Fitch confirms Andorra’s ’A-’ rating with stable outlook

Investing.com -- Fitch Ratings has reaffirmed Andorra’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ’A-’ and maintained a Stable Outlook. The decision was announced on Friday, April 4, 2025, from Frankfurt am Main.

Fitch’s decision is based on several key factors. Andorra’s credit profile is strengthened by a GDP per capita and governance indicators that surpass the median for ’A’ category peers. The country has a prudent fiscal framework that has sustained fiscal and macroeconomic stability despite external challenges. Strong financial buffers and a public debt-to-GDP ratio below the ’A’ category median further support the rating.

Andorra’s economy expanded by 3.4% in 2024, up from a 2.6% increase in 2023. The primary drivers of GDP growth in 2024 were the construction and financial services sectors as tourism activity returned to normal post-pandemic. The service-dominant economy has limited direct exposure to the global trade war due to its lack of large-scale manufacturing or goods exports typically affected by tariffs.

However, Andorra’s reliance on imports exposes it to external developments of key trading partners, particularly through prices. Imported goods and services constitute about 46% of the CPI basket.

Andorra’s growth is projected to slow to 1.8% in 2025 and 1.5% in 2026. The country’s small domestic market, limited economic diversity, tight labor market, and aging population pose challenges to potential growth.

Andorra’s fiscal metrics are strong. The national fiscal framework has a central government debt ceiling of 40% of GDP and a deficit limit of 1% of GDP, which has anchored fiscal credibility. Andorra’s competitive tax economy makes major tax reform unlikely. Central government fiscal deficits are expected to average 0.5% of GDP in 2025 and 2026, reflecting increased public investment in transport infrastructure, public housing, and healthcare.

At the end of 2024, Andorra’s general government debt ratio was 33.2% of GDP, below the ’A’ category median ratio of 57.4%. It is projected to gradually decline to 30.8% of GDP by 2026. The country has no external financing requirements until February 2027, when a EUR500 million Eurobond matures.

Long-term debt sustainability is challenged by demographic pressures and rising age-related spending. However, strong immigration-driven population growth has deferred deficits in the public social security fund until after 2026. Pension reform remains a key government priority, with a consensus to outline a reform strategy this year.

The Association Agreement (AA) between Andorra and the EU is pending approval by the EU Council. If approved, Andorra plans to present the AA for a national referendum. Fitch believes the AA will facilitate Andorra’s further integration into the EU internal market, expand export opportunities and potentially support economic diversification over the medium to long term.

Andorra’s banking sector is large, with consolidated assets close to EUR19 billion or 5x GDP, but the banks maintain satisfactory capital and liquidity buffers over requirements. The latest assessment by the Andorran Financial Authority indicates the sector’s credit-to-GDP gap as below long-term trend but set to turn positive by end 2025.

Andorra has a high ESG Relevance Score of ’5[+]’ for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption. These scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in Fitch’s proprietary Sovereign Rating Model (SRM). Andorra has a high WBGI ranking at 89.6 percentile, well above the ’A’ median, reflecting strong institutional capacity and effective rule of law.

Fitch has outlined several factors that could lead to a negative or positive change in Andorra’s rating. A severe shock to the banking sector that would result in significant spillovers to Andorra’s economic performance and public finances could lead to a downgrade. A material increase in the government debt ratio could also lead to a negative rating action. On the other hand, an improvement in growth potential or a material decline in general government debt or reduction in contingent liability risks could lead to a positive rating action.

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