The Principality of Andorra is a European microstate situated between France and Spain in the Pyrenees mountain range, it has a population of 78,015 as of 2020. The country was hit hard by the 2008 financial crisis, and also experienced a slow recovery due to a banking crisis during 2016-18. The COVID-19 pandemic has also been massively disruptive on the Pyrenean country’s economy, which saw a 10.2% drop in GDP in 2020.
Having said this, the country still has robust public finances compared to its neighbours (it will close 2021 with a debt level close to 52%) and a projected strong economic recovery ahead, with average real GDP growth of just over 3.5% for the 2021-25 period (IMF estimate).
The country’s credit profile also benefits from the high level of liquid assets that it holds (over 61% of its GDP is under the CASS – its social security body), the move to increase the average maturity of its debt (from 2.3 years at YE20 to an estimated 6.9 years by the end of this year), the definitive exit from the EU’s tax haven grey list in 2018 and its membership to the IMF (since October 2020).
Looking at its two debt instruments, the main hindering factors we observe are the much lower liquidity of Andorran bonds, large weight of the financial sector on the country’s economy (total assets from its five banking groups are 6.05x larger than the country’s GDP), the lack of a lender of last resort, which has been partially set back by its IMF membership and the lack of knowledge because it is a recent entrant in the market.
On the other hand, the lack of EU/ECB support could play it in favour of Andorran bonds, isolating them from the negative effects of possible future purchase reductions of the different ECB purchasing programmes (as they are not ECB purchase eligible). We also see its close links to the domestic financial sector playing in favour of the sovereign, as financials are one of our top plays for credit markets in 2022. Therefore, we recommend buying ANDRRA 1.7 10/2041 @ MS +110bp.