Standard & Poor's Ratings Services has upgraded its long-term foreign and local currency sovereign credit ratings on Albania to 'B+' from 'B’ on better fiscal performance.

Albania’s short-term foreign and local currency sovereign credit ratings were affirmed at 'B', the rating agency said on February 5.

In October 2015, S&P affirmed Albania at B/B, saying it could raise the rating over the next six months on good fiscal performance and successful reviews of the International Monetary Fund (IMF) arrangement. Albania's 36-month EFF arrangement with the IMF was approved on February 28, 2014.

The outlook remained stable, S&P said in a statement, adding it also revised upward its transfer and convertibility (T&C) assessment for Albania to 'BB'.

“The upgrade reflects the rating agency’s view that Albania's fiscal performance will remain strong over 2016-2019 as authorities continue to make progress under an IMF programme that targets fiscal and structural reforms,” it said.

S&P expects Albanian general government debt to decline to under 60% of GDP in 2019 from about 70% of GDP in 2015.

Despite weaker revenue performance in 2015, the fiscal deficit, at an estimated 3.8% of GDP, outperformed expectations (4.6% of GDP) due to lower expenditures, particularly on investment projects. To improve revenue performance, the government is strengthening fiscal institutions and public-sector financial management, said the statement.

The Albanian government is also under pressure from the IMF to increase budget revenues.

The rating agency expects Albania's economy to grow by an annual average of nearly 4% over 2016-2019, with domestic demand contributing more prominently to growth performance over the next one or two years, unlike in recent years when net exports were the primary growth engine.

The Albanian government sees its economy rising by 3.4% in 2016.

“We project significant net foreign direct investment (FDI), especially in the hydropower sector and the Trans-Adriatic Pipeline project in 2016-2018," it said.

According to S&P, FDI inflows will likely fund most of Albania's large current account deficit of 11% of GDP on average in 2016-2018. Remittances are projected to remain subdued at about 7% of GDP in the next few years (compared with an average 13% of GDP over 2004-2008) due to developments in Greece, which is home to a substantial Albanian minority.

Albania's gross external financing needs are estimated at 115% of current account receipts in 2016, which are significant.

The agency assessed that Albania’s external indebtedness is relatively low as financing for the current account deficit has historically been mainly in the form of net foreign investment, particularly in the energy sector, rather than debt-creating inflows.

S&P believes that implementation of judicial reform, currently under preparation, and a successful track record in that area would be key to improving the business climate and could help Albania progress toward opening EU accession negotiations. The country was granted candidate status in 2014.

Reforms are also underway in several other areas such as pensions, local government, and energy supply.

“The stable outlook reflects S&P view of the balanced risks to the ratings on  Albania and the underlying expectation that Albania will continue to comply with its IMF EFF programme, including progress on its fiscal consolidation path,which will bring the general government debt-to-GDP ratio on a downward trajectory," the statement said.

S&P said that Albanian ratings could be raised if structural reforms established a track record of more robust fiscal institutions and strengthened economic growth prospects. A significant government debt reduction beyond current forecasts, potentially alongside higher-than-expected economic growth, would also be positive for the ratings.

However, the ratings could be lowered if, as in 2013, government finances deteriorated again, along with potential financing pressures, potentially tied to noncompliance with the conditions of Albania's IMF arrangement. A significant deterioration in Albania’s external position and ability to fund its current account deficit will also be reasons for downgrading of ratings.