Moody's Affirms Andorra Baa1 Rating with Positive Outlook

Moody's has affirmed Andorra's sovereign credit rating at Baa1 with a positive outlook, praising the country's strong public finances, low debt levels, and institutional framework while cautioning about vulnerabilities in the oversized banking sector.

The agency points to consolidated banking assets nearing 550% of GDP in 2025 as the main risk, noting that any crisis could spill over into broader economic activity and public finances. Progress includes enhanced supervision and a 2022 emergency liquidity mechanism, but Andorra still lacks a fully operational lender of last resort on par with eurozone standards. Recent changes to the Eurosystem repo mechanism for central banks are viewed positively, as they expand euro liquidity access and mitigate banking risks.

Economic diversification remains limited, alongside demographic strains on the pension system. Growth is forecast to moderate after 3.9% in 2025, to 2.4% this year and 1.9% in 2027, due to softer tourism, retail, and population trends. Inflation hit 4.2% in June from elevated global fuel costs and is expected to average 3.1% for 2026.

Public finances stay robust, bolstered by significant financial assets acting as a buffer. A 3.5% GDP surplus estimated for 2025 will narrow to about 1.4% this year with higher spending over the legislative term, while debt declines only modestly. Higher-than-expected revenues—driven by overall economic performance rather than tax hikes—have supported surpluses and debt reduction.

High per capita income and recent supervisory advances further underpin the outlook. Approval of the EU association agreement could catalyze diversification, resilience to shocks, and rating improvement; rejection might prompt its withdrawal. A growth slump, banking turmoil, or unaddressed pension issues could lead to a downgrade.