From ‘BB-‘ to ‘BB’: What lies behind Albania’s new Credit Rating?

Standard & Poor’s decision to upgrade Albania’s credit rating from “BB-” to “BB” represents an important development for public finances and capital markets. On the surface, this signals an improvement in macroeconomic stability, debt management, and confidence in the country’s economic institutions. However, this rating should not be interpreted as absolute evidence of economic progress. It requires critical analysis, taking into account the methodology used, the motives behind the rating, and the real implications for the Albanian economy.

Credit rating agencies such as S&P use a methodology based on macroeconomic and fiscal indicators to assess a country’s ability to meet its financial obligations. For Albania, several key elements played a role in this rating upgrade:

1. Reduction of Public Debt

In recent years, Albania has demonstrated improvement in managing public debt. From a level above 80% of GDP in 2020, debt has been reduced to a range between 60–65% by 2024. This is a considerable achievement, especially given the pressure of past economic crises and the effects of the pandemic.

However, although the debt-to-GDP ratio has declined, it remains high compared to the average of countries with the same credit rating. Moreover, a significant portion of this debt is denominated in foreign currency, making Albania vulnerable to exchange rate fluctuations and external shocks. In the case of a leke depreciation or an international financial crisis, the debt burden could increase substantially.

2. Stable Economic Growth

Albania’s economy has shown stable growth rates of over 3% in recent years. This growth has been primarily driven by tourism and the construction sector, both of which have contributed notably to GDP and public revenues.

Nonetheless, reliance on these sectors carries significant risks. Tourism is a cyclical industry and highly sensitive to external factors such as geopolitical crises or climate change. Construction, on the other hand, has benefited from remittances and real estate speculation, but the lack of a broad industrial and technological base leaves little room for sustainable long-term growth.

3. Foreign Direct Investment (FDI)

Albania has maintained a stable level of foreign direct investment, particularly in sectors such as energy and infrastructure. This is a positive indicator for economic stability and development prospects.

However, it should be noted that a significant portion of these investments comes through Public-Private Partnership (PPP) projects, which, although they bring in foreign capital, also create a considerable future financial burden on the state budget. If not managed carefully, these projects could worsen the country’s long-term fiscal situation.

Subjective Factors and Political Influence in S&P’s Rating

In addition to objective indicators, rating agencies often consider subjective factors such as perceptions of political stability and commitment to structural reforms.

Perception of Reforms
S&P’s rating is based on the assumption that Albania is progressing with economic and financial reforms. The government has announced plans to improve tax administration, reduce fiscal evasion, and strengthen public institutions. However, these reforms are still in early stages, and their results are not yet evident.

Another influencing factor may be Albania’s EU integration prospects. The negotiation process creates a more favorable climate for investors, impacting perceptions of the country’s stability.

Interest of International Investors
An improved rating makes it easier for the Albanian government to issue debt in international markets at lower interest rates. However, this primarily benefits the government rather than the citizens, as it can lead to increased borrowing without effective use of the funds.

In the past, Albania has used borrowing mainly to cover budget gaps rather than to finance productive projects with long-term economic impact. If this trend continues, the improved rating could merely serve as a justification for more debt, without tangible improvement in citizens’ well-being.

Important caveats for a Small Economy like Albania

For a small country like Albania, credit ratings have several significant limitations because they:

• do not reflect the real economic conditions of citizens. A higher rating does not automatically mean improved living standards or reduced economic inequality.
• are influenced by political factors and global perceptions. In some cases, ratings have been delayed or inaccurate, as seen during the 2008 financial crisis.
• can create a false sense of stability. A higher rating does not guarantee that the economy is shielded from external shocks or structural weaknesses.

S&P’s decision to upgrade Albania’s rating is a positive signal for financial markets, but it should not be interpreted as an unconditional economic success. The real benefits will depend on how the government uses this rating to strengthen the domestic economy.

If structural reforms are not deepened and the economy continues to rely on unsustainable sectors, this improvement will remain just a figure in international reports, with no tangible impact on citizens’ lives.