Moody's Ratings has changed the outlook on the Government of Albania to positive from stable and has affirmed the long-term foreign and local currency issuer ratings at B1. Concurrently, Moody's has also affirmed the foreign currency senior unsecured debt ratings at B1.

Moody's decision to change the outlook to positive reflects the possibility of a better-than-anticipated scenario for fiscal and debt metrics based on fiscal consolidation supported by the implementation of fiscal reforms. 

Positive rating momentum could also stem from higher trend growth of GDP and per-capita income than currently expected by Moody's. The implementation of further institutional reforms in the context of the EU accession process adds to upward pressure on the rating.

The affirmation of Albania's B1 ratings reflects moderate fiscal, economic, and institutional strength balanced by elevated susceptibility to event risks driven by government liquidity and banking sector risks.

The local currency country ceiling remains unchanged at Baa3. The four-notch gap with the sovereign rating reflects predictable institutions, a contained government footprint in the economy and financial system, manageable political risk, and moderate external imbalances. The foreign currency country ceiling remains unchanged at Ba2. The two-notch gap to the local currency ceiling reflects relatively weak, albeit improving, policy effectiveness and moderate external indebtedness.

The positive outlook reflects the possibility of a better-than-anticipated fiscal scenario which could result in a sustained improvement of Albania's fiscal strength. The public debt ratio turned on a sustained downward path in 2022 and fully reversed the increase of the public debt ratio over 2019-21. The positive impact of the falling debt burden on fiscal strength is softened by the weakening of debt affordability metrics. The deterioration of debt affordability is more limited than we had expected at the time of the last rating action in April 2023. Moody's expects the debt-to-GDP ratio to decrease to 56.3% in 2024 from 59.2% in 2023 and interest payments to revenue to show a gradual weakening to 8.8% in 2024 from 7.4% in 2023.

Beyond this year, Moody's expects the debt-to-GDP ratio to remain on a sustained downward path falling to below 50% in 2030 being driven by small primary surpluses and solid nominal GDP growth. Interest payments to revenue will remain roughly unchanged in 2025-26 and then turn on a downward path probably falling to 7.7% in 2030.

The decline in debt-to-GDP is driven by the interplay of cyclical and structural factors related to the ongoing implementation of fiscal reforms. These reforms include the implementation of the medium-term revenue strategy (MTRS) and enhancements to public investment management. Moody's expects the authorities to comply with the fiscal rules set in the Organic Budget Law, which includes having a nonnegative primary balance and a reduction of the public debt-to-GDP ratio each year until it reaches 45% of GDP.

Moody's sees potential upside risks to its fiscal and debt forecasts as the impact of fiscal reforms could be more sizeable than currently expected. This is mainly because the impact of the MTRS could result in a more sizeable increase in the revenue base than currently expected by Moody's. Moody expects quasi-fiscal risks related to weather-related electricity to be further lowered in the coming years because of a comprehensive power sector reform, a reduction of electrical losses and increasing domestic electricity production.