Moody's Upgrades Andorra's Credit Outlook to Positive, Affirms Baa1 Rating

Moody's Ratings has upgraded Andorra's credit outlook from stable to positive while affirming the long-term issuer rating at Baa1, praising better-than-expected economic performance and public finances in 2025.

The agency cited sustained fiscal surpluses averaging close to 3% of GDP in recent years, despite pandemic-related deficits, which have driven public debt down to about 31% of GDP across all administrations by the end of 2025. GDP has expanded by more than 3% annually on average over the last three years, fueled by strong tourism, retail sales and population growth that are straining public services, housing availability and infrastructure. Moody's projects surpluses around 1% of GDP for 2026-27, with debt falling to nearly 28% by 2027. Public financial assets equal to 60% of GDP offer significant protection against shocks, including banking sector risks without a full lender of last resort.

Authorities have shown a proactive reform history with forward-looking policies, though progress on pension overhaul remains comparatively slow amid political sensitivities and demographic aging pressures on health and pension costs. Moody's expects a comprehensive pension reform after upcoming elections but warns that delays or lack of a credible plan could pressure the outlook, signaling weaker institutions.

The EU Association Agreement's implementation could spur rating upgrades by enhancing economic diversification, shock resilience, institutional strength and banking stability. High per capita income, sound governance and political stability balance vulnerabilities from the economy's small scale, limited diversification and reliance on tourism and retail, which face risks from external crises, EU regulatory shifts or demand changes in neighboring markets. Failure to advance the EU deal could shift the outlook back to stable, weaken growth prospects and raise borrowing needs.

The government hailed the move as recognition of its fiscal policies and bolstered global trust, with the EU pact poised to aid diversification.

In related economic news, the IMF this week raised its 2026 GDP growth forecast for Andorra to 1.6%, up from 1.4% in October, though less upbeat than local statistics office projections of 1.7%. It anticipates inflation dropping to 1.8% by year-end after 2.7% in 2025.