TIRANA (Albania), February 5 (SeeNews) – Standard & Poor's said it has affirmed its long- and short-term foreign and local currency sovereign credit ratings on Albania at B+/B, with a stable outlook.
"We expect Albania will continue on its path of relatively high economic growth and ongoing fiscal consolidation, which will support a gradual reduction of the country's high public debt burden," Standard & Poor's said in a statement late on Friday.
The ratings agency also said that they expect the government will move ahead on its structural reform agenda, in part because it aims to join the EU, gradually improving Albania's institutional effectiveness and predictability.
"The economy will continue to grow at a relatively fast pace, albeit from a low base," S&P said, adding that as the effects of large-scale investment projects on economic growth fade, domestic demand will become a more significant engine of economic development..
Standard & Poor's also said:
“Fiscal reform and consolidation efforts are paying off. The general government deficit hardly budged in 2017 despite the general election, whereas in previous election years, deficits and payment arrears increased markedly.
We expect the government will remain committed to fiscal consolidation, with general government deficits declining to 1.5% of GDP in 2020. Revenue growth has been solid, and tax revenues have risen by almost 10% over the past year, on the back of rapid nominal GDP growth and stronger tax enforcement. The shadow economy continues to weigh on revenues, leaving further room for improvement in tax compliance. In this vein, we will particularly monitor the implementation of a new valuation-based property tax in 2018. A successful introduction would signal further strengthened capabilities of the public administration.
On the expenditure side, we acknowledge Albania's successful efforts to prevent the accumulation of government arrears through tighter monitoring. Successful implementation and adherence to the "organic budget" law, which stipulates limits on government spending in an election year, have also delivered sound results. The fiscal balance of negative 2.1% of GDP in 2017 also included spending obligations due to environmental effects. Yet, the deficit it was still significantly lower than in 2013-2014 when election-driven arrears resulted in financing pressures for the government.
We expect Albania's general government net debt burden will decline by about 109 percentage points over the next few years, to around 612% in 2021 from 702% currently. Despite the authorities' inroads in improving the sustainability of public finances, several major risks to Albania's public debt stock remain.
The average maturity of government debt has lengthened considerably over the past three years. Yet, for the domestic portion of debt, average maturity remains relatively short, at slightly above two years. Domestic debt currently accounts for just slightly more than 50% of the total public-sector debt stock, and approximately 49% of total government debt is denominated in foreign currency. Albania's banking system still holds the largest share of domestic debt, and about 24% of the banking system's assets are government securities. We expect these risks will abate as the government's debt burden declines.
Albania's external vulnerabilities remain elevated, reflected in sizable current account deficits averaging 8.2% of GDP for 2017-2021. Large-scale, import-intensive investment projects that are mostly foreign funded fuel the current account deficits. Albania's current account has benefited from growth of the country's tourism industry, as well as from economic recovery in Greece and Italy, the main origins of the country's sizable remittances. We estimate net transfers will continue contributing more than 7% of GDP to the current account over our forecast horizon through 2021, albeit down from an average 13% over 2004-2008.
FDI will remain Albania's main external financing source, and large-scale investment projects will continue to be a major source of FDI. The TAP project stayed on schedule last year, and the largest share of the project's needed investment, totaling €1.5 billion, was executed in 2017. This contributed markedly to net FDI inflow of around 9% of GDP in 2017.
Improvements in Albania's institutional and business environments could support attracting further FDI, likely in the energy sector, particularly for projects in hydropower, and in tourism.
Albania's external indebtedness is relatively low, reflecting external funding relying on foreign equity. Narrow net external debt declined to 8% of current account receipts (CARs) in 2017, but we expect this ratio will pick up to 15% by 2020. Albania's reliance on equity funding of current account deficits and particularly the large stock of such external funding, with net external liabilities at 113% of CARs in 2017, could leave the country vulnerable to a change in investor sentiment should flows stop or even reverse.
The deposit-funded financial sector has strengthened its position as a net external creditor. The steady rise of the financial sector's net foreign assets--partly reflecting high liquidity--illustrates Albania's limited lending opportunities for banks in recent years. We expect growth of domestic credit will trail nominal GDP growth over our forecast horizon, making it a drag on economic growth. Particularly if sustained over an extended period, this trend might indicate a weakening of transition mechanisms, which would constrain the central bank's monetary flexibility.
Consolidation in the financial sector continues. The ratio of NPLS to total loans had reduced to 14% at the end of 2017. The NPL ratio varies widely between financial institutions, but the consolidated figure already represents a large decrease from a 25% peak in September 2014. Although write-offs are mainly driving reduction, capital buffers and liquidity in the banking system remain well above minimum requirements. Subsidiaries of Greek banks maintain a sizable presence in Albania, and the authorities have taken measures to limit exposure to their Greek parents and prevent contagion risks to the domestic banking sector.
The high share of foreign currency deposits and loans further impairs the effectiveness of Albania's monetary policy, as it does in several economies across the region. Despite the Bank of Albania's (BoA's) efforts to achievede-euroization, deposits in foreign currencies will likely remain well above 50% of total deposits throughout our forecast horizon. However, loans in foreign currencies have decreased in recent years and could dip below 50% of total loans in the coming years.
The central bank has repeatedly missed its inflation target in recent years. Despite the BoA's more accommodative policy stance, we project inflation will not reach the 3% target before 2020.
The Albanian lek remains a generally free-floating currency, and this has been underscored recently by strong upward pressure on the currency. The BoA has intervened only marginally in the foreign exchange market in recent years, primarily with the intent of increasing its foreign currency reserves in line with its targets. The central bank's only significant open market operations include three-month liquidity injections to help enforce its policy rate, which remains historically low at 1.25%.
Overall, we note that Albania fiscally outperforms its peers in the same rating category. The current exchange rate regime is more stable than peers', and Albania has made improvements to its institutional set-up.
OUTLOOK
The stable outlook balances our views on continuing reforms to the country's institutional framework, as well as steady economic growth and generally improving public finances, with external and monetary vulnerabilities that remain high.
We could raise our ratings on Albania if structural reforms, potentially focused on EU accession, established a stronger track record of more robust institutions and bolstered economic growth prospects. A positive rating action could also follow further fiscal consolidation efforts on the back of improving revenue collection and a lessening interest bill as a share of government revenues. This would lead to a marked decline of the government's debt burden. A reduction ineuroizationof the economy, along with a revitalized financial sector, could also prompt an upgrade.
In turn, we could lower the ratings if we observed a deterioration in Albania's government finances, potentially alongside resumed constraints on borrowing conditions. We would also downgrade Albania in the event of a prolonged period of repressed domestic credit growth, pointing to a weakened monetary transition mechanism, or if we observed marked deterioration in Albania's external position and ability to finance its high current account deficit."