Moody’s affirms Albania’s B1 rating, maintains stable outlook
Moody’s Investors Service, (“Moody’s”) has affirmed the Government of Albania’s B1 long-term foreign and local currency issuer ratings and the B1 foreign currency senior unsecured rating. The outlook remains stable.
The decision to affirm the ratings and maintain the stable outlook balances the following key rating factors:
(1) Progress on fiscal consolidation, structural reforms and institutional capacity building;
(2) Structural economic challenges, despite improving growth prospects; and
(3) A still high, albeit declining, debt burden with unfavorable structure of domestic debt
Albania’s long-term foreign currency bond and deposit ceilings remain unchanged at Ba2 and B2, respectively. The local currency bond and deposit ceilings remain unchanged at Baa3.
According to Moody’s, “The decision to affirm Albania’s credit rating takes into account the significant progress achieved in recent years in terms of fiscal consolidation and structural and institutional reforms. These support the current rating by helping to reverse the damage to the government’s balance sheet caused by the financial crisis. However, offsetting these positive developments are a number of credit challenges that continue to weigh on the country’s credit profile. These include the still high, albeit declining, debt burden, still large financing needs reliant on the banking system, and a small economy with a narrow export base.”
The first driver for the rating affirmation is Albania’s progress on fiscal consolidation and structural reforms under the recently concluded three-year IMF program, as well as progress in strengthening the quality of institutions in pursuit of EU accession, states Moody’s.
“The government’s fiscal deficit narrowed to 1.8% of GDP in 2016 from 5.2% in 2014. Fiscal discipline has been maintained through this electoral cycle and Moody’s expects the deficit to decline further in 2017-2018, supported by expenditure rationalization, reduced energy-related payments and a number of measures aimed at improving revenue collection, an area where Albania still lags behind its regional peers. Fiscal consolidation efforts have been accompanied by enhancement of the fiscal framework through the amendments to the Organic Budget Law approved in mid-2016 and other initiatives aimed at strengthening public financial management. These measures include the new law on local finances and procedures to monitor and address the build-up of potential new arrears.”
The second factor considered in the affirmation of the rating at B1 – notwithstanding the improvements noted above – is Albania’s low economic strength, which balances improving growth dynamics against small economic size, low competitiveness and relatively low GDP per capita. Albania’s low level of economic diversification compared with its peers weighs on its credit profile. Agriculture accounts for 23% of gross value added, while Albania also has a narrow export base, with 50.5% of merchandise exports destined for Italy.
“Economic growth is supported by improvements in domestic demand and net exports. Moody’s projects real GDP growth to accelerate slightly to 3.6% in 2017 and 3.8% in 2018 from 3.4% in 2016. Nevertheless, being a small and narrowly diversified economy, Albania remains exposed to external shocks, including adverse weather, given the importance of the agricultural sector and the country’s reliance on hydroelectric resources. The latter continues to pose a risk, albeit a diminishing one, to economic growth and the fiscal position.”
The third driver is the still high, albeit declining, debt burden along with still large financing needs reliant on a banking system burdened by high non-performing loans (NPLs).
“Although declining, public debt still exceeded 70% of GDP in 2016, remaining above the pre-crisis level of 62.1% of GDP in 2012 and significantly above the B-rated median of about 54% in 2016. Furthermore, despite making progress, Albania continues to face fiscal risks, particularly from the electricity sector due to its exposure to adverse weather conditions that can lead to costly energy imports.”
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