February 24, 2017 / 9:11 PM / 3 years ago

Fitch Revises Andorra's Outlook to Positive; Affirms at 'BBB'

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Andorra - Rating Action Report here LONDON, February 24 (Fitch) Fitch Ratings has revised the Outlook on Andorra's Long-term Issuer Default Rating (IDR) to Positive from Stable. The Long-Term IDR is affirmed at 'BBB'. Fitch has also affirmed the Short-Term IDR at 'F3' and the Country Ceiling at 'A-'. KEY RATING DRIVERS The revision of the Outlook on Andorra's rating reflects the following key rating drivers and their relative weights: MEDIUM Stronger-than-expected tax revenues in the second half of last year have boosted public finances. We estimate that the general government surplus was 3.2% of GDP in 2016, up from 1.9% in 2015. The government's 2017 budget points to a central government deficit of EUR25m, around 1% of GDP, but surpluses in the local government and social security sectors mean that at general government level we forecast a surplus of 2.5% of GDP this year and 2.3% in 2018. The general government debt ratio was 40.5% of GDP at end-2016. Debt dynamics are driven by the central government balance, as local government and social security surpluses go towards accumulating assets. Our public finance projections are consistent with the government debt ratio falling just below 40% by 2018. Large liquid assets held by the social security fund and state-owned entities mean that Andorra has a large net asset position in the public sector, estimated at 82% of GDP at end-2015. The Andorran banking sector has shown resilience against the fallout of the crisis that led to the liquidation of Banca Privada d'Andorra (BPA), the country's fourth-largest bank, in 2015. The Andorran authorities are on track to aligning regulation and information exchange with European and international standards by end-2017. From 1 January this year, the Andorran authorities have implemented regulations leading to automatic exchange of information on financial accounts between Andorra and the EU, and the exchange of information with other countries too, subject to parliamentary approval. Also from the start of the year, Andorran financial institutions and banks will adopt International Financial Reporting Standards (IFRS) for accounting purposes. Andorra's 'BBB' rating also reflects the following key rating drivers: The country's wealth (per capita income is estimated to be almost 4x the peer median), strong public finances and political stability are balanced by the economy's small size, risks associated with a large banking sector and poor data quality. Available economic data point to moderate growth in the Andorran economy. Over the first three quarters of 2016, real GDP growth was estimated to be 1%, while GDP in cash terms was 1.7% higher. This points to a slight pick-up in growth compared with 2015 (nominal GDP growth of 0.4%). Other indicators also point to strengthening economic activity. House prices stopped falling in 2016, with the average price per square metre edging up 1.2% after declining for seven out of the previous eight years. Fitch expects the recent trends in economic activity to continue, resulting in a further pick-up in economic growth this year and next, with real GDP growth of 1.5% this year and 2% in 2018. The average Viability Rating of Fitch-rated Andorran banks is 'bbb'. However, the large size of the banking sector relative to the economy (total banking assets were around 7x nominal GDP at end-2015) represents a contingent liability for the sovereign. The lack of a credible lender-of-last-resort in the Andorran financial system increases banking sector risks. In the event of a systemic banking disruption, we would expect some banking sector contingent liabilities to materialise on the sovereign balance sheet. A further tail risk is related to an outstanding lawsuit brought by BPA's former owners. Potential financial damages in case of an adverse court judgement could be around 14% of GDP. SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns Andorra a score equivalent to a rating of 'A-' on the Long-Term IDR scale. Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final Long-Term, IDR by applying its QO, relative to rated peers, as follows: - Macroeconomic factors: -1 notch, to reflect weak policy coherence stemming from a lack of a lender-of-last-resort in a small, euroised economy with a very large banking sector. Poor availability and frequency of macroeconomic data relative to peers also weigh on macroeconomic factors; - Structural factors: -1 notch, to reflect the large banking system that renders the economy and the sovereign balance sheet vulnerable to the impact of a banking crisis. Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a Long-Term IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable or not fully reflected in the SRM. RATING SENSITIVITIES The main factors that could, individually or collectively, lead to an upgrade are: -Reduced risk of contingent liabilities from the banking sector materialising on the sovereign balance sheet, for example through increased foreign ownership, improved regulation or strengthened credit fundamentals for banks; -Continued budget surpluses leading to improvements in the government's financial position; -Successful economic diversification of the economy away from reliance on tourism and financial services; - Improvements in data availability and frequency. The Outlook is Positive. Consequently, Fitch does not currently anticipate developments with a high likelihood of leading to a downgrade. However, future developments that may, individually or collectively, lead to negative rating action include: -Sharp deterioration in creditworthiness of the large Andorran banks, increasing the risk of contingent liabilities crystallising on the sovereign's balance sheet or a large adverse impact on the real economy; -Sharp deterioration in economic growth prospects, particularly if it leads to rising government indebtedness. KEY ASSUMPTIONS Fitch has not included the potential costs of financial damages from the lawsuit brought by BPA's former owners against the government in its public finances projections. Contact: Primary Analyst Alex Muscatelli Director +44 20 3530 1695 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Eugene Chiam Associate Director +44 20 3530 1512 Committee Chairperson Ed Parker Managing Director +44 20 3530 1176 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Summary of Data Adjustments For Andorra, a number of data series that normally feed into our credit analysis are not available, including the international investment position (IIP) and the balance of payments (BoP). We have therefore made the following adjustments: -Current account plus foreign direct investment: assumed to be 0% of GDP (a conservative assumption given Andorra's structural trade surplus); -External debt service: assumed to be the same as the 'BBB' median estimate for the three-year average centred on 2016 - 16.5% of current account receipts; -Share of foreign currency-denominated public debt assumed at 100% to reflect the euroised economy; -Private sector credit and broad money estimates are unavailable; we have used information from the consolidated balance sheets of Fitch-rated banks as a proxy; -Gross external debt is estimated by assuming zero non-bank private sector external debt, and estimating aggregate banks' liabilities towards non-residents as a proxy for financial sector external debt. We conservatively assume that foreign assets are zero. 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