Moody's suggests a better than anticipated outcome for fiscal and debt parameters with the implementation of fiscal reforms, it said in a statement last week. Potential continuation of the reforms further influences an improved rating.
The global rating agency also said in the statement:
“The affirmation of Albania's B1 ratings reflects moderate fiscal, economic and institutional strength balanced by elevated susceptibility to event risks driven by government liquidity and banking sector risks.
The local currency country ceiling remains unchanged at Baa3. The four-notch gap with the sovereign rating reflects predictable institutions, a contained government footprint in the economy and financial system, manageable political risk, and moderate external imbalances. The foreign currency country ceiling remains unchanged at Ba2. The two-notch gap to the local currency ceiling reflects relatively weak, albeit improving, policy effectiveness and moderate external indebtedness.
RATIONALE FOR CHANGING THE OUTLOOK TO POSITIVE FROM STABLE
The positive outlook reflects the possibility of a better than anticipated fiscal scenario which could result in a sustained improvement of Albania's fiscal strength. The public debt ratio turned on a sustained downward path in 2022 and fully reversed the increase of the public debt ratio over 2019-21. The positive impact of the falling debt burden on fiscal strength is softened by the weakening of debt affordability metrics. The deterioration of debt affordability is more limited than we had expected at the time of the last rating action in April 2023. Moody's expects the debt-to-GDP ratio to decrease to 56.3% in 2024 from 59.2% in 2023 and interest payments to revenue to show a gradual weakening to 8.8% in 2024 from 7.4% in 2023.
Beyond this year, Moody's expects the debt-to-GDP ratio to remain on a sustained downward path falling to below 50% in 2030 being driven by small primary surpluses and solid nominal GDP growth. Interest payments to revenue will remain roughly unchanged in 2025-26 and then turn on a downward path probably falling to 7.7% in 2030.
The decline in debt-to-GDP is driven by the interplay of cyclical and structural factors related to the ongoing implementation of fiscal reforms. These reforms include the implementation of the medium-term revenue strategy (MTRS) and enhancements to public investment management. Moody's expects the authorities to comply with the fiscal rules set in the Organic Budget Law, which includes to have a nonnegative primary balance and a reduction of the public debt-to-GDP ratio in each year until it reaches 45% of GDP.
Moody's sees potential upside risks to its fiscal and debt forecasts as the impact of fiscal reforms could be more sizeable than currently expected. This is mainly because the impact of the MTRS could result in a more sizeable increase of the revenue base than currently expected by Moody's. Moody's expects quasi-fiscal risks related to weather-related electricity to be further lowered in the coming years because of a comprehensive power sector reform, a reduction of electrical losses in distribution and transmission, further diversification of the country's energy mix and increasing domestic electricity production.
Solid foreign direct investment flows into the tourism and energy sectors, further productivity enhancing sectoral shifts and a further increase of labour market participation rates support the solid medium-term economic outlook and could if materialized improve Moody's assessment of Albania's economic strength.
Albania's credit profile will also benefit from the gradual implementation of further reforms related to the EU accession process. Reform momentum is likely to strengthen as EU accession talks progress, particularly in the areas of rule of law, control of corruption and voice and accountability. Further economic integration with the EU, Albania's largest trading partner, is likely to improve its economies' growth potential in the medium term and ultimately further narrow the gap in income levels with EU member states. The Reform and Growth Facility for the Western Balkans, which was adopted by the European Commission in November 2023, pre-accession EU funds and investments under the Western Balkans Investment Framework (WBIF) will support the implementation of further institutional reforms and income catch up to EU countries. As we move forward, the steady execution of institutional reform has the potential to enhance Moody's assessment of institution and governance strength of Albania.
RATIONALE FOR THE AFFIRMATION OF THE B1 RATINGS
The affirmation of Albania's B1 ratings reflects overall moderate economic, institutional and fiscal strength balanced by elevated susceptibility to event risks driven by government liquidity and banking sector risks.
More specifically, the affirmation of the B1 ratings captures moderate economic strength against the backdrop of moderate wealth levels and a small economic size. Limited economic diversification, a large informal sector and comparatively weak competitiveness are limiting factors. Macroeconomic stability was preserved during the recent triple shocks – the earthquake in 2019, the coronavirus pandemic in 2020 and the European energy crisis that started in 2022 – and trend GDP growth remained at a solid 3.3% over 2018-27 which is slightly higher compared to the B1-rated median of 3.1%. Moody's forecasts real GDP growth of 3.5% in 2024 and 3.3% in 2025 after 3.4% in 2023.
In addition, Moody's expects the recent material improvement of the current-account balance to be structural and forecasts only small current-account deficits for 2024-25 underpinned by the booming tourism sector and a sustained solid flow of remittances.
Furthermore, the affirmation of the B1 ratings reflects the moderate institutional and governance strength of Albania. It is informed by challenges in the areas of rule of law and control of corruption. Moody's takes into account Albania's efforts to address persistent challenges in these areas, for example, by the ongoing judiciary reform.
Moody's assesses fiscal strength to be moderate taking into account risks related to the share of foreign currency denominated public debt as well as contingent liability risks continue to have a negative impact on Moody's assessment of Albania's fiscal strength.
Government liquidity risk and banking sector risk drive Albania's susceptibility to event risks. The government's gross borrowing requirements are relatively large at 18% of GDP in 2024 and 20% of GDP in 2025, higher than the B1-rated median of 11% of GDP in 2024-25. About 70% of gross borrowing requirements in 2024-25 are related to maturing domestic debt which accounted for 55% of total debt and had a relatively low average time to maturity of 2.2 years at end-2023. The interlinkage between the sovereign and banking system is relatively high as the banking system is a key funding source for the government. The banking system held 63% of domestic debt at end-2023, which accounted for 24% of banking system assets. External debt accounted for 45% of total debt at end-2023 and had an average time to maturity of almost 9 years so that the average time to maturity of total debt was 5.2 years at end-2023. To support the state budget and to pro-actively manage rollover risks of external debt, the Albanian authorities issued its sixth Eurobond with a five-year maturity and a volume of €600 million in June 2023. Active liability management of buying back €133 million of the seven-year 2018 Eurobond maturing on 9 October 2025 reduced the outstanding amount to €367 million.
That said, Albania's government liquidity risk is mitigated by its cash buffer, which increased to €565 million or 2.5% of GDP at end-2023 from 0.7% of GDP at end-2022, and the domestic banking system being a reliable, sizeable funding base because of its high liquidity as measured by the loan to deposit ratio of 46% as of February 2024. Albania's banking sector risk is driven by the relatively weak intrinsic strength of the highly euroized banking system in combination with the size of the system accounting for 88% of GDP.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Albania's CIS-4 ESG Credit Impact Score reflects moderate exposure to environmental risks, high exposure to social risks and a moderately weak governance profile. The last factor, along with weak fiscal metrics, also points toward relatively low resilience.
Albania's overall E-3 issuer profile score is underpinned by low or moderately negative exposure to environmental risks across all categories. Albania is sensitive to environmental risks because increased temperatures and precipitation variability will have a negative impact on the large agriculture sector (16% of real GDP in 2023). In addition, the large tourism sector (overall contribution to GDP of about 20% in 2023) and the coastal population will be adversely affected by sea level rise. Moreover, Albania almost exclusively relies on hydropower for electricity generation. Power shortages as a result of drought can weaken economic growth and increase electricity imports that pose quasi-fiscal risks to the government's budget. That said, those risks are mitigated by the reforms in the power sector, a reduction of electrical losses in distribution and transmission, further diversification of the country's energy mix and increasing domestic electricity production.
Albania's S-4 issuer profile score reflects mainly the low quality of basic service and unfavorable demographics, given high emigration and an aging population, which will weigh on growth over the long term. Health outcomes, housing, education and labour and income are also a source of credit risk, although to a moderate extent.
Albania's G-3 issuer profile score reflects significant improvements in strengthening its institutions in recent years, though its performance in respect of rule of law and control of corruption remains relatively weak. Reform momentum is likely to strengthen as EU accession talks progress, particularly progress in these areas.
GDP per capita (PPP basis, US$): 18,164 (2022) (also known as Per Capita Income)
Real GDP growth (% change): 4.9% (2022) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 7.4% (2022)
Gen. Gov. Financial Balance/GDP: -3.7% (2022) (also known as Fiscal Balance)
Current Account Balance/GDP: -5.9% (2022) (also known as External Balance)
External debt/GDP: 55.1% (2022)
Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.
On 16 April 2024, a rating committee was called to discuss the rating of the Albania, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's institutions and governance strength, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has materially increased. The issuer's susceptibility to event risks has not materially changed.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Albania's B1 ratings could be upgraded if further evidence emerges that the improvements of the country's fiscal and debt metrics will be sustained, and growth of GDP and per-capita income will remain solid. This would be supported by a more positive impact of fiscal reforms as well as a more positive economic impact from investment projects and the implementation of reforms and external funding related to EU accession, compared to Moody's baseline assumptions.
An improvement in institutional and governance strength would also put upward pressure on the rating, for example driven by a strengthening of fiscal policy effectiveness or further progress on reforms related to rule of law and control of corruption.
The positive outlook signals that the rating is unlikely to be downgraded in the near term. However, the outlook would likely be returned to stable if a more positive fiscal and macroeconomic scenario won't crystallize, such as in the case of an economic shock or the materialization of contingent liabilities which would result in a significantly weaker outlook on fiscal and debt metrics. Credit negative would also be an increase in government liquidity risks.
Waning political support to progress on further economic and institutional reforms in combination with turning away from the EU accession process would also be credit negative. In addition, Albania's ratings would come under pressure were susceptibility to event risk to rise significantly in the unlikely event of an escalation of the Russia-Ukraine war with NATO involvement.
