In its latest report issued this month, Moody’s kept Albania’s government bond rating unchanged at B1 reflecting the country’s `low’ economic, institutional and government financial strength and ‘medium’ susceptibility to event risk
TIRANA, March 13 – Failure to execute planned reform programme, both economic and institutional, could put downward pressure on Albania’s government bond rating, Moody’s Investor Service, one of the top three global credit risk rating agencies has warned in its latest country report on Albania whose public debt has been lingering at around the legal limit of 60 percent of the GDP since 2009 and is projected to slightly drop to 58 percent only by 2015.
“More immediately, failure to maintain fiscal consolidation could also undermine the rating as could a significant setback to its ambitions to join the EU,” says Moody’s.
In its latest report issued this month, Moody’s kept Albania’s government bond rating unchanged at B1 reflecting the country’s `low’ economic, institutional and government financial strength and `medium’ susceptibility to event risk.
Moody’s warns the government debt as a share of GDP is high for a country of Albania’s level of development. The government is aiming to limit the budget deficit to 3.5% of GDP this year and 3% in 2012-14, which would enable government debt to GDP to fall in the near term. 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.
The rating outlook on the Albanian government’s bond rating is stable, with equally balanced upside and downside risks to the ratings. Although the European Commission (EC) issued a negative opinion regarding Albania’s potential EU candidacy, the opposition’s parliamentary boycott, which the EC mentioned was a key hurdle in its November report, has now ended. Candidacy is credit relevant as Albania could expect extensive assistance from the EU in its efforts to strengthen its institutions.
Albania has made significant progress in improving its economic and institutional strength since the late 1990s, albeit from very low levels. However, considerable challenges remain. While its economy remained relatively resilient during the global financial crisis of 2008-09, economic recovery has yet to gain traction. Moreover, Albania is now a middle-income country and, as such, faces a squeeze both from higher income, higher productivity countries and from those with lower cost bases. As for institution building, continued tensions between the main political parties during the first part of the year have hampered Albania’s attempts to be accepted as a candidate for membership of the EU.
Although the government is addressing the economy’s structural problems, more substantial progress would be needed before we considered an upgrade of the country’s ratings, Moody’s says. Improvement in institution building including judicial efficiency and success in the tackling of corruption would be beneficial, as such shortcomings hamper investment.
Since 2007 when Moody’s starting assessing Albania’s credit rating it has kept its B1 rating unchanged in all reports. Obligations rated B are considered speculative and are subject to high credit risk, according to Moody’s definition.
Standard & Poor’s also kept Albania a B+ sovereign credit rating unchanged with a stable outlook, citing an increasing public debt and political uncertainty. The agency also noted that there has been little increase in the country’s prosperity, although it acknowledged that Albania was one of the very few countries in Europe that managed to keep economic growth in positive territory, avoiding recession.
“Differently from regional countries, Albania has demonstrated sustainable economic growth at a rate of 4 percent in the past years. The rating agencies also appreciate Albania’s economy potential to continue registering sustainable and high growth in the coming years, strengthen fiscal consolidation by lowering the budget deficit to 3 percent and government’s commitment to keep public debt under control and gradually lower it,” says the Albanian Finance Ministry citing the agencies in a statement.
The two rating agencies assess Albania’s banking system as liquid, well capitalized and with a constant increase in deposits. Referring to Albania’s European integration aspirations, the agencies say that getting the EU candidate status and lowering the public debt, currently at 60 percent of the GDP, would reduce Albania’s risk perception, added the Finance Ministry.
Under the 2012-2014 macroeconomic framework, government expects public debt to remain within the 60 percent legal limit; at 59.4 percent for 2012, at 59.1 percent for 2013, and at 58.4 percent for 2014.
However, the International Monetary Fund has warned Albania’s public debt, currently at the legal limit of 60 percent of the GDP, will rise to 64 percent by 2016 under current fiscal policies.
With public debt at around 60 percent of the GDP, Albania remains the most vulnerable country among six regional EU- aspirant South East European countries, according to a World Bank “South East Europe Regular Economic Report.”
Latest detailed Finance Ministry data show Albania public debt stood at 767.8 billion lek or 58.2 percent of the GDP at the end of Sept. 2011. Domestic debt accounts for the majority of 33.17 percent compared to 25.03 percent in external debt.
What puts the Albanian public debt more at risk is that it accounts for more than double the annual revenues, while interest expenditure has risen to 3.4 percent of the GDP, compared to an average of 1.3 percent in the SEE 6, international financial institutions have warned.
