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S&P affirms Albania at B+/B, outlook stable

S&P affirms Albania at B+/B, outlook stable gary yim/Shutterstock.com

TIRANA (Albania), August 6 (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's real GDP growth will average almost 4% over the  next three years, driven by investments and rising service exports,” Standard & Poor's said in a statement late on Friday.

“Albania continues to progress with fiscal consolidation, resulting in reduced risks associated with still-high public debt but we consider that challenges in consolidation remain, also pertaining to the government's public-private partnership (PPP) projects,” Standard and Poor's noted.

The rating agency also said the stable outlook reflects its view that Albania will deliver solid economic growth and is unlikely to incur significant fiscal or external imbalances over the next three to four years.

“Additionally, we view the recent foreign exchange interventions by the  Bank of Albania to be only temporary and limited,” the agency noted.

Standard & Poor's also said:

“The ratings are constrained by Albania's relatively weak institutional framework, characterized in particular by an ineffective judiciary system and limited rule of law. Despite elevated growth rates, Albania's income levels are still lower than many peers and remain limited by a large informal economy and a significant illegal sector. That said, the country's fiscal performance has improved significantly in recent years on the back of solid economic growth and an enhanced fiscal framework, which now includes a formalized debt brake and other fiscal rules (Organic Budget Law). This will help continue to reduce risks associated with the high public debt and very high annual refinancing needs, particularly in the domestic market. Remittances and inflows on the service account continue to contain current account (CA) deficits, which are financed by high FDI inflows, but the external position of the overall economy remains vulnerable. The BoA is currently using its policy instruments in a limited manner in the form of a policy rate reduction and foreign exchange interventions, but credit growth remains suppressed and levels of euroization remain high, pointing to potentially weakening transition mechanisms for the central bank.

We expect Albania's government will continue to pursue its structural reforms agenda, which should gradually improve its political and institutional framework. The Socialist party emerged as the sole winner of last year's election and has formed a government under the previous Prime Minister Edi Rama. Despite stagnancy of reform efforts in the aftermath of elections, we expect policy continuity and sustained structural reform regarding the economy, public administration, and particularly the judicial sector. These will be anchored by the government's efforts to prepare for potential EU accession.

We acknowledge the government's efforts to enhance the rule of law and combat the informal economy, with the aim of fulfilling requirements for EU accession. The recent Sofia declaration determined that EU accession negotiations for Albania will likely start in 2019. However, given strong sentiments in specific EU countries against further geographic expansion of the EU, we think that Albania's accession is unlikely before 2025.

Strong EU membership aspirations, for example, spurred the government to pass the judicial reform last year, which aims at creating a more independent judiciary. The reform has the potential to sustainably improve the country's business environment, for example, by increasing the effectiveness of property rights enforcement. Implementation of the reform is currently on track with the formal vetting bodies established and several judges already leaving the system voluntarily or due to being forced out. This is a strong indication that these key reform efforts are sustainable, even though comprehensive reform and restructuring of the judicial system will require more time.

Further structural reforms are necessary to strengthen Albania's still-weak institutional framework, in our view. In general, the country has a considerable shadow economy, with prevalent corruption and constrained effectiveness of the rule of law.

We project that Albania's formal economy will expand by an average of 3.8% in real terms between 2018 and 2021, albeit still from a relatively low level of development. A number of large-scale investment projects currently underpin growth, and will likely be completed in 2019, including the Trans-Adriatic Pipeline (TAP), which will connect Albania with Italy and the Caspian Sea, as well as the construction of a hydropower plant. In addition, the tourism sector has indicated very solid growth rates over the past two years, and we see clear further development potential in this area. We consider that strong domestic demand, with rising consumption and private investment, will be a primary expansion engine, also aided by rising employment levels.

In the long term, government reforms could support an improved business environment and help the country to attract additional FDI. This would help unlock Albania's economic potential, for example in the areas of energy, tourism, and potentially in higher value-added sectors, such as business services, and information and communication technologies.

OUTLOOK

The stable outlook reflects our view that Albania will deliver solid economic growth and is unlikely to incur significant fiscal or external imbalances over the next three to four years.

A stronger and more pronounced period of sustainable economic growth, fostered by continuous attraction of foreign direct investment (FDI) and successfully combatting of the informal economy, could lead to a positive rating action. An upgrade could also follow if fiscal consolidation strengthened beyond our base case leading to a more pronounced downward trajectory for public debt, or a lower interest bill as a share of government revenues. Additionally, effective de-euroization efforts by the Bank of Albania (BoA) would enhance monetary transmission and could put upward pressure on the ratings.

We might take a negative rating action if we observed material fiscal slippages, resulting from higher fiscal deficits or materialization of contingent liabilities from PPP projects or arrears. We could also lower the rating if we observed a prolonged period of repressed credit growth, pointing to weaker monetary transition mechanisms."

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