TIRANA, Dec. 12 – Albania’s high public debt level and its large domestic rollover needs remains a key challenge for Albania, Moody’s Investors Service, one of the top three global rating agencies, has warned in its latest annual report on Albania, keeping unchanged its B1 stable rating.
Albania’s public debt, currently hovering at 70 percent of the GDP is considered a huge burden for the current stage of Albania’s economic development with its high servicing costs affecting much needed investment in key infrastructure, health and education sectors.
Moody’s, which expects Albania’s public debt to slightly drop to 69 percent of the GDP in 2017, warns the country faces “sizable gross borrowing needs requirements given its large domestic roll-over needs.”
Albania’s domestic debt, which has been gradually declining in the past decade as the country has diversified its borrowing needs with the issue of two Eurobonds, still holds a slight advantage over external debt. Domestic debt stock accounted for 36.5 percent of the GDP at the end of the third quarter of 2016, down 3 percentage points compared to a decade ago when Albania’s public debt stood at comfortable levels of below 60 percent of the GDP and external debt accounted for only 16.5 percent of the GDP, according to finance ministry data.
More than a third of Albania’s domestic debt is short term, dominated by 12-month T-bills, the government’s key instrument for internal borrowing.
“The government continues to rely on liquidity from a domestic banking system burdened by significant non-performing loans to finance itself,” says Moody’s.
Albania’s non-performing loans have embarked on a new upward trend during the past few months fuelled by the bankruptcy of some key enterprises despite measures adopted by the government and the country’s central bank to curb them in order to boost sluggish credit growth.
NPLs currently stand at 21 percent, down from a peak level of 25 percent in mid-2014, being a key barrier to easier lending standards.
However, Moody’s remains optimistic that “Albania’s ongoing administrative and judicial reform efforts in pursuit of EU accession should lead to notable improvements in the country’s business environment.”
“The recommendation by the European Commission to open formal accession negotiations, conditional on judicial reform implementation, reflects Albania’s progress on addressing corruption and advancing public sector reform,” Moody’s says.
The Moody’s report drew different conclusions by the ruling Socialists and the opposition Democrats. Prime Minister Edi Rama described the report as “another meaningful praise for Albania whose financial position has improved thanks to fiscal discipline.”
However, opposition Democratic Party MP Jorida Tabaku said the report was concerning especially about the country’s debt level and its lack of competitiveness.
Earlier this year, Standard & Poor’s, another leading rating agency, affirmed Albania’s ‘B+/B’ long- and short-term foreign and local currency sovereign credit ratings with a stable outlook, but slightly revised downward the country’s GDP growth forecast for the next four years to an annual 3.7 percent, down from an earlier 4 percent.
“We believe that Albania’s steady economic performance and ongoing improvement in its fiscal consolidation are likely to continue, despite the risk of fiscal slippages due to the 2017 general elections or external financing pressures,” said S&P in its latest country report.
The Albanian government and the IMF expect the country’s public debt to embark on a downward trend in 2016 that will gradually bring it back to 60 percent of the GDP by 2019 in a slightly overoptimistic considering the sluggish performance of public finances even after an aggressive late 2015 nationwide campaign against widespread informality.
In addition, a recent rise in yields, could further increase debt servicing costs and further affect much needed investment in priority sectors.
Spending on interest, at about 3 percent of GDP, is already much higher in Albania than in the other SEE countries, crowding out more productive spending and representing a major source of vulnerability, the World Bank has warned.
Obligations rated B are considered speculative and are 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.
