In its latest rating, of 8th July, Fitch Ratings upgraded Andorra to A-, with a stable outlook. This is the Principality’s highest rating to date. In the previous report, of January, 2022, the Principality was rated BBB+. Both the improvement in public finances and the reduction in the debt-to-GDP ratio were much better than forecast at the beginning of the year, and were the reasons why Fitch Ratings awarded Andorra an A- rating. Among other factors, the report also highlights the containment of inflation caused by the geopolitical situation; in any case, that inflation had been lower than in other European countries. Finally, and despite the good grade obtained, the rating agency’s report details some of the factors that could modify the current situation.
Table of contents:
- Improving public finances
Reducing the level of debt
The geopolitical situation
Standard & Poor’s also gives Andorra its highest rating so far
The Agency points to a strong recovery of the economy from the COVID-19 crisis. The general government fiscal deficit stood at 1.1% of GDP, whereas its forecast in its latest revision (January 2022) was that the deficit would reach 3.5% of GDP. On the other hand, it also forecasts a surplus in public finances from 2022 onwards, thanks to economic momentum and new sources of revenue. The latter will come from, among other sources, the new tourism tax that will take effect on 1st July, 2022.
In 2021, the ratio of gross general government debt-to-GDP did not change much from that of the pre-pandemic years. It stood at 46.2% (compared with 35.4% in previous years) and is forecast to stand at 35.1% in 2024, according to Fitch Ratings. The debt reduction is expected to be greater in Andorra than in the other European countries, thanks to a faster economic recovery and the reduction in government deposits.
Another factor that Fitch Ratings has assessed positively is the build-up of foreign reserves, which strengthens the Principality’s ‘shock absorption’ capacity. The Agency does not forget to point out the country’s economic dependence on foreign funding, as well as on the banking sector, with a large volume of non-resident deposits which, in adverse situations, could quickly become prone to outflows. Despite all this, its report also stresses that Andorran banks are highly liquid and adequately capitalised, and that customers’ deposits have been stable in times of stress.
The Agency notes that in 2021 the economy grew by 8.9%, more than forecast in previous reports (6.6%). Economic activation came about thanks to the construction sector, which took over from tourism, which was going through a disastrous winter season due to restrictions on movements.
In 2022, as the pandemic recedes, strong growth is expected thanks to the recovery of the tourism sector. For this reason, Fitch Ratings has revised growth in GDP upwards, to 7.6% instead of the 5.2% initially forecast.
According to the Agency, the Andorran economy has so far been fairly insulated from the effects of war in Ukraine. Inflation could reach 5%, whereas in the Eurozone it is estimated that it will reach 6.5%. This is due to the country’s long-term energy contract, which limits rising prices. The Andorran government has implemented a law to improve the purchasing power of the citizens and thus curb inflation, which amounts to only 0.3% of GDP. On the other hand, it is also estimated that the price of servicing government debt will remain stable, although the cost of borrowing will increase.
In its report, Fitch Ratings also lists a number of actions that could improve or worsen Andorra’s future ratings.
Greater economic diversification, the implementation of structural reforms to improve the business sector, or further integration into the European Union, would be actions which they consider would be appropriate to improve the country’s economic resilience and its rating.
On the other hand, a bad situation in the banking sector (which would trigger negative effects on the economy and on public finances), or the growth of public debt, would be factors that could cause Andorra to lose its A- rating.
A second rating agency has also upgraded Andorra’s rating from BBB/A-2 with a positive outlook (in January) to BBB+/A-2 with a stable outlook (in July 2022).
Standard & Poor’s has also revised its growth forecast from 4.5% to 4.7%, thanks to the good winter tourist season and thanks to the construction sector. It expects the tourism sector to reach pre-pandemic levels in terms of arrivals of visitors this year.
The growth in the first quarter of 2022 has led to a reduction in the budget deficit and a recovery of the economy. This will lead to a declining public debt-to-GDP ratio and an improvement in the budgetary balance.
Regarding the rate of unemployment, Standard & Poor’s considers that in 2023 it will again be similar to the rate prior to the coronavirus pandemic, and stresses that the rate is much lower than the median for European countries.
The Agency points out that Andorra’s entry into the IMF in October 2020 is a factor which contributes to the country’s economic resilience. Another element which it identifies as positive is the expansion of sources of financing, thanks to financial diversification. This will help to delay the average maturity of the debt. It also takes into account the constitution of international reserves and, finally, it points to the importance of reaching an association agreement with the European Union.
Despite the geopolitical situation and the effects of the COVID-19 pandemic crisis, the agencies Fitch Ratings and Standard & Poor’s have upgraded Andorra’s rating in only six months. An encouraging outlook which predicts a prosperous future for our little country.