TIRANA, Feb. 8 – Standard & Poor’s has upgraded Albania’s long-term credit ratings to ‘B+’ from ‘B’ on improving fiscal performance with a stable outlook.
“We believe that Albania’s fiscal deficit is on a declining trajectory that will lead to a gradual decline in government indebtedness over the next four years,” said S&P, one of the big three credit rating agencies.
“The stable outlook reflects our expectation that fiscal performance will remain sound over the next 12 months and that compliance with the International Monetary Fund’s Extended Fund Facility will shield Albania from potential external risks,” added the rating agency in its latest rating action.
Prime Minister Edi Rama hailed the upgrade as good news for the Albanian economy.
“This is a very encouraging result for the economy. International Standard & Poor’s credit rating agency upgraded Albania to B+ again,” wrote Prime Minister Rama on social networks.
S&P expects the Albanian economy to grow by an annual average of 4 percent over 2016-2019 with domestic demand contributing more prominently to growth performance over the next one or two years, in contrast with recent years when net exports were the primary growth engine.
The rating agency expects a boost in foreign direct investment fuelled by projects in the hydropower sector and the ongoing construction of the Trans-Adriatic Pipeline, but a standstill in remittances especially because of the situation in neighboring Greece, Albania’s second top trading partner and the host of some 500,000 Albanian migrants. Migrant remittances have almost halved to 7 percent of the GDP compared to a pre-crisis level of 13 percent with a significant negative impact on domestic consumption and the long-ailing construction sector.
S&P warns it could lower Albania’s ratings in case of a deterioration in government finances as happened in 2013, along with potential financing pressures, likely linked to noncompliance with the conditions of Albania’s IMF arrangement.
In fact, the IMF has not approved yet its two new loan tranches worth about €74 million scheduled for early 2016 after failed mid-year negotiations over poor performance of Albania’s public finances. The poor tax performance in the first half of this electoral year forced the Albanian government to revise downward its 2015 budget, while the International Monetary Fund postponed its new loan tranche as part of a three-year €331 million loan.
“We could also lower the ratings if we saw a significant deterioration in Albania’s external position and ability to fund its current account deficit,” says S&P.
The agency says it could raise Albania’s ratings if structural reforms yield positive results in more robust fiscal institutions and strengthened growth prospects. “A significant government debt reduction beyond our current forecasts, potentially alongside higher-than-expected economic growth, would also be positive for the ratings.”
Meanwhile, Moody’s, another big three rating agency, in its latest rating action in August 2014 affirmed Albania’s B1 government bond rating with a stable outlook, citing the Albanian government’s fiscal consolidation and arrear repayment under an IMF deal and the EU candidate status obtained in mid-2014.
“While Albania’s EU candidacy has fostered progress in tackling corruption and advancing public sector reform, institutional convergence with EU standards remains protracted and we expect the business environment to remain constrained,” said Evan Wohlmann, a Moody’s analyst, in a report last December.
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.
