Frankfurt am Main, February 04, 2022 -- Moody's Investors Service ("Moody's") has assigned
a Baa2 long-term issuer rating to the Government of Andorra and
has also assigned a stable outlook
The assignment of the rating balances the following factors:
1. Solid institutional and governance capacity which is supported
by greater international openness;
2. Moody's expectation that Andorra's government balance
sheet will gradually recover from the pandemic shock;
3. A moderate level of economic strength balancing a wealthy economy
with constrained growth potential and exposure to a very large banking
sector.
The stable outlook reflects Moody's expectations that Andorra's
credit profile will remain resilient to the pandemic environment.
Moreover, the stable outlook balances the intrinsic strengths of
Andorra's institutions and fiscal metrics with credit challenges
that relate to the economy's very small size and volatile nature,
as well as to the exposure to the country's very large banking sector
(with assets accounting for 600% of GDP in 2020) and fundamental
limitations such as the absence of a lender of last resort.
Concurrently, Moody's has assigned Andorra a foreign currency ceiling
of A1. The four-notch gap between the foreign currency ceiling
and sovereign rating reflects strong predictability of government actions
and reliability of key institutions, as well as low political risks
and a robust external vulnerability profile. At the same time,
data for the government footprint in the economy are not available and
the reliance on tourism and retail activities is high (20% of value
added in 2020) against the backdrop of a very small economy.
RATINGS RATIONALE
RATIONALE FOR THE Baa2 RATING
FIRST DRIVER: SOLID INSTITUTIONAL AND GOVERNANCE CAPACITY WHICH
IS SUPPORTED BY GREATER INTERNATIONAL OPENNESS
The first driver of the action relates to Andorra's solid institutional
and governance capacity. According to the Worldwide governance
indicators (WGI) published by the World Bank, Andorra scores consistently
high (80th to 90th percentile) in the indicators Moody's considers
for the quality of legislative and executive institutions (government
effectiveness, regulatory quality). Andorra also scores highly
on indicators related to the strength of civil society and the judiciary
(control of corruption, rule of law, voice and accountability).
In terms of policy effectiveness, a rules-based fiscal framework
has been in place since 2014 setting clear targets for debt, deficit,
current spending and direct taxes. In terms of monetary and macro-prudential
policy, Andorra has a comprehensive strategy to adopt common European
Union standards and allow for better supervision. Andorra further
benefits from a single financial supervisor (AFA), a specialized
unit in charge of AML/CFT enforcement (UIFAD) and a bank resolution authority
(AREB).
Moreover, from an international perspective, Andorra has followed
the Organisation for Economic Cooperation and Development's (OECD) Common
Reporting Standard since 2018 and introduced IFRS to the overall financial
system reporting in 2019. In addition, Andorra incorporated
the Basel III accord requirements in 2018 and the MiFID II/MiFIR regulatory
framework in 2020. In terms of tax policy, Andorra is no
longer considered in the list of noncooperative tax jurisdictions published
by the European Union since 2018. Finally, Moody's
considers that Andorra's accession to the International Monetary
Fund (IMF) as a member in 2020 is an important milestone.
Moody's believes that the IMF membership has the potential to further
strengthen Andorra's institutional capacity and partially mitigate
the country's intrinsic limitations due to its size. As noted
by the IMF, closing data gaps and publishing statistics according
to international standards would allow for better transparency.
From a macroeconomic perspective, Moody's notes that the absence
of a domestic currency and of a lender of last resort are major constraints
for Andorran policymakers.
That said, building of international reserves will help Andorra
cushion the impact in a stress-scenario without a lender of last
resort. Finally, the ongoing negotiation with the European
Union (EU) on an Association Agreement has the potential to broaden Andorra's
access to the single market and foster new business and trade opportunities.
SECOND DRIVER: MOODY'S EXPECTATION THAT ANDORRA'S GOVERNMENT
BALANCE SHEET WILL GRADUALLY RECOVER FROM THE PANDEMIC SHOCK
Prior to the coronavirus pandemic, Andorra recorded seven years
of fiscal surpluses between 2013 and 2019, reflecting the government's
willingness to adopt sound fiscal policies. As a result,
the general government debt-to-GDP ratio declined from 42.5%
in 2013 to 35.4% in 2019. In line with several other
advanced economies, debt affordability metrics improved, with
the interest payments-to-revenues ratio declining from 3.1%
in 2013 to 1.3% in 2019.
Furthermore, Andorra's fiscal profile is enhanced by the presence
of large public sector liquid assets: in 2020, these assets
accounted for almost EUR 1.8 billion, equivalent to 73%
of Andorra's GDP. While mostly earmarked to the social security
system and hence not readily available in case of a shock, these
accumulated resources will help contain the impact of an ageing population
on Andorra's public finances.
To date, the coronavirus pandemic has had a negative impact on Andorra's
public accounts; following a 1.1% of GDP deficit in
2020, Moody's estimates that Andorra's general government
deficit reached 3.0% of GDP in 2021.
In addition, the authorities new issuance strategy is having a --
temporary but significant -- impact on the amount of gross borrowing
requirements in 2021 and 2022 (20% of GDP on average). As
a result, Moody's estimates that the public debt-to-GDP
ratio reached around 50% in 2021. Looking ahead, Moody's
forecasts a reduction in the budget deficit in 2022 and 2023, before
returning to a surplus as of 2024. While economic activity will
lift public revenues, receding of pandemic-related spending
will mechanically reduce public outlays.
Under its baseline scenario, Moody's forecasts the debt-to-GDP
ratio to fall as of 2022 and return close to its 2019 levels by 2025.
Moody's also expects debt affordability metrics to remain strong,
with the interest payments-to-revenue ratio to stabilize
at around 1.6% of GDP over the next three years.
THIRD DRIVER: A MODERATE LEVEL OF ECONOMIC STRENGTH BALANCING A
WEALTHY ECONOMY WITH CONSTRAINED GROWTH POTENTIAL AND EXPOSURE TO A VERY
LARGE BANKING SECTOR
With a GDP per-capita of 52,000 (international USD,
PPP) in 2020, Andorra is much wealthier than the Baa2 median (22,423).
This reflects a mature economy with structurally low unemployment in the
context of a fluid labour market. Andorra's attractiveness
for foreign workers, customers and investors relies on a favourable
tax system as well as modern infrastructure allowing for generalized access
to the internet.
At the same time, Andorra's very small economy (USD 2.9
billion) is constrained by the country's size and the modest growth
rate of GDP due to its sectoral composition. Over the last two
decades (2001-2019), average real GDP growth reached 1.7%,
with a clear declining trend between the first decade (3.4%
on average between 2001 and 2009) and the second one (0.1%
on average between 2010 and 2019).
In 2020, the initial phase of the coronavirus pandemic had a significant
impact on the Andorran economy, with real GDP contracting by 11.2%.
With trade and tourism accounting for a fifth of the country's gross
value added, Andorra is significantly exposed to travel restrictions,
including the closure of borders by neighbouring Spain (Baa1 stable) and
France (Aa2 stable), the country's main economic partners
who provide around 90% of the country's annual foreign tourists
and are the country's gateways to the rest of the world.
Retail activities are also largely dependent on cross-border flows
from commuting visitors.
Furthermore, the very large relative size of the Andorran banking
sector, with total assets accounting for 600% of GDP in 2020,
represents a credit challenge for Andorra given the adverse impact a shock
to the banking system would have on the economy and the country's
public finances.
Moody's notes that the share of financial services has halved over
the past two decades, from 24% of gross valued added in 2000
to 12% in 2020. In addition, the system exhibits solid
profitability and an improved tracked record since the Banca Privada d'Andorra
(BPA) scandal in 2015, which had limited spillovers to the rest
of banking entities. However, the system's high reliance
on volatile foreign deposits and the geographical concentration in the
principality of Andorra are significant risks compounded by the absence
of a lender of last resort.
Looking ahead, Moody's expects Andorra's real GDP growth
to reach 4% in 2022, 1.8% in 2023 and 1.5%
in 2024. Rising vaccination rates and stronger economic activity
in the euro area will support Andorra's gradual recovery,
with Moody's expecting Andorra's real GDP to recover its 2019
levels by 2023. A tight labour market will support wages and hence
private consumption. The gradual recovery in the tourism sector
will also contribute positively to economic growth. Given the recent
pandemic developments in Western Europe, risks to the economic outlook
are to the downside.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook reflects Moody's expectations that Andorra's
credit profile in terms of economic and fiscal strength will remain resilient
to the pandemic environment. The stable outlook considers the intrinsic
strengths of Andorra's institutions and fiscal metrics, with
prudent policymaking underpinned by low political risk. This is
balanced by credit challenges that relate to the economy's very
small size and volatile nature, as well as to the country's
very large banking sector (600% of GDP in 2020) and fundamental
limitations such as the absence of a lender of last resort.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Andorra's overall E issuer profile is moderately negative (E-3),
reflecting the economic importance of winter tourism, a source of
vulnerability in the context of climate change as warmer temperatures
reduce the amount of snow available.
We assess Andorra's S issuer profile score as neutral to low (S-2).
This reflects very high quality of health and safety, as well as
strong access to basic services. While Andorra's population
is ageing, in line with other advanced economies, high activity
and employment rates are credit strength.
Andorra's high institutions and governance strength is reflected
in a positive G issuer profile score (G-1). Andorra scores
well on global surveys assessing voice & accountability, regulatory
quality and government effectiveness. The effectiveness and credibility
of fiscal policy is solid.
Andorra's ESG Credit Impact Score is neutral-to-low
(CIS-2), reflecting some exposure to physical climate risk,
low exposure to social risks and, like many other advanced economies,
strong governance and in general strong capacity to respond to shocks.
GDP per capita (PPP basis, US$): 51,989 (2020
Actual) (also known as Per Capita Income)
Real GDP growth (% change): -11.2% (2020
Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): -0.2%
(2020 Actual)
Gen. Gov. Financial Balance/GDP: -2.8%
(2020 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: 14.5% (2020 Actual) (also
known as External Balance)
External debt/GDP: [not available]
Economic resiliency: baa1
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 25 January 2022, a rating committee was called to discuss the
rating of the Andorra, Government of. The main points raised
during the discussion were: The assignment of the Baa2 issuer rating
for Andorra balances moderate economic strength, solid institutions
and governance strength as well as fiscal strength, and an exposure
to susceptibility to event risk driven by the banking sector risk.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
WHAT WOULD CHANGE THE RATING UP
Upward pressures on the rating might develop over time should Andorra
lift its economic trend growth in a sustained manner. Further diversification
of the economy would be credit positive, broadening the sources
of growth and making the country more resilient to shocks. A stronger
banking system helping to limit the sovereign's potential contingent
liabilities would also be credit positive.
WHAT WOULD CHANGE THE RATING DOWN
Downward pressures on the rating might result from an increase in the
general government's public debt. This would reflect a deterioration
in the fiscal balance stemming from unfinanced new measures and/or a permanently
weaker economic environment due to larger than expected scarring from
the pandemic. Given the sector's very large relative size,
any deterioration in the quality of Andorra's banking system would
also be credit negative.
The principal methodology used in this rating was Sovereign Ratings Methodology
published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631.
Alternatively, 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.
This rating action concerns a new rating for an issuer not previously
publicly rated by us at the time that the EU sovereign release calendar
was published, and is therefore being released on a date not listed
in that publication.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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.
The rating has been disclosed to the rated entity or its designated agent(s)
and issued with no amendment resulting from that disclosure.
This rating is solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the UK and is endorsed
by Moody's Investors Service Limited, One Canada Square,
Canary Wharf, London E14 5FA under the law applicable to credit
rating agencies in the UK. Further information on the UK endorsement
status and on the Moody's office that issued the credit rating is
available on www.moodys.com.
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.
Olivier Chemla
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Alejandro Olivo
MD-Sovereign/Sub Sovereign
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
