Albania leaps forward in Euromoney’s risk rankings

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By:
Jeremy Weltman
Published on:

The sovereign borrower is upgraded by risk experts as it continues along the path towards EU accession.

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Four years since Albania became a candidate for EU accession talks, the country is doing all it can to ensure that negotiations begin earnestly, with a view to joining in 2025.

Prime minister Edi Rama’s government is finally implementing the judicial reforms required for initiating those discussions, vetting judges, police officers and prison officials, and dismissing those who refuse the intrusion that is aimed at establishing their competence and integrity.

Consequently, speculation is growing the EU negotiation process will finally get under way this June, a development that is likely to underpin the trend improvement of Albanian assets alongside other countries in the region similarly targeting integration.

Improving risk

On a total risk score of just 38 points from a maximum 100 available in the survey, Albania is still a high-risk borrower within the fourth of Euromoney’s five risk categories.

However, its score and ranking have improved, pushing Albania higher to 89th out of 186 countries surveyed, above FYR Macedonia – now two places below – and with similar EU ambitions to Serbia (75th) and Montenegro (112th).

Albania would be a higher, tier-three risk were it not for concerns about non-performing loans (NPLs) in the banking system, a tricky investor climate and large public debt burden.

Exacerbated by liabilities linked to the use of public-private partnerships, and with some liabilities in arrears, the debt burden makes state-owned enterprise reforms, better debt management and tax changes urgently required.

Short-term prospects, moreover, are hindered by the winding down of large-scale energy projects potentially softening GDP growth, while the country is vulnerable to worse scenarios involving financial meltdown, political crisis or a transatlantic trade war.

However, Albania’s rise is unlikely to stop long-term.

The country is enjoying one of the fastest annual growth rates in the region – the latest figures showing 3.6% in the third quarter of 2017 – with a good deal of stability in the political and economic environment fuelling improving economic scores for the growth outlook and regulatory and policymaking environment, among others.

They are among 15 political, economic and structural factors contributing to the country risk score in Euromoney’s survey.

Credit access has similarly improved in recent years and is also factored in to the risk score – reforms to facilitate credit access are behind the improvement in Albania’s ranking for Doing Business compiled by the World Bank.

And with the economy growing, the debt burden fell to just below 70% of GDP last year, after reaching a peak of 73% in 2015, according to figures published by the Ministry of Finance – an achievement secured by a legal change passed by parliament in 2016 to make it incumbent upon government to ensure the debt falls each year, ultimately below the 60% threshold forming one of the Maastricht macro-fiscal criteria for EU membership.

This is signalling credit rating upgrades, especially since Standard & Poor’s already awards FYR Macedonia BB- while rating Albania lower on B+:

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IMF forecasts revised in February point to 3.7% GDP growth this year, with solid financing conditions thanks to low inflation and borrowing rates, and the central bank has adequate reserves covering six months of import payments.

Dimitria Rotsika, senior economist at Piraeus Bank Group, is one of several Euromoney survey contributors with a generally favourable impression of Albania’s prospects.

“The country has been showing steady signs of a strong momentum, with radical structural reforms already paving the way of a new growth model,” she says.

“The combination of relatively high economic growth in the coming few years, fiscal consolidation and correction of the banks’ NPL balances is positive for the country’s aim of future EU accession.”

Further reforms hold the key to Albania’s prospects and receiving its allocated pre-accession funding. The debt is high, and the country must continue to grow briskly, but with the political will, and EU accession targeted, the country will stay on a steadily improving trajectory.