TIRANA, Aug. 7 – Two of the leading global rating agencies, Moody’s and Standard & Poor’s, have reconfirmed Albania’s stable outlook, citing ongoing consolidation and maintenance of fiscal discipline ahead of the June 25 general elections.
In its latest rating action, Moody’s Investors Service reaffirmed Albania’s B1 long-term foreign and local currency issuer ratings with a stable outlook.
“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,” said Moody’s, one of the top three global rating agencies.
“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,” Moody’s added.
Albania’s public debt hit a three-year low of 66.8 percent of the GDP at the end of the first half of this year, down from about 70 percent during the same period last year, also slightly reducing the country’s high debt servicing needs, according to the Albanian finance ministry.
The 2017 first half performance shows that the government is little likely to achieve its 63.3 percent debt target for this year despite tax income having performed well in contrast to the tradition of underperforming revenues in general or local election years. In addition, Albanian experts say bringing public debt to a more affordable 60 percent of the GDP target by 2020 would require further fiscal consolidation, tax hikes and tight spending, also affecting public investment considering the country’s projected growth of about 4 percent in the next three years.
Moody’s says Albania’s fiscal discipline has been maintained through this electoral cycle and 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.
Moody’s projects Albania’s real GDP growth to accelerate slightly to 3.6 percent in 2017 and 3.8 percent in 2018 from 3.4 percent in 2016. The forecasts are slightly less optimistic compared to the Albanian government’s projections of growth picking up to 3.8 percent and 4.1 percent in the next couple of years.
“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,” warns Moody’s.
The prolonged drought Albania has been facing in the past three months has almost paralyzed the country’s wholly hydro-dependent domestic electricity generation, increasing reliance on costly electricity imports and with a negative impact on the agriculture sector lacking irrigation systems.
“Ongoing reforms in the energy sector and efforts to diversify the country’s power supply through greater access to natural gas, with the Trans Adriatic Pipeline scheduled to begin operations in 2020, are expected to increase the country’s economic resiliency to external shocks,” the rating agency says.
Moody’s warns downward pressure on the rating would arise from a reversal of the fiscal adjustment and a failure to stabilize the public debt to GDP ratio or from a reduced political commitment to the institutional and economic reform agenda. “Furthermore, emerging challenges in funding the current account deficit due to a significant decline of FDI would be credit negative.”
Upward pressure on the rating would likely only emerge in the event of developments which addressed at least two of Albania’s key credit constraints: the small, and undiversified economy; the high public debt burden; and the country’s weak institutions. “A material decline in public sector debt, and further advances in institutional building resulting in an improved business environment and competitiveness, would lead to upward rating pressure,” Moody’s says.
S&P
Standard & Poor’s has also affirmed Albania’s ‘B+/B’ long- and short-term sovereign credit ratings on Albania and the country’s stable outlook.
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.
“The stable outlook reflects our expectation that Albania will continue to gradually progress toward strengthening its institutional framework, building up on the country’s past cooperation with international institutions, such as the International Monetary Fund, and due to preparatory efforts in the EU accession process,” said S&P.
“The stable outlook reflects our expectation that the government of Albania will maintain its commitment to fiscal consolidation, particularly on the revenues side, supported by steady economic growth and the authorities’ increased capability to enforce tax compliance,” says S&P.
“Lower risks associated with the country’s gradually declining debt-to-GDP ratio will also help to reduce the government’s interest bill as a share of government revenues. At the same time, the country will continue to strengthen its institutions ahead of the EU accession process, and we expect its external financing position will not deteriorate,” adds S&P.
The rating agency says it could raise the ratings if structural reforms established a stronger track record of more robust institutions and strengthened economic growth prospects. A positive action could also follow should ongoing fiscal consolidation efforts result in a faster-than-expected decrease in government debt.
“We could lower the ratings if we observed deterioration in government finances–for example, due to a significant deviation from our current forecast–alongside resumed constraints on borrowing conditions. We could also lower the ratings if we saw a marked deterioration in Albania’s external position and ability to fund its high current account deficit,” S&P warns.
The rating agency says the formalized deficit brake, the “organic budget” law, and generally enhanced institutional oversight, helped to prevent the renewed accumulation of arrears and secured the country from a fiscal slippage ahead of this year’s general elections.
“We expect that Albania, coming from a low base, will be able to generate solid economic growth rates of about 3.8 percent per year on average in real terms during 2017-2020. Growth will primarily stem from strong domestic demand, with rising consumption and private investment,” S&P says.
Economic development in 2017 will also benefit from two large investment projects in the energy sector, for which most of the construction will occur this year.
“Progress on the Trans-Adriatic Pipeline (TAP), which will connect Albania with Italy and the Caspian Sea, appears on track, with completion expected by year-end 2018 and costing an estimated €1.5 billion,” says S&P.
