Moody’s Upgrades Andorra’s Outlook to Positive, Affirms Solid Credit Ratings

Moody’s Ratings has updated its outlook for the Government of Andorra, shifting it from stable to positive while reaffirming the country’s Baa1 long-term foreign-currency issuer and senior unsecured ratings. This enhancement signals Moody’s confidence in Andorra's economic trajectory and fiscal management. The rating agency attributes this positive outlook primarily to the potential economic and institutional benefits of Andorra’s forthcoming Association Agreement with the European Union. Set to potentially take effect by late 2027, contingent upon ratification by all EU member states and national approval via referendum, this agreement is anticipated to support greater diversification of Andorra’s economy, improve its resilience to external shocks, and enhance institutional frameworks.

Andorra’s recent economic record has been robust, with an average growth rate exceeding 3% annually over the past three years, driven predominantly by the tourism and retail sectors which comprise the backbone of its economy. The government has consistently maintained fiscal surpluses averaging around 3% of GDP in the last four years, with projections indicating a surplus of 2.1% in 2025. This fiscal prudence is reflected in the nation’s declining debt burden, as the debt-to-GDP ratio has fallen to roughly 31% by the end of 2025 from a peak near 50% during the height of the pandemic. Moody’s forecasts this ratio will further contract to approximately 28% by 2027, assuming the government successfully refinances the bond maturing in that year.

The affirmation of Andorra’s Baa1 ratings underscores its strong fiscal position marked by low government debt alongside substantial public financial assets estimated to be nearly 60% of GDP. These financial resources serve as meaningful cushions against economic or financial shocks, particularly those related to the sizeable banking sector, whose assets represent roughly 565% of GDP. Nonetheless, Moody’s highlights several persistent challenges, including the country’s lack of a comprehensive lender of last resort facility, its very small market size, limited prospects for broader economic diversification, and demographic trends that place pressure on healthcare and pension systems.

The foreign currency ceiling rating remains at Aa3, indicative of a stable institutional environment with low political risk, counterbalancing the risks posed by an economy heavily dependent on tourism and retail activities. Moody’s identifies the successful implementation of the Association Agreement with the EU as a key catalyst for a potential future upgrade in Andorra’s credit rating. Conversely, failure to achieve the agreement’s implementation could lead to a reversal of the outlook back to stable. This development highlights the importance of economic integration efforts in shaping fiscal and credit outcomes for small nations like Andorra.