Obligations rated B are considered speculative and are subject to high credit risk, according to Moody’s definition
TIRANA, Aug. 29 – The government of Albania’s B1 rating and stable outlook are based on low economic, institutional and government financial strength and medium susceptibility to event risk, despite the significant progress made since the late 1990s, says Moody’s Investors Services in its new annual credit analysis on Albania.
Since 2007 when Moody’s starting assessing Albania’s credit rating it has kept its B1 rating unchanged in all five reports, says Albania’s Finance Ministry. Obligations rated B are considered speculative and are subject to high credit risk, according to Moody’s definition.
Moody’s currently deems Albania’s economic strength as low, mainly on account of the small size of the economy and low GDP per capita. Although growth potential is good, it is dependent on the government enacting its reform programme. The economy grew 3.5-4% in 2009-10, but recorded growth of over 6% from 2001-10, one of the strongest performances in Europe. Moody’s notes that economic activity proved relatively resilient during the global financial crisis and that the economy is currently rebalancing. However, Albania faces the challenge of returning to pre-crisis growth rates. Albania is now a middle-income country and as such faces a squeeze both from higher-income, higher-productivity countries and from those with lower cost bases. In such circumstances, structural reforms become even more essential to ensure continued economic convergence.
Moody’s also rates Albania’s institutional strength as low, reflecting to a large extent its relatively low scores on the World Bank’s governance indicators for government effectiveness and the rule of law. As the World Bank has pointed out, the former is below what would be expected for a country of Albania’s income level. Stronger institutional capacity would also be supportive of foreign direct investment, which would in turn be supportive of economic growth and hence of the sovereign rating. However, continuing tensions between the main political parties could hamper Albania’s attempts to be accepted as a candidate for membership of the EU. As a candidate, Albania could expect extensive assistance from the EU in its efforts to strengthen its institutions.
Government debt as a share of GDP is high for a country of Albania’s level of development and any reduction is likely to be limited in the near term. The government is aiming to limit the budget deficit to 3.5% of GDP and 3% in 2012-14. As a result of optimistic growth assumptions in the original budget, the government recently introduced remedial measures to ensure it reaches this year’s target.
Event risks are largely driven by economic as well as political factors. The former reflect the narrow economic base and extensive euroisation. The economic base is showing some signs of broadening, mainly in the energy sector, but the still elevated current account deficit poses potential risks to the currency, which are a particular concern in view of extensive euroisation. Financial risks, by contrast, are less pressing given the banking sector is relatively well capitalised and not facing any particular stresses at present.
Last year, Standard & Poor’s rating agency gave Albania a B+ sovereign credit rating with a stable outlook, citing an increasing public debt and political uncertainty.
The agency also noted that there has been little increase in the country’s prosperity, although it acknowledged that Albania was one of the very few countries in Europe that managed to keep economic growth in positive territory, avoiding recession.
S&P says that Albanian public finances are characterized by consistently high government debt, despite very strong economic growth.
