11 - February / 2019

Fitch Ratings highlights Andorra's sovereign debt reduction, balanced public finances and moderate GDP growth

Fitch Ratings has reaffirmed Andorra's rating in BBB + and a stable outlook. The evaluators have confirmed the improvement of the last evaluation and emphasizing the acceleration that is being carried out from the Principality in the alignment with the international standards of financial regulation and fiscal transparency. The agency highlighted Andorra's exit from the EU list of non-cooperative tax jurisdictions.

In his eighth assessment, Fitch points out the reduction of the Principality's sovereign debt, as well as the balance of public finances and moderate GDP growth. It also stresses the improvement in the flexibility of financing and the fact that public debt bonds are replacing bank financing. In addition, the evaluators forecast debt stability over the next two years based on balanced government finances, sustained surpluses and moderate GDP growth.

The agency highlights the solidity of Andorra's economic activity in 2018, the growth in the number of tourists, as well as the construction sector and the financial services sector. It also points to a 2.5% increase in the average wage, while the increase in the CPI was only 0.7%.

The steps taken to align the country in the regulatory environment, especially in the financial sector, with the adaptation to international and European standards, such as the adoption of international standards of transparency and exchange of tax information, are also considered positively. In this sense the agency refers to the introduction of Basel III capital standards, in addition to the prior adoption of IFRS accounting standards, which will stabilize the financial market. The note also refers to the entry into force last month, within the framework of Andorra's Monetary Agreement with the EU, of the Solvency, Liquidity and Prudential Supervision of Banking Institutions and Investment companies.

The agency insists the weight of the financial system in the economy is a risk and the lack of a lender of last resort restricts options in crisis situations and increases the risks of the banking sector.
Fitch Ratings points out some factors that could lead to an increase in the rating in future evaluations, such as the reduction in the risk of contingent liabilities in the banking sector, the improvement in the quality and frequency of the available data, continuous decreases in public debt in relation to GDP, or the improvement in medium-term growth prospects.

At the same time, it warns the potential increase in government’s debt or a deterioration in the solvency of the large Andorran banks, that could lead to a worsening of the country's ratings.

In general, Fitch Ratings indicates that the country's economic capacity, the soundness of public finances and the political stability of Andorra are balanced by the small size of the economy and the weight of the financial sector. The evaluators expect continuity in efforts to align with international standards, and in general macroeconomic policy, after the April elections.

Text: Govern d’Andorra