S&P upgrades Albania’s rating outlook to positive

In its new rating, S&P has revised Albania’s outlook on long-term sovereign credit rating to positive from stable affirming its ‘B/B’ ratings.
TIRANA, Oct. 13 – Expecting mid-term progress on fiscal consolidation and debt reduction, Standard & Poor’s, one of the world’s leading rating agencies, has revised upward Albania’s rating for the second time this year after a downgrade in late 2013 due to the widening of the fiscal deficit and rollover risk on increased debt stock.
In its new rating, S&P has revised Albania’s outlook on long-term sovereign credit rating to positive from stable affirming its ‘B/B’ ratings.
“We think Albania will make noticeable progress on its fiscal consolidation path in 2014-2016 and begin to reduce debt relative to GDP. The program agreed between the government and the International Monetary Fund in early 2014 provides a policy anchor for the government’s reform
agenda and continues to support the sustainability of Albania’s high net general government debt of 66 percent of GDP in 2014,” said Standard & Poor’s which along with Moody’s are the only top agencies rating Albania.
“The positive outlook reflects the possibility that we could upgrade Albania in the next 12 months if fiscal consolidation proceeds swiftly on the back of accelerated growth in the coming year,” added S&P.
Last April, Standard & Poor’s revised its outlook on Albania to stable from negative and affirmed its ‘B/B’ long- and short-term sovereign credit ratings
The revised rating comes after the giant credit rating agency lowered in December 2013 Albania’s long-term sovereign credit ratings to ‘B’ from ‘B+ with a negative outlook on rising debt levels and subdued economic growth.
“The new government in office since fall 2013 is moving forward on its ambitious reform agenda, aiming to strengthen fiscal institutions and public sector financial management, and mitigate fiscal risks. After recently passing a pension reform, the government now faces the key task of shaping a comprehensive energy sector reform over the coming months,” says S&P.
“Further efforts and a sustained track record of tackling structural reforms, particularly in strengthening of property rights and rule of law, could over time prompt us to improve our assessment of weaknesses in institutional and governance effectiveness. Weak rule of law and widespread corruption continue to weigh on the business climate, and unresolved real estate property rights can be a deterrent for foreign investors.”
S&P expects real GDP growth to pick up to 2 percent in 2014 after a sharp dip to just 0.4 percent in 2013 on the back of sound export performance and supported by the government’s clearance of arrears.
The rating agency says it could raise the ratings on Albania over the next 12 months if steady fiscal consolidation reduces general government deficits further during the period. A resumption in real GDP growth, supported by the government’s ongoing structural reform efforts, particularly in the areas of energy, the judiciary, property rights, and rule of law, could also support an upgrade.
The agency warns it could downgrade the outlook to stable if Albania’s refinancing risks re-emerged or its commitment to and compliance with the IMF program were called into question, or growth indicators weakened and debt relative to GDP continued to rise markedly over the next 12 months.
According to S&P’s definition, a short-term obligion rated ‘B’ is regarded as vulnerable and has significant speculative characteristics. “The obligor currently has the capacity to meet its financial commitments; however, it faces major ongoing uncertainties which could lead to the obligor’s inadequate capacity to meet its financial commitments.”
Moody’s Investors Service, another top rating agency, has affirmed Albania’s B1 government bond rating with a stable outlook, citing fiscal consolidation efforts with the IMF and the country’s EU candidate country status which “represents an anchor for institutional reforms and is a potential driver of foreign direct investments (FDI).”
Moody’s expects positive effects from EU integration, which in the past has shown to be an important driver of FDI inflows among accession countries in the region.
“A failure to stabilise the fiscal deficit and the public debt ratio would exert downward pressure on the rating, as would the materialisation of potentially large contingent liabilities stemming from property restitution claims or from the electricity sector. Additional downside risks stem from the still sizable current account deficit amid waning remittance inflows,” warns Moody’s.