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

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.

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.

S&P expect the government to remain committed to fiscal consolidation, with general government deficits declining to 1.5% of GDP in 2020. Revenue growth is assessed as solid, and tax revenues have risen by almost 10% over the past year.

On the expenditure side, Albania’s successful efforts to prevent the accumulation of government arrears through tighter monitoring have been acknowledged. Successful implementation and adherence to the “organic budget” law, which stipulates limits on government spending in an election year, have also delivered sound results.

S&P highlights that Albania’s banking system still holds the largest share of domestic debt, and about 24% of the banking system’s assets are government securities. These risks are expected abate as the government’s debt burden declines.

FDI will remain Albania’s main external financing source, and large-scale investment projects will continue to be a major source of FDI.Ai??Improvements in Albania’s institutional and business environments could support attracting further FDI, likely in the energy sector, particularly for projects in hydro power, and in tourism.

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.

The central bank has repeatedly missed its inflation target in recent years. Despite the BoA’s more accommodative policy stance, inflation is expected not to reach the 3% target before 2020.

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.

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-writes S&P./Klara Ruci/

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