bloomberg.1/ Data through July 22, 2010.

20. The banking sector registered a slight recovery in profitability in 2009, but nonperforming loans have not peaked yet. Return on assets after taxes registered a slight increase, as profits from trading income increased substantially, but loan loss provisioning increased, to 2.8 percent as of the end of 2009 for Austrian non-bank customers, and 5.2 percent for subsidiaries in CESEE and CIS. At end-2009, for the largest banks, nonperforming loans reached an average of 2.3 percent of all loans in Austria and 9.7 percent of non-bank customer loans in CESEE and CIS countries—with large heterogeneity across countries. However, some banks are also restructuring loans, expecting that the recovery will restore customer solvency.

A01ufig07

Austria: Tier I Ratio for Six Largest Banks

Citation: IMF Staff Country Reports 2010, 276; 10.5089/9781455205530.002.A001

Source: OeNB.

21. Looking ahead, banks will face a number of headwinds. Some banks rely heavily on money and financial markets, and a high share of bonds will mature in the next few years (26 billion euro in 2011 alone). The sustainability of banks’ earnings performance will be challenged as the currently favorable environment (low funding costs, a steep yield curve, and a rebound in markets) subsides and if the need for provisioning continues to rise. Banks’ profitability will also be dented by anticipated bank levies. The authorities expressed concern about their introduction in neighboring countries—and the resulting possible multiple taxation of Austrian banks. The mission advised that bank taxes should be properly designed, and coordinated, to enhance the resilience of the financial sector.

A01ufig08

Share of Bonds Maturing Each Year - 2010-2060

Citation: IMF Staff Country Reports 2010, 276; 10.5089/9781455205530.002.A001

Source: OeNB, based on Bloomberg.

22. Banks would be strongly affected by Basel requirements as proposed in December 2009. Liquidity requirements were seen as overly demanding by banks and the authorities. There was also high sensitivity to the definition of Tier 1 capital, with minority interests representing 25 percent of tier 1 capital in Austrian banks. However, no validated quantitative estimates of the impact of Basel proposal were available, as the quantitative impact study had not been completed. While recognizing the need to implement measures in a manner that does not adversely affect economic recovery and noting ongoing calibration, staff stressed that strengthening capital and liquidity positions was needed in light of the crisis. The authorities agreed with the need to strengthen the global financial system but were particularly attentive to the fact that new requirements should not put customer oriented business models at a disadvantage.

23. Direct exposure to euro area countries that have come under market scrutiny seems manageable. According to BIS consolidated data, exposure to Southern euro area countries (excluding Italy) and Ireland represented about $25 billion at end-2009 (6.8 percent of GDP), while exposure on Italy alone was also about $25 billion. This compares with an exposure on CESEE of $242 billion (⅔ of GDP). However, in addition to their direct exposure and if developments were unchecked, Austrian banks would also be affected through increased counterparty risk and more expensive funding, including as one large bank is a subsidiary of an Italian group.6

24. In this context, staff concurred with the authorities on the need to keep the financial sector support package in place for the time being. The authorities have obtained EC approval to extend the banking stabilization package until end-2010. Staff agreed that while care should be taken to limit distortions by tighter access costs and conditions, as agreed at the EU level, a stronger financial sector is necessary for the removal of financial support.

25. Efforts to discourage foreign currency lending are being stepped up. Despite a string of policy measures since 2003, foreign currency lending still constituted slightly less than a fourth of banks’ loan exposure on an unconsolidated basis at the end of 2009. Tighter guidelines were defined by the Austrian Financial Market Authority (FMA) in 2010, with OeNB assessing compliance through on-site inspections. In Austria, bullet loans with repayment vehicles, often associated with fx lending—of which some three fourths were directly exposed to market risk in spring 2009—should no longer be available and when offered an fx loan, customers must have a natural hedge or the highest credit rating. Banks are expected to reduce volumes of fx loans over the long term. In the CESEE subsidiaries, about half of the lending was in foreign currency at the end of 2009. Austrian banks are requested to avoid non-euro denominated fx lending, and Austrian supervisors are working with other home and host supervisors. While fx loans to domestic households have started to decline, they have shown little decrease abroad. The authorities expressed hope that the European Systemic Risk Board would contribute to working out cooperative solutions among supervisors. Staff supported ongoing efforts to reduce this source of vulnerability while avoiding to undermine excessively the financing of CESEE countries.

26. The insurance sector recovered in 2009. Overall results of insurance companies recovered in 2009. FMA noted that stress tests conducted at end-2009 showed a clear improvement and that the two biggest companies were able to pass all EU-level stress tests. However, as pensions companies were unable to generate sufficient revenue in 2008, they had to request additional payments from employers (close to 0.3 percent of GDP) to meet defined benefit payouts (30 percent of the plans) and will often need to reduce pension payouts for defined contribution schemes. In state-sponsored retirement provision (Zukunftsvorsorge), and in line with the FSAP recommendations, minimum investment requirement in stocks was decreased in January 2010 to 30 percent and a life-cycle model introduced.

Supervision and regulation

27. Staff welcomed the ongoing strengthening of supervision. The OeNB is responsible for fact finding, including off-site and on-site bank supervision, while the FMA is responsible for decision making, including licensing and enforcement.7 Clear responsibilities and communication channels have been established between the two institutions and reflected in a joint report. The supervisory capacity and the number of inspections have increased, including on a cross-border basis, but the large number (more than 800) of small banks still implied a lot of reliance on off-site assessments. Also, the authorities do not have so far the ability to undertake on-site inspections in some non-EU Member states—Ukraine, Kazakhstan, and Russia—comprising 9 percent of all CESEE exposures. Staff supported ongoing effort to remedy this situation and FMA willingness to be able to impose greater financial penalties and supervise non-bank activities which have been a source of vulnerability.

28. Staff also recommended extending FMA’s early intervention powers and introducing a specific bank resolution framework. Staff advised putting in place a system mandating early remedial action, with powers entrusted to the FMA to intervene if needed to restructure a bank. The authorities felt early intervention powers were important but expressed reservations on a framework that would rely on hard triggers, as recommended in the 2008 FSAP update. Furthermore, staff recommended designing a specific bank resolution framework, as the existing one only provides for a limited range of options (receivership and insolvency under the standard company law) while other bank resolution methods (e.g. purchase and assumption, bridge banks, or mergers) are not explicitly recognized.

29. Staff welcomed Austria’s action plan to remedy strategic deficiencies previously identified by the Financial Action Task Force (FATF). Based on Austria’s commitment to further improve compliance, the FATF plenary removed Austria from its specific review list in June 2010. Austria has also accepted article 26 of the OECD model Tax convention.

30. In May 2010, the Republic of Austria acquired the OeNB’s remaining shares from financial sector institutions and economic interest groups. Regardless of the ownership structure, staff indicated that the operational and financial independence of the Central Bank had to be preserved.

V. Staff Appraisal

31. Decisive policy action is needed to preserve Austria’s strengths and address weaknesses unearthed by the crisis. As an open and competitive economy Austria’s performance had been strong before the crisis. Going forward, significant integration with neighboring countries also bears risks, notably in the financial sector. This calls for determined fiscal consolidation, continued efforts to strengthen financial sector resilience, and structural measures to support potential growth.

32. The increase in public debt should be reversed through steadfast consolidation. As planned, the general government deficit should start decreasing in 2011, be brought below 3 percent by 2013, and continue to decrease thereafter to bring debt on a declining path. With a debt-to-GDP ratio expected to rise until 2013 even with the planned consolidation, a clear commitment to a lasting consolidation and sustainability should be signaled and measures defined early on. Also, the authorities should stand ready to take additional measures if needed.

33. A well-designed and mostly expenditure-based consolidation, with participation of all government levels, could minimize the effects on growth and enhance sustainability. Savings should be targeted in areas where spending is high and outcomes not commensurate (health) or where spending could be better targeted (subsidies, social benefits). In this respect, while the revised medium-term expenditure framework at central government level is welcome, participation of sub-national levels in consolidation should also be ensured. To this end, the current framework (“internal stability pact”) needs to be strengthened and ceilings to local governments’ debt and guarantees issuance need to be introduced. Across-the-board tax increases should be avoided.

34. Potential growth should be supported by structural reforms. In particular, special schemes and long transition periods which are undermining the 2003 pension reforms should be eliminated. Raising the effective retirement age would enhance sustainability and growth. In the services sector, competition should be stepped up, including through an effective transposition of the EU Services Directive.

35. The overall situation of banks has improved but vulnerabilities remain. As some banks have weaker capital positions and strong dependence on wholesale and market funding, the authorities should closely monitor the situation of individual banks, including on the basis of stress tests results, and ensure appropriate action is taken in a timely manner.

36. Exit policy and new policy measures need to be carefully designed. The extension of the current financial support package is appropriate. The authorities should furthermore ensure various measures and regulatory changes considered enhance the resilience of the financial sector, through proper design and taking into account their combined effects.

37. Supervision should be further strengthened. A number of positive steps have already been taken, but FMA powers should be further stepped up. In particular, a system mandating early remedial action and a proper resolution framework should be put in place.

38. Providing continued financing to the CESEE region while reducing the share of foreign exchange loans will be a key challenge. The authorities’ efforts to implement and enforce tighter fx-lending standards in coordination with other supervisors are welcome.

39. Steps taken by the authorities to ensure that their financial system cannot be used for unlawful purposes are welcome. Compliance with FATF recommendations should be further strengthened.

40. It is proposed that the next Article IV consultation be held on the standard 12-month cycle.

Table 1.

Austria: Basic Data, 2005-11

article image
Sources: Austrian authorities; Datastream; and IMF staff estimates and projections.

Contribution to GDP growth.

On ESA95 basis. The Maastricht Excessive Deficit Procedure (EDP) definition differs from this due to the inclusion of revenues from swaps.

Table 2.

Austria: Medium-Term Macroeconomic Framework, 2007-15

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Sources: Austrian authorities; and IMF staff estimates and projections.

On ESA95 basis. The Maastricht Excessive Deficit Procedure (EDP) definition differs from this due to the inclusion of revenues from swaps.

Table 3.

Austria: Balance of Payments, 2007-15

(In percent of GDP)

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Sources: Austrian National Bank; WIFO; and IMF staff projections.
Table 4.

Austria: General Government Accounts, 2007-15

(In percent of GDP, unless otherwise indicated)

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Sources: Federal Ministry of Finance; Austrian Stability Program; and IMF staff estimates and projections.

Assumes implementation of expenditure ceilings at federal level in 2011.

Negative of the change in the structural balance.

The Maastricht Excessive Deficit Procedure (EDP) definition is used by the Austrian authorities. The difference from ESA95 is due to the inclusion of revenues from swaps.

Table 5.

Austria: Financial Soundness Indicators for the Banking Sector, 2005-10 1/

(In percent)

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Source: Austrian National Bank.

Figures refer to the whole banking system, including foreign owned banks, unless noted otherwise.

Figures refer to Austrian owned banks only.

Comparability in 2008 and 2009 is limited due to changes in reporting requirements or introduction of new reporting schemes.

Annex I. ‘Boom-Bust’ in CESEE and Implications for Austria1

This Annex provides an overview of economic linkages between CESEE and Austria, giving some order of magnitude ofpossible effects on Austria of a slowdown in CESEE activity relative to before the crisis.

Table A1.

Financial and Real Linkages Austria-CESEE

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Source: OeNB, WIIW and staff calculations. Note: In the case of CESEE, gross investment income is a good proxy for net investment income.
A01ann1ufig01

Goods exports to CESEE

(million USD)

Citation: IMF Staff Country Reports 2010, 276; 10.5089/9781455205530.002.A001

Source: CEPII, Chelem Database.
A01ann1ufig02

NominalExports

(1995=100)

Citation: IMF Staff Country Reports 2010, 276; 10.5089/9781455205530.002.A001

Source: OeNB
A01ann1ufig03

Gross investment income from CESEE

(Percent and Percentage Points)

Citation: IMF Staff Country Reports 2010, 276; 10.5089/9781455205530.002.A001

Source: OeNB

Austria’s economic and financial integration with Central, Eastern and South Eastern European countries (CESEE) increased considerably up to the crisis (Figure 4. Table A1).2 With substantial investments flowing to the region, by 2007, the CESEE region accounted for nearly half of the total stock of Austrian FDI, or close to 19 percent of GDP. Studies suggest that while Austrian firms may have outsourced part of their production to take advantage of lower costs, market seeking motivations have typically dominated.3 In particular, Austrian banks established subsidiaries and in many countries control large parts of financial intermediation. Exports to CESEE also grew rapidly, now representing one fifth of total. Reflecting Austria’s competitive advantage, intermediary and investment goods continue to dominate Austrian exports to the region, the rise in the share of consumption goods notwithstanding. The share of services in total exports to CESEE has been fluctuating around 22 percent, the largest sectors being transportation and travel, each accounting for around one third.

The catching up process in CESEE and resulting higher growth rates have boosted Austrian incomes. Apart from its positive effects on growth and employment-estimates indicate that EU enlargement alone increased Austrian GDP growth by 0.4 percentage points each year, with also positive effects on employment4—integration with CESEE countries also boosted balance of payment surpluses. Trade surpluses with the region have averaged about 2 percent of GDP between 2004 and 2008, while gross investment income from CESEE averaged around 2.7 percent of GDP over the same period, steadily increasing its share in total gross investment income. Investment income from CESEE is dominated by returns on FDI and other investments (eg loans and deposits). In 2004-09, up to half of Austrian banks’ profits came from the CESEE.

A01ann1ufig04

Domestic demand in CESEE FB and other countries

(2000=100)

Citation: IMF Staff Country Reports 2010, 276; 10.5089/9781455205530.002.A001

Source: April2010 WEONote: Weighted by Austrian exportshares.
A01ann1ufig05

Domestic demand growth in CESEE

(Percent)

Citation: IMF Staff Country Reports 2010, 276; 10.5089/9781455205530.002.A001

Note: FBcountries=SEE+Ukraine + Hungary, Other=Slovakia, Czech Republic, Poland, Slovenia; all weighted by share in Austrian exports.
A01ann1ufig06

Exports to CESEE in 2008

Citation: IMF Staff Country Reports 2010, 276; 10.5089/9781455205530.002.A001

Source: IMF, DOT.

However, while some countries experienced more balanced growth, in others, the convergence process degenerated into a boom/bust credit cycle, whose legacy of debt overhang and depressed property markets is likely to weigh on domestic demand and future credit growth. In the SEEs, but also in the Ukraine or Hungary domestic demand collapsed in 2009, following in most cases large expansions of demand and credit in preceding years.5 Hungary and Croatia also display relatively high ratios of private sector indebtedness, possibly putting pressure on agents to deleverage. The Spring 2010 WEO forecast for 2010-15 anticipates domestic demand in formerly booming (FB) economies to be well below levels and pace before the crisis, in contrast to the more balanced economies (Other) of the region6: the level of domestic demand in FB countries’ in 2015 is projected to be about 30 percent less than what a simple continuation of the trend observed in 2000-08 would have suggested. For the other countries the difference is only 10 percent.

Austria’s exposure to formerly booming economies is non-negligible and their rebalancing and hence expected more modest demand growth is likely to dampen Austrian exports and incomes. Over 40 percent of Austrian exports to CESEE (around 4 percent of GDP) went to FBs, with Hungary and Romania accounting for the bulk. Anticipated lower domestic demand in FBs could contain the recovery of Austrian exports. Simple correlations suggest a decline of nominal export growth to the region to 10 percent in 2010-15, down from close 14 percent in the four year period leading up to the 2009 recession.

Yet, the negative repercussions on Austria could be mitigated by the fact that exports to CESEE also reflect intra-industry trade, the result of the outsourcing activities of Austrian firms. A high import content of exports is likely to buffet the effects of an external shock. And demand for Austrian products may be more dependent on supply performance in CESEE (e.g. competitiveness of these economies) and on demand developments in third countries. Indeed, the prospects for overall GDP growth in CESEE, also for FBs while of course more subdued than in the past, compare favorably with domestic demand, and projections based on past correlations between exports and GDP would indicate somewhat higher export growth than based on the relationship with domestic demand. It should be noted though that the relationship with GDP is somewhat weaker than with domestic demand.

A01ann1ufig07

Austrian exports and Austrian export weighted domestic demand in CESEE

(Percent, annual growth)

Citation: IMF Staff Country Reports 2010, 276; 10.5089/9781455205530.002.A001

Source: WEO, OENBand staff calculations
A01ann1ufig08

Austrian exports to CESEE

(Percent, annual growth)

Citation: IMF Staff Country Reports 2010, 276; 10.5089/9781455205530.002.A001

Source: WEO and Staff calculations.

Incomes from abroad are also likely to be affected. Over half of gross income (1 percent of GDP) originated in FB countries. The share of consumer/real-estate/financial sector activities in FDI in these economies is estimated to be large, between 50-70 percent, with the share of returns of these sectors in total returns exceeding 80 percent. Again, for illustration, simple correlation between investment income and demand growth in CESEE indicates that income from the CESEE could be growing just over half the rate recorded in 2004-08.

A01ann1ufig09

Gross investmentincome

(2004-2009 average)

Citation: IMF Staff Country Reports 2010, 276; 10.5089/9781455205530.002.A001

Source:OeNB/AUFIN
A01ann1ufig10

Gross investmentincome from CESEE (lhs) and domestic demand growth in CESEE (rhs)

Percentgrowth)

Citation: IMF Staff Country Reports 2010, 276; 10.5089/9781455205530.002.A001

Source: OeNB, WEO andstaffcalculations.

Losses in the financial sector, where Austrian FDI is concentrated, are expected to rise further, but should remain manageable in a scenario of ongoing economic recovery in the region. Profitability of banking sectors in the region and thus of Austrian banks is being hampered by rising nonperforming loans, subdued demand for new credit and increased capital requirements. The average NPL ratio of Austrian banks’ subsidiaries in CESEE stood at just under 10 percent at end-2009. Based on the evidence of previous crises, estimations in the Spring IMF GFSR project NPLs in CESEE to keep rising in 2010 and to improve only gradually in 2011.7 OeNB simulations also suggest a further, but limited overall decline in the financial sectors’ operating results by about 7 percent by 2011 relative to end-2009 in the baseline scenario. Renewed stresses, however, could double the amount of shrunk profits. 8

Finally, however, while individually, the effects of an overall slower growth rate in CESEE appear small, jointly, the implications could be more substantial. Table A2 below provides an overview. The effect on GDP growth could range between 0.1 and 0.2 percentage points each year and the effect on the current account balance could be around 0.4 percent of GDP.9

Table A2.

Summary of Effects of Lower Growth in CESEE on Austria

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Source: OeNB; and staff calculations.

Relative to pre-crisis period.

OeNB assumptions on import content.
1

CESEE refers to Hungary, Poland, Slovakia, Slovenia, Czech Republic, Romania, Bulgaria, Albania, Bosnia& Herzegovina, FYRM, Serbia, Montenegro, Croatia, Ukraine.

2

Fenz and Fessler, “Wealth Effects on Consumption in Austria,” Monetary Policy & The Economy, Q4/08, österreichische Nationalbank.

3

Taking into account actual short-term work and adjusting by one third to take account of the effective reduction in working time.

4

See Annex.

5

F. Breuss, “Oesterreich, 15 Jahre EU-Mitglied”, WIFO-Monatsberichte (2/2010).

6

By construction, this bank’s exposures are counted as Italian exposures in BIS consolidated data.

7

The FMA also participated in interpreting and drafting supervisory legislation.

1

This Annex has benefited from valuable inputs and comments provided by colleagues at the OeNB.

2

CESEE refers to Hungary, Poland, Slovakia, Slovenia, Czech Republic, Romania, Bulgaria, Albania, Bosnia& Herzegovina, FYRM, Serbia, Montenegro, Croatia, Ukraine.

3

See Marin (2009).

4

F. Breuss, “Oesterreich, 15 Jahre EU-Mitglied”, WIFO-Monatsberichte.

5

Hungary experienced volatile growth already in 2004-07.

6

’Formerly booming’ countries refer to Albania, Bosnia Herzegovina, Croatia, Serbia, Romania, Bulgaria, FRYM, Hungary and Ukraine. These countries experienced strong swings in credit and/or domestic demand and/or record relatively high levels of private sector indebtedness.

7

Box 1.2, Chapter “Non-performing loans in Central and Eastern Europe-Is it different this time?”

8

OeNB Financial Stability Report (June 2010).

9

Trade elasticities used by OeNB would imply a roughly similar result.

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Cover IMF Staff Country Reports
Austria: 2010 Article IV Consultation: Staff Report; Staff Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Austria
Author:
International Monetary Fund
Volume/Issue:
Volume 2010: Issue 276
Publisher:
International Monetary Fund
ISBN:
9781455205530
ISSN:
1934-7685
Pages:
49
DOI:
https://doi.org/10.5089/9781455205530.002
Figure 1.

Austria: An Overview

Austria: Sources of Real GDP Growth

(percentage point contribution)
Figure 2.

Austria: The Labor Market
Figure 3.

Austria: Competitiveness and Imbalances
Figure 4.

Austria: Legacy Effects From Boom-Bust in CESEE Countries
Figure 5.

Austria: Legacy Effects From Boom-Bust in CESEE Countries

Labor market developments during the crisis

(Percent of Labor Force)
Figure 6.

Austria: Fiscal Trends 1/

(Percent of GDP)

Debt dynamics: baseline vs. full adjustment

(debt as percent of GDP)

Government Expenditure by Function

(2008, percent age points in terms of the percent share of GDP)

General Government Revenue

(2009, Percent of GDP)

Utilization of the Austrian Bank Support Package as of June 2010

Austria: Sovereign and Banks’ CDS

(basis points)
Figure 7.

Austria: Banks’ CESEE Exposure
Figure 8.

Austria: The Banking System 1/
Figure 9.

Austria: Selected Financial Market Indicators 1/

Austria: Tier I Ratio for Six Largest Banks

Share of Bonds Maturing Each Year - 2010-2060

Goods exports to CESEE

(million USD)

NominalExports

(1995=100)

Gross investment income from CESEE

(Percent and Percentage Points)

Domestic demand in CESEE FB and other countries

(2000=100)

Domestic demand growth in CESEE

(Percent)

Exports to CESEE in 2008

Austrian exports and Austrian export weighted domestic demand in CESEE

(Percent, annual growth)

Austrian exports to CESEE

(Percent, annual growth)

Gross investmentincome

(2004-2009 average)

Gross investmentincome from CESEE (lhs) and domestic demand growth in CESEE (rhs)

Percentgrowth)