The rating action follows a significant unanticipated increase in the general government debt burden which S&P now expects to reach nearly 67 percent of GDP in 2013
TIRANA, Dec. 9 – Citing a significant widening of the fiscal deficit and rollover risk on increased debt stock, Standard & Poor’s, one of the top three international credit rating agencies, has lowered Albania’s long-term sovereign credit ratings to ‘B’ from ‘B+ with a negative outlook. The new rating means Albania is more vulnerable to adverse business, financial and economic conditions but currently has the capacity to meet financial commitments, according to S&P’s definition.
“We consider that Albania could face difficulty rolling over its debt without financial assistance from official lenders. We are therefore lowering our long-term sovereign credit ratings on Albania to ‘B’ from ‘B+’. At the same time, we are affirming the short-term ratings at ‘B’. The negative outlook reflects the one-in-three chance that we could lower the ratings on Albania over the next year due to the high rollover risk on its increased debt stock,” says Standard & Poor’s Ratings Services.
The rating action follows a significant unanticipated increase in the general government debt burden which S&P now expects to reach nearly 67 percent of GDP in 2013, a large and unexpected deviation compared to previous forecasts.
“The ratings remain constrained by low GDP per capita estimated at $4,000 and significant structural difficulties related to weak institutions and governance (in particular, weak rule of law and high levels of corruption). The ratings are supported by significant future growth potential, underpinned by Albania’s ongoing efforts toward EU integration.”
The negative outlook reflects the risk that Albania may struggle to continue to roll over its expanded debt stock at sustainable rates.
Albania’s public finances deteriorated markedly during 2013, partly linked to the expansionary fiscal policy ahead of the elections. “We now expect the general government deficit to rise to 6.5 percent of GDP in 2013 from 3.5 percent in 2012, based on poorer growth performance than expected, a statistical revision to GDP and, crucially, the recognition of a stock of arrears currently estimated at 4 percent of GDP,” says S&P.
Over 40 percent of the money the government owes is due to nonresidents. Although its average debt maturity has increased, it remains short at 510 days (up from 386 at the end of 2012).
Real GDP growth over 2012 and 2013 has slowed to the lowest rates in over a decade, and is expected to be 1.2 percent in 2013.
Although the country has become less dependent on remittance-funded consumption, S&P expects lower remittances to limit consumption growth and import demand. Since 2008, remittances from Albanians living in Italy and Greece have fallen to a still-significant 6-7 percent of GDP from 12-13 percent.
Weak enforcement of contract rights and high levels of corruption have long been a significant structural barrier to investment that might lead to stronger domestic demand. Growth is also impaired by a lack of credit, as arrears have weakened banks’ asset quality. Although S&P anticipates that net exports will support growth, real GDP growth is likely to average around 2.5 percent between 2013 and 2016, compared to estimated potential growth of 4 percent.
Up to a quarter of nonperforming loans (NPLs) in the banking system are estimated to be related to the government’s recently recognized arrears.
The high level of NPL, about 24 percent of total loans, in the system could also constrain economic growth. Although the Albanian subsidiaries of Greek parent banks appear well-capitalized, their external funding positions could weaken in future.
Outlook
Standard & Poor’s warns it could lower the ratings if the government recognized further arrears or increased its debt stock, given the potential difficulty of financing them, and that it could revise its outlook to stable if the budget deficit is reduced and growth accelerates.
“We could revise the outlook to stable if pressures on government finances abate, through higher-than-expected growth combined with a reduction in the budget deficit. Progress on removing long-standing structural impediments to sustained growth would also be positive for the ratings,” said Standard & Poor’s.
Few weeks ago, Moody’s Investors Service affirmed Albania’s B1 rating but warned it could downgrade the country’s credit rating on rising debt levels and subdued economic growth. 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. 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.
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.
Gov’t, opposition trade accusations
The downgrade of Albania’s credit rating sparked reactions by both the government and the opposition, trading accusations and blaming each other for the situation.
The Albanian government blames what it calls the severe financial and economic situation on the irresponsible legacy from the first three quarters of this electoral year by the former government.
“The irresponsible legacy of very high and dangerous debt, documented or hidden, but now verified, and made transparent by the current government, the IMF and other international financial institutions make the former government fully responsible not only for this downgrade but also for the deteriorated situation of the state budget, the severe economic and financial situation of the country and Albanian citizens,” said the Economic Development Ministry in a statement.
The government says it is aware of the situation and is drafting in cooperation with the IMF, the World Bank and the European Commission a mature and well-though answer to the inherited crisis that would restabilize the economy and create the conditions for a sustainable growth of the Albanian economy.
Deputy Finance Minister Erjon Lu詠says the management of the country’s public finances will now be more difficult. “We could now face tougher financing terms in the international market. In addition, foreign private trade agents could tighten their terms on Albania, which makes the duty of debt management more difficult,” said Lu詬 a former economist at the World Bank.
“What we are now trying to do is finding the right balance between regaining reliability of the public finances and orientation toward growth policies. The latter will always remain a key target. We need sustainable economic growth and not just economic growth,” said the deputy minister.
The opposition Democratic Party, which governed the country for eight years until last September, blamed the new rating on the new government’s fiscal irresponsibility and arbitrariness.
Opposition Democratic Party leader Lulzim Basha described the downgrade as “bad news for every Albanian, for the economy, for enterprises, for foreign investors operating in Albania and for the present and future of foreign investments in Albania.”
Sherefedin Shehu, a former deputy Finance Minister and current Democratic Party MP, said that since 2007 when Moody’s and Standard & Poor’s carried out Albania’s first rating, the credit rating had remained stable and unchanged. “This rating will unfortunately prevent new investments and urge the departure of foreign investors from Albania. On the other hand, it will increase the interest rates on government debt and will use the Albania taxpayers’ money for the increased cost of debt instead of public investments.”
