IMF con­cludes 2015 Ar­ti­cle IV with Aus­tria

The Pak Banker - - COMPANIES/BOSS -

The Ex­ec­u­tive Board of the In­ter­na­tional Mon­e­tary Fund (IMF) con­cluded the 2015 Ar­ti­cle IV con­sul­ta­tion with Aus­tria. Aus­tria is sta­ble and af­flu­ent. It has weath­ered the global fi­nan­cial cri­sis well, and out­put and em­ploy­ment have re­cov­ered to pre-cri­sis lev­els. The bud­get deficit has been well con­tained in re­cent years. Nev­er­the­less, as in other coun­tries, bud­get sup­port for bank re­struc­tur­ing and res­o­lu­tion has ratch­eted up pub­lic debt, which stands now at about 86 per­cent of GDP. Cri­sis le­ga­cies also still weigh on the bal­ance sheets of large Aus­trian banks, which must raise prof­itabil­ity and fur­ther im­prove cap­i­tal cush­ions.

Fol­low­ing the lack­lus­ter growth in re­cent years, Aus­tria's econ­omy is pro­jected to ex­pand by 1.4 per­cent in 2016, driven by a large per­sonal in­come tax cut, re­cov­er­ing in­vest­ment, and ac­cel­er­at­ing ex­ports. Un­em­ploy­ment, al­though ris­ing, is ex­pected to re­main mod­er­ate, while head­line in­fla­tion will grad­u­ally reach 2 per­cent in the medium term. The main risks to the out­look stem from lower-than-ex­pected growth in im­por­tant trad­ing and fi­nan­cial part­ners in the euro area and emerg­ing mar­kets.

The el­e­vated pub­lic debt level leaves lit­tle fis­cal room for ab­sorb­ing in­creas­ing ag­ing cost or fur­ther re­duc­ing high la­bor taxes. Broad re­form-based ex­pen­di­ture cuts in ar­eas with ob­vi­ous in­ef­fi­cien­cies, such as health care, education, and sub­si­dies, as well as fur­ther pen­sion re­forms, would al­low rapid debt re­duc­tion and ad­di­tional cuts in la­bor tax­a­tion.

The surge in refugee in­flows of­fers both risks and op­por­tu­ni­ties. His­tor­i­cally, Aus­tria has al­ways re­ceived a size­able num­ber of im­mi­grants. The un­rest in the Middle East, how­ever, has pro­pelled the es­ti­mated num­ber of asy­lum seek­ers in 2015 to an ex­cep­tional 90,000, or about 1 per­cent of Aus­tria's pop­u­la­tion. While the in­flux of refugees is pos­ing nu­mer­ous chal­lenges, their suc­cess­ful in­te­gra­tion can help reignite po­ten­tial growth and even­tu­ally re­duce fis­cal im­bal­ances.

In the fi­nan­cial sec­tor, large Aus­trian banks are chang­ing their busi­ness mod­els by fo­cus­ing more on core mar­kets and im­prov­ing ef­fi­ciency to raise prof­itabil­ity and cap­i­tal ra­tios. This is nec­es­sary and timely as cap­i­tal cush­ions, while im­prov­ing, ap­pear thin in com­par­i­son with peers. The au­thor­i­ties have been re­vamp­ing the reg­u­la­tory and su­per­vi­sory frame­work in line with the im­ple­men­ta­tion of the EU Bank­ing Union. Con­sid­er­able progress has also been made in the res­o­lu­tion of na­tion­al­ized banks.

Ex­ec­u­tive Di­rec­tors com­mended Aus­tria for preserving macroe­co­nomic and fi­nan­cial sta­bil­ity af­ter the global fi­nan­cial cri­sis. While the out­look is pos­i­tive, re­solv­ing post-cri­sis le­ga­cies and en­sur­ing the suc­cess­ful in­te­gra­tion of refugees re­quires fur­ther re­forms.

Di­rec­tors en­cour­aged the au­thor­i­ties to ad­dress th­ese chal­lenges over the medium term through fis­cal con­sol­i­da­tion, struc­tural re­forms to in­crease pro­duc­tiv­ity growth and la­bor force par­tic­i­pa­tion, and mea­sures to fur­ther strengthen the fi­nan­cial sec­tor. Di­rec­tors noted that the high pub­lic debt to GDP ra­tio con­strains the room for fis­cal ma­neu­ver, es­pe­cially in the con­text of the pro­jected in­crease in age-re­lated spend­ing. While a neu­tral fis­cal stance in the near term would sup­port eco­nomic ac­tiv­ity and fa­cil­i­tate the in­te­gra­tion of refugees, over the medium term fis­cal pol­icy should tar­get a struc­tural sur­plus un­til pub­lic debt falls below 60 per­cent of GDP. Di­rec­tors sug­gested that this fis­cal con­sol­i­da­tion be de­liv­ered through ef­fi­ciency-boost­ing re­forms in health care, education, and sub­si­dies as well as fur­ther pen­sion re­forms.

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