Moody’s says that Albania’s B1 government bond rating remains constrained by the country’s significant fiscal challenges, its rising debt levels and the subdued economic growth that the rating agency expects over the next few years
TIRANA, Nov. 18 – Moody’s has reaffirmed Albania’s B1 rating but warned it could downgrade the country’s credit rating on rising debt levels and subdued economic growth. In a report published this week, Moody’s Investors Service, which is one of the top sovereign credit rating agencies, says that Albania’s B1 government bond rating remains constrained by the country’s significant fiscal challenges, its rising debt levels and the subdued economic growth that the rating agency expects over the next few years. Positive externalities are likely to be derived from Albania potentially being granted EU candidate status in December and the construction of the Trans Adriatic Natural Gas Pipeline in 2015, says Moody’s.
Moody’s notes that Albania’s credit challenges are primarily reflected in the significant deterioration in the government’s fiscal performance over the past year, which has resulted in materially higher debt levels than its B1-rated peers. These challenges are exacerbated by the fragile funding structure, which displays a low, albeit steadily increasing, weighted average debt maturity, a narrow investor base via the domestic banking system, and the banking system’s and the government’s significant foreign-currency exposure. Mitigating factors include the Bank of Albania’s macro-prudential track record and strong price-stability credentials, which are reflected in its stable exchange-rate performance over the past few years. Moreover, recently implemented improvements in the collateral execution process further hold the potential to accelerate the workout of the sizable non-performing loan overhang in the banking system.
Moody’s says that the credit strengths of Albania include the economy’s relative resilience to the global financial and euro area debt crises due to fiscal and monetary stimulus. Moreover, durable foreign direct investment continues to cover a large part of the economy’s sizable current account deficit. However, the country continues to report low average incomes and the economy remains small in size, has a narrow export base and retains significant trade and financial ties with the euro area. Economic activity slowed significantly in 2012 amid contracting credit supply, and Moody’s expects growth to remain subdued over the forecast horizon.
The stable outlook on Albania’s bond rating balances its potential EU candidate status with the government’s high public debt ratio and vulnerabilities in the domestic debt-financing structure. Although the government has started to address the economy’s structural problems, more substantial progress would be needed before Moody’s considered an upgrade of the country’s ratings. More immediately, a failure to reign in the deterioration in fiscal metrics could undermine the rating.
Obligations rated B are considered speculative and are subject to high credit risk, according to Moody’s definition. 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.
Moody’s has earlier described Albania as a small-sized, upper middle-income country, with a GDP per capita of around US$4,000. “The economy is open and mainly oriented towards the EU. The country experienced robust growth of 6.1% on average over 2000-08 and has proven to be relatively resilient to the euro area debt crisis, having recorded real growth of 3.3 percent and 3.9 percent in 2009 and 2010, respectively, which ranks Albania among the best performers in the EU periphery. However, the countercyclical measures implemented during the crisis נlarge tax cuts and spending increases נhave led to a deterioration in the government’s fiscal metrics,” says Moody’s in its previous reports.
Moody’s has previously warned the government debt as a share of GDP is high for a country of Albania’s level of development. Event risks are largely driven by economic as well as political factors. The former reflect the country’s narrow economic base and extensive euroisation. Financial risks are ‘moderate’ given that the banking sector is adequately capitalised while liquidity has been bolstered by an increase in deposits. However, asset quality remains stressed, as reflected by an increasing non-performing-loans ratio.
Since 2007 when Moody’s starting assessing Albania’s credit rating it has kept its B1 rating unchanged in all reports.
Standard & Poor’s, one of the top sovereign credit rating agencies has also kept Albania’s sovereign rating unchanged at B+, which the former government said reconfirms the stability of the Albanian economy.
“The ratings on Albania are constrained by our view of the country’s relatively weak political and institutional environment, which has constrained the government’s ability to implement reforms that could help its EU accession. The ratings also reflect its low per capita GDP and persistently high government debt compared with peers. The ratings are supported by our view of the economy’s long-term growth potential, a legal framework that explicitly prioritizes debt-service payments and the long-term prospect of EU membership serving as a policy anchor,” says S&P.
