London, 02 August 2019 -- Moody's Investors Service ("Moody's") has today
affirmed the Government of Albania's B1 long-term foreign and local
currency issuer ratings and the B1 foreign currency senior unsecured debt
rating. The outlook remains stable.
The decision to affirm the ratings balances the following key rating factors:
(1) Favorable economic prospects constrained by persisting structural
challenges and decelerating reform advances;
(2) Debt burden on a declining trajectory but still high relative to B-rated
peers and rising contingent liabilities;
(3) Susceptibility to shock stemming from the country's banking
system and large government gross financing requirements;
The decision to maintain the stable outlook reflects credit risks being
broadly balanced. Albania's macroeconomic profile and debt
metrics have overall improved, but the country remains vulnerable
to domestic and external shocks as well as to weaker political commitment
to reform.
Albania's long-term foreign currency bond and deposit ceilings
remain unchanged at Ba2 and B2, respectively. The local currency
bond and deposit ceilings remain unchanged at Baa3. The short-term
foreign currency bond ceiling and short-term foreign currency deposit
ceiling remain at Not Prime (NP).
RATINGS RATIONALE
AFFIRMATION OF B1 RATING
The decision to affirm Albania's credit rating balances the improved macroeconomic
profile, progress in structural and institutional reforms and fiscal
consolidation achieved in recent years against a number of persisting
credit challenges that continue to weigh on the country's credit profile.
These include a small economy exposed to environmental risks with a narrow
export base and limited diversification, weak fiscal metrics compared
with B-rated peers and moderate susceptibility to banking system
risk and, to a lesser extent, risks stemming from the government's
large financing needs reliant on the domestic banks.
FIRST DRIVER: FAVORABLE ECONOMIC PROSPECTS CONSTRAINED BY PERSISTING
STRUCTURAL CHALLENGES AND DECELERATING REFORM ADVANCES
Albania's growth dynamics have improved in recent years, and
economic prospects remain favorable despite this year's growth moderation.
Real GDP expanded by 4.1% in 2018, the highest growth
rate achieved in the past decade, and Moody's projects real GDP
growth of 3.6% on average in 2019-20. Economic
growth is supported by solid domestic demand and gradual improvements
in the export sector. However, as a small and narrowly diversified
economy, Albania remains exposed to domestic and external shocks,
including slower growth of its trade partners' economies (Italy,
in particular) and adverse weather conditions that can negatively affect
agricultural output and the country's electricity supply. Moreover,
the recent political volatility poses a risk to the economic outlook and
to the pace of structural reform implementation.
The quality of Albania's institutions has improved in pursuit of
EU accession, which is supportive of the country's medium-term
growth prospects. Notable progress has been made on judicial reform,
which is ongoing, along with advancements in combating informal
economy, corruption and organized crime. While progress in
the areas of rule of law and property rights has improved the business
environment, the prospects for private investment in the non-energy
sector crucially depend on the government's ability to maintain
the reform momentum and to address the structural constraints that include
weak infrastructure, skill shortages and large informality.
Progress on energy and tax system reforms has been mixed. Furthermore,
the reform impetus in the energy sector has moderated since the end of
the IMF program, and a number of reforms remain incomplete,
in particular the liberalization of the sector and the unbundling of the
energy companies. While the financial position of state-owned
electricity enterprises has improved, inefficiencies in the energy
sector continue to pose a risk to the economy and to the fiscal position
of the government.
SECOND DRIVER: DEBT BURDEN IS ON A DECLINING TRAJECTORY BUT REMAINS
HIGH RELATIVE TO B-RATED PEERS, WHILE CONTINGENT LIABILITIES
ARE RISING
The debt stock decreased to just below 70% of GDP in 2018 from
a high of 74% of GDP in 2015, but more recently this was
mainly driven by the appreciation of the Lek versus the euro. Moody's
expects the debt-to-GDP ratio to continue to decline over
the coming years, falling below 60% of GDP by 2022.
Despite being on a gradual downward trajectory, the debt level remains
high relative to the median of B-rated peers (54.5%
of GDP).
The fiscal deficit was 1.6% of GDP in 2018, lower
than planned in the budget, but mainly as a result of under-execution
of capital spending, while tax revenue underperformed. Moody's
anticipates a slower pace of fiscal consolidation than the authorities
expect, mainly due to less optimistic assumptions on revenues.
Moody's forecasts the fiscal deficit to remain around 2%
of GDP in the medium-term, resulting in a more gradual decline
in the debt-to-GDP ratio. Furthermore, Albania's
debt dynamics are vulnerable to a negative growth shock and to a scenario
of an exchange rate depreciation.
The stock of arrears has increased again since 2017 and reached about
1.9% of GDP at end-2018, although remaining
below the level of 2013. The authorities set up a plan to accelerate
the repayment of the arrears (mostly VAT refunds and local government
arrears) over 2019 and 2020 and a strategy to prevent the creation of
new arrears.
Albania faces other fiscal risks, particularly from weather-related
electricity imports and contingent liabilities arising from the energy
sector and public private partnerships (PPPs). In particular,
the reliance on off-balance sheet financing in the form of PPPs
to scale up investment has increased. As of 2018, Albania
had signed PPP contracts (mostly concessions) with an estimated value
of more than 30% of GDP and an additional 15% of GDP is
in the pipeline. Governance and capacity issues surrounding PPPs
underline the contingent liability risk.
THIRD DRIVER: SUSCEPTIBILITY TO SHOCK STEMMING FROM THE COUNTRY'S
BANKING SYSTEM AND GOVERNMENT'S LARGE GROSS FINANCING REQUIREMENTS
The third driver is the country's moderate susceptibility to banking
system risk and, to a lesser extent, risks stemming from the
government's large financing needs reliant on the domestic banks.
The banking system is adequately capitalized and liquid, but asset
quality remains weak, despite having improved. NPLs declined
to 11.4% of gross loans as of May 2019 from 18.3%
at end-2016. However, about half of loans are denominated
in foreign currency, in part to unhedged borrowers, pointing
to asset quality risks.
Gross borrowing requirements exceeded 20% of GDP in 2018,
and are expected to stay elevated in 2019-20, remaining relatively
large compared to rating peers and well above the B-rated median
of 8.8% of GDP in 2018. While the structure of the
central government domestic debt, which accounts for about half
of the total, has improved as maturity lengthened, short-term
debt continues to account for about one third of the total as of end-2018,
and displays a strong reliance on the domestic banking system, which
holds about 60% of domestic debt. Nevertheless, government
liquidity has been supported by access to external markets, with
Albania successfully issuing a seven-year €500 million Eurobond
in October 2018.
RATIONALE FOR STABLE OUTLOOK
The stable outlook balances Albania's improved macroeconomic profile
and robust growth prospects against risks arising from limited shock absorption
capacity on the back of a less favorable external environment.
The debt burden has declined but remains high, while Albania's
contingent liability risk has increased. Despite notable progress
in strengthening the quality of institutions, Albania continues
to lag similarly rated peers in terms rule of law and control of corruption,
while the reform impetus has slowed in certain areas, with the current
political volatility posing risks to the pace of reforms.
WHAT COULD CHANGE THE RATING - UP
A material decline in public sector debt, along with a reduction
of the fiscal risks posed by contingent liabilities and the energy sector,
as well as further advances in strengthening institutions that results
in an improved business environment and competitiveness would be credit
positive.
WHAT COULD CHANGE THE RATING - DOWN
Downward pressure on the rating would arise from a less prudent fiscal
policy or materialization of contingent liabilities leading to a reversal
of the public debt-to-GDP ratio's downward trajectory,
or from a reduced political commitment to the institutional and economic
reform agenda. Furthermore, the emergence of challenges in
funding the current account deficit due to a significant decline of FDI
would be credit negative.
GDP per capita (PPP basis, US$): 13,345 (2018
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 4.1% (2018 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 1.8%
(2018 Actual)
Gen. Gov. Financial Balance/GDP: -1.6%
(2018 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -6.7% (2018 Actual)
(also known as External Balance)
External debt/GDP: 63.5%
Level of economic development: Moderate level of economic resilience
Default history: At least one default event (on bonds and/or loans)
has been recorded since 1983.
On 30 July 2019, 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
institutional strength/framework, have not materially changed.
The issuer's fiscal or financial strength, including its debt profile,
has not materially changed. The issuer's susceptibility to event
risks has not materially changed.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in November 2018. Please see the Rating Methodologies
page on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this credit rating action, if applicable.
REGULATORY DISCLOSURES
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
ratings in accordance with Moody's rating practices. For ratings
issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
to the assignment of the definitive rating in a manner that would have
affected the rating. For further information please see the ratings
tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Daniela Re Fraschini
Asst Vice President - Analyst
Sovereign Risk Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
