Despite the global geopolitical context, Fitch Ratings has maintained Andorra’s A- rating with a stable outlook – the same rating and outlook that the Principality received in July 2022. In its latest assessment (at the end of April), the agency positively assessed factors such as last year’s growth in GDP, efficient debt management and the resilience of Andorra’s banking sector, among others. And in some cases, Andorra outperforms other countries rated at the same level, as we show below.
Table of contents:
- GDP growth above the forecast
A prudent fiscal policy with sound foundations
Reduction of public debt
Resilience of the banking sector
Rising prices and increase in the CPI
Factors that could change the assessment of Fitch Ratings
What does the ‘A’ rating indicate?
- GDP growth above the forecast
One of the factors contributing to the maintenance of the rating of the previous report has been the Principality’s good economic growth over the past two years. It closed 2022 with a GDP of 8.8% and 2021 with a GDP of 8.3%, exceeding the pre-pandemic level of 2019. Construction and tourism were the key sectors driving this growth. However, given the current situation, the agency expects real GDP growth to reach 1.2% in 2023. The Andorran economy will slow down due to high inflation rates, which will result in economic growth below that of its main trading partners. On the other hand, the evaluators have also taken into account that a surplus of almost 3% of GDP was achieved in 2022, and they forecast a surplus of 1.7% in 2023.
It also appears that overall expenditure has been lower than budgeted. However, additional resources had to be devoted to measures to cope with the rising cost of living and to contain the loss of purchasing power due to the sharp rise in inflation. On the other hand, the unemployment rate has been low and the resources used to cope with the pandemic proved to be fewer than expected.
Among the factors that could have a negative impact are the size of the Andorran economy, its limited diversification and the dependence of the GDP on the banking sector.
The report highlights the fact that Andorra’s credit profile is above the average for countries in category A, as its general government debt is lower. It has fallen to 39.4% of GDP (at the end of 2022), compared with 48.5% in 2021. This is also well below the average for category A countries, which is 50.8% (in 2022). Fitch Ratings’ forecast for the Principality is that public debt will continue to decline, but at a slower pace due to slower economic growth. The report points out that Andorra’s financing costs remain stable, and that the country is not expected to need to seek external refinancing until 2027.
The assessment highlights capital and liquidity ratios that exceed requirements, and also the fact that profitability is higher than in the pre-pandemic years. Although loans are mainly for property, and interest rates are rising, they would have to be sustained because of population growth and the limited supply of housing.
Another factor mentioned in the report is the recent movements in the capital markets, which in principle will not affect Andorran banks, as they are not dependent on them.
If you would like to know more about Andorra’s banking sector, don’t miss our article:
How Andorra’s banking system works: the keys to understanding Andorran banking.
On the negative side, Fitch Ratings highlights the Principality’s dependence on imported goods, which makes prices more exposed to external inflation. The food sector is one of the most important and has seen the largest increase in prices. As a result, it has contributed to the rise in the CPI. The inflation forecast for 2023 is 5.3%, down from 6.2% in 2022.
The report assesses current economic and fiscal policies, highlighting the need to implement measures to make housing affordable and to reform pensions. As noted in the previous assessment, economic growth would be improved by reforms to stimulate the business environment and measures to promote economic diversification.
Finally, the report highlights some elements that could affect the rating negatively. A disruption of Andorra’s banking sector would have a negative impact on economic performance and public finances, given its size and its contribution to GDP. And if public debt were to increase in the face of an economic shock, public finances would also be at risk.
For Fitch Ratings, an ‘A’ rating indicates a low expected risk of default. It means that the ability to honour financial commitments is considered strong. However, this rating may indicate more vulnerability to adverse economic conditions than do higher ratings.
The agency uses categories from AAA (the highest) to D (the lowest) for its ratings. Ratings from AAA to BBB indicate investment grade and those from BB to D indicate speculative grade.
On balance, the assessment is positive.
Andorra has made every effort to strengthen itself in the aftermath of the pandemic. It has taken measures to stem the loss of purchasing power due to rising inflation and has created new laws to diversify and stimulate the economy.
Thanks to these policies, the July 2022 rating and the one ratified by Fitch Ratings in April were the highest that Andorra has ever achieved. For more details, you can read our article about this here: Fitch Ratings upgrades Andorra to an A- rating. The Principality has been regularly rated since 2016, starting with a BBB- rating and gradually improving its creditworthiness.
This prestigious rating agency also maintains the BBB+/A-2 rating it awarded the country in July, but improves the outlook from stable to positive.
The reasons on which S&P bases its decision are the return to fiscal surpluses after the pandemic and the reduction in debt as a percentage of GDP, which is expected to be sustained until 2026. Also relevant have been the policies applied for the recovery of macroeconomic stability, which have allowed the country to resist despite the energy crisis. In this regard, it highlights how the Andorran government has implemented measures to strengthen the financial sector and pension reform.
For Standard & Poor’s, the negotiation of the Association Agreement, which will strengthen the Andorran financial sector, has also been important. To this must be added the improvement in the production of statistical data that allows for more reliable external data, a fact that strengthens confidence in Andorra’s external position. These data have also shown a surplus in the current account.