The Principality of Andorra (NR/BBBpos/BBB+pos) is a European microstate situated between France and Spain in the Pyrenees mountain range. As of 2021 it had a population of 79,535. The country was hit hard by the 2008 financial crisis as well as a slow recovery due to a banking crisis in 2016-18. The COVID-19 pandemic has also been massively disruptive to the Pyrenean country’s economy, which registered a 10.2% drop in GDP in 2020.
The healthy performance of the winter tourist season in 2021-22 has led us to revise upwards our GDP growth expectations and debt dynamics for the country. Andorra is estimated to have closed 2021 with a debt-to-GDP ratio of just under 50% – more than 15 points below the BBB and A- rated country median – and this figure could fall to under 40% as early as 2025.
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 of the IMF (since October 2020).
After the EUR500mn bond issued this month and the additional EUR100mn to be issued later this year, the estimated contained budget deficits for the next three years, and given that there are no significant debt maturities until 2027, we do not expect any further issuances in the short to medium term.
Looking at Andorra’s three debt instruments, the main factors of potential concern we see relate to the much lower liquidity of Andorran bonds, the considerable weight of the financial sector in 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 offset by its IMF membership, and the lack of proven track record as it is a recent entrant to the international credit market.
On the other hand, the lack of EU/ECB support could favour Andorran bonds, isolating them from the negative effects of the termination of the ECB’s PEPP (as they are not purchase-eligible) and from the expected acceleration in tapering of APP (PSPP) net purchases that we expect to be announced by the ECB at its 10 March meeting. We also believe the close ties with its domestic financial sector could favour 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.