TIRANA, Feb. 4 – U.S.-based Standard & Poor’s has reconfirmed Albania’s ‘B+/B’ long- and short-term sovereign credit ratings with a stable outlook, in a rating that remains unchanged for the fifth consecutive year, with not much impact on Albania’s debt servicing whose cost is expected to pick up on a hike in bond rates following a decade of easier monetary policy.
In its latest rating, S&P, one of the ‘big three’ credit rating agencies, says “high public debt remains a key credit risk for Albania, although the debt burden continues to gradually shrink.”
S&P says it expects Albania’s public debt, currently hovering at around 68 percent of the GDP, including unresolved government arrears of 1.5 percent of the GDP (around €200 mln), to meet the Albanian government’s 60 percent target by the end of 2022. The forecast is made on a fiscal consolidation agenda and assuming that the country’s economy will grow by nearly 4 percent on average in the next four years.
Albania’s public debt is considered too high for the current stage of Albania’s economic development and is the highest among Western Balkan economies, being a drag on much-needed investment due to spending on interests at 2.5 percent of the GDP, around half of what the country spends on public investment.
Spending on debt interests is expected to rise to 53.5 billion lek (€428 mln), representing a 6-year high of 2.7 percent of the GDP by 2021, assuming GDP growth will pick up to 4.5 percent of the GDP, according to the Albanian government’s mid-term outlook.
Last October, Albania raised €500 million at a rate of 3.5 percent, down 2.2 percent compared to three years ago, but at higher rates compared to regional countries with lower debt level. The 7-year €500 million Eurobond also included €200 million in a buyback from the previous €450 million in a five-year Eurobond that was due to mature by November 2020, in a move aimed at taking advantage of favorable environment ahead of an expected hike in bond rates at European markets.
Albania’s central bank says it could consider a hike in the key rate by mid-2019, putting an end to nearly a decade of easy monetary policy in the aftermath of the 2008-09 global financial crisis as it tried to stimulate economic growth through lower interest rates despite its effectiveness being hampered by the country’s high levels of euroisation.
Albania’s key rate currently stands at a historic low of 1 percent, but Euro-denominated deposits and credit at half of the total, hold back the efficient pass-through of the easier monetary policy, in addition to barriers such as high levels of non-performing loans and poor demand for new loans.
The decision on a possible hike comes at a time when the Federal Reserve, America’s central bank, undertook several key rate hikes during 2018 and the European Central Bank stopped its quantitative easing programme in late 2018, but said its key rates will remain unchanged at least through the summer of 2019 before considering a possible hike.
Growth outlook
Standard & Poor’s expects Albania’s growth to embark on a downward trend in the next four years after picking up to 4.2 percent of the GDP in 2018 as major large-scale investment projects such as the Trans Adriatic Pipeline and the Devoll Hydropower complete by the end of this year and the fast-growing tourism sector is forecast to emerge as a new key driver of growth in addition to expected rising domestic consumption.
S&P expects Albania’s growth to slow down to 3.9 percent in 2019 and linger around 3.7 percent annually in the next three years until 2022, in forecasts that are around 0.5 to 0.8 percent lower compared to the Albanian government’s more optimistic scenario.
Predicting that reform momentum could slow down as seven new ministers, half of the cabinet, have taken over in the past few weeks in a reshuffle ahead of the mid-2019 local elections and an upcoming EU decision on the possible opening of long-awaited accession talks, the rating agency urges continued reforms to support growth and rule of law, with a focus on the judiciary reform.
“The [judiciary] reform has the potential to sustainably improve the country’s business environment, for example, by increasing the effectiveness of property rights enforcement,” says the rating agency about judiciary reform that is slowly progressing but has already ousted half of vetted senior judges and prosecutors over failing to justify their assets.
“Further structural reforms are necessary to strengthen Albania’s still-weak institutional framework, in our view. In general, the country has a considerable shadow economy, with prevalent corruption and constrained effectiveness of the rule of law,” says S&P.
Weak headline credit growth and high euroization are also rated as key challenges for Albania’s central bank’s monetary policy, which the S&P rates as a downside risk for a possible downgrade.
Inflation rate, currently at 2 percent, is not expected to meet the central bank’s 3 percent target before 2023, at a time when the Bank of Albania and the government expect it to achieve the 3 percent target, estimated to have a positive effect on consumption and growth in general, by 2020.
Europe’s single currency losing a sharp 7 percent against the Albanian lek, making key imports much lower, and sluggish growth in consumption, kept inflation at a 2 percent rate for the second year in a row in 2018.
PPP risk
In similar style to key international financial institutions, S&P also warns of risks that the rising use of the much-rumored public private partnerships could pose to the country’s fiscal consolidation agenda through hidden debt.
“While we acknowledge high infrastructure needs for the country, the risk framework governing these projects [PPPs with local construction companies] is currently not yet sufficiently developed and many of these proposals remain unsolicited tenders. Annual expenditures for PPP projects currently stand at an estimated 2%-5% of government revenues, but the full amount of potential financial risks for the administration is impossible to evaluate,” says S&P.
Albania is set to lift controversial unsolicited proposals in PPPs for major road projects and replace bonuses awarded to companies preparing feasibility studies with financial compensation in case of failing to win in final tenders by mid-2019. The proposed legal changes expect unsolicited proposals to continue for non-road PPP projects despite a series of transparency concerns and a major scandal with a phantom offshore company that falsified links to a US company to get a multi-million lucrative PPP before having it cancelled following media revelations.
The rating agency warns it might take a negative rating action if it observed material fiscal slippages, potentially resulting from higher fiscal deficits or materialization of contingent liabilities from PPP projects.
The last time S&P downgraded Albania was in late 2013 when the country’s long-term sovereign credit ratings were changed to ‘B’ from ‘B+ with a negative outlook affected by a significant widening of the fiscal deficit and rollover risk on increased debt stock following the June 2013 general elections.
Obligations rated B are considered speculative and subject to high credit risk. Both S&P’s B+ and Moody’s B1 ratings signify that the issuer or carrier is relatively stable with a moderate chance of default and that investors and policyholders of the rated entity are taking a low to medium risk.
