Ratings:
Foreign and Local Currency: BBB/Stable/A-2

For further details see ratings list.

Overview

We expect Andorra's real GDP growth to average 1.5% over the next two 
years, following the expected economic recovery of its main trading 
partners, Spain and France.
In our view, Andorra's economic performance and sound fiscal performance 
will support continuing improvement in its net creditor position over the 
next two years.
We are affirming our 'BBB/A-2' long- and short-term ratings on Andorra.
The outlook remains stable.

Rating Action

On Jan. 19, 2018, S&P Global Ratings affirmed its 'BBB/A-2' long- and 
short-term foreign and local currency sovereign credit ratings on the 
Principality of Andorra. The outlook remains stable.

Outlook

The stable outlook reflects our expectation that, over the coming two years, 
ongoing institutional overhauls, combined with robust economic activity and 
sound fiscal outcomes, will counterbalance risks related to the large size of 
Andorra's international financial sector.

We could consider raising the ratings if:

Andorra's ongoing negotiations with the EU concluded favorably, and we 
estimated that the terms of its association agreement were favorable for 
Andorra;
Andorra strengthened its access to international institutions that could 
provide the country with emergency funding in case of any future financial
crises; or
Improved reporting of official statistics led us to conclude that the 
external position is stronger than we currently estimate.

We could consider lowering the ratings if:

The country's economy underperformed our expectations, and we expected 
structural repercussions on income levels or fiscal outcomes;
We perceived heightened risks in the country's financial sector, and we 
believed this could have a material impact on the country's economy and 
the government's fiscal prospects; or
We expected that ongoing litigation arising from the resolution of Banca 
Privada d'Andorra (BPA) could have a material impact on government 
finances.

Rationale

The affirmation reflects our expectation that Andorra's government will 
continue the successful implementation of its reform agenda, including 
gradually converging with global standards of financial reporting and 
supervision. Additionally, we expect robust economic activity, based on our 
forecasts for the economic growth of its main trading partners, Spain and 
France. That said, Andorra's large financial sector in relation to the size of
the economy and its lack of monetary flexibility offset these strengths.

Institutional and Economic Profile: Steady progress in alignment with global standards, coupled with robust economic growth

We expect the government to continue progress on its reform agenda, which 
is leading to convergence with international practices of financial 
supervision.

We forecast Andorra's real GDP growth at 1.5% on average over 2018-2019, 
based on our expectation of continued economic growth in Spain and France,
countries to which Andorra's economic activity is closely linked.

Andorra's stable and mature political institutions support generally effective
policy-making in the country. The government is making progress toward 
convergence with international financial regulation and supervision practices.
In June 2017, the OECD provisionally graded Andorra "largely compliant" with 
regard to its exchange of information standards.

The rating could benefit from the successful completion of the ongoing 
negotiations for Andorra's association agreement with the EU and the country's
accession to the International Monetary Fund (IMF). We understand Andorra 
expects to conclude negotiations with the IMF before the end of 2018. If 
concluded on favorable terms, this accession could improve the country's 
ability to avoid future financial crises or deal with their repercussions.

Andorra's GDP growth depends crucially on the cyclical position of its main 
trading partners, Spain and France. We estimate Andorra's 2017 real GDP growth
at 2%, up from an average of 1% the previous two years. In our forecast for 
2018-2019, we factor in our economic forecast for Spain and France. We expect 
real GDP growth to average about 1.5% over this period.

Three sectors dominate Andorra's economy: financial services, tourism, and 
commerce; all of them deeply interlinked and correlated. Moreover, Andorra's 
dependence on Spain is particularly acute. Spain is the main source of the 
country's visitors and the key client of its financial services. Additionally,
over half of Andorra's exports are to Spain, while 64% of its imports come 
from this partner.

Flexibility and Performance Profile: Andorra will remain a net creditor and exposed to high contingent risks

Overall, we forecast general government fiscal surpluses of about 1.3% on 
average for 2017-2021. We expect moderate central government deficits, which 
we estimate at about 0.5% of GDP for 2017-2021, and which will modestly raise 
central government debt. However, we expect this to be more than compensated 
by declining debt at the local government level. Continuous accumulation of 
social security reserves supports our forecast of Andorra's net creditor 
position at 14% of GDP by 2021.

Andorra issued €520 million in debt in 2017. The government's financial policy
focused on increasing the average life of its debt and lowering its cost. 
Average debt maturity as of October 2017 had extended to 3.8 years, from 2.9 
years in 2016, and the average cost of debt is now 1%. We estimate that the 
Andorran government's refinancing needs for 2018 amount to about €205 million 
(7% of GDP). We expect the central government will issue additional debt this 
year to roll over these debt instruments, in line with its debt-management 
strategy.

The high contingent liabilities coming from Andorra's large financial sector 
limit our debt assessment. As of October 2017, assets under management 
represented 17.4x our estimated 2017 GDP, while deposits were about 4.1x GDP. 
Following the collapse of BPA in 2015, the financial sector has stabilized.

In our view, any potential banking crisis could have repercussions for the 
country's budget and potentially lead to debt accumulation. Moreover, the BPA 
resolution process remains subject to litigation, which we understand could 
impose costs on the government in the case of an adverse court ruling.

We continue to consider that Andorran banks' very large size and international
expansion expose the Andorran government to high potential contingent 
liabilities. Financial institutions' claims on the resident nongovernment 
sector, at about 170% of 2016 GDP, are among the highest of the sovereigns we 
rate. Andorra's financial sector contributes about 20% of total GDP and 
approximately 5% of salaried employment (at year-end 2016), which highlights 
the country's vulnerability to any potential turbulence in this sector.

Andorran authorities and banks continue improving risk-management policies and
oversight, while supervisors (Institut Nacional Andorrà de Finances) and the 
financial intelligence unit (Unitat d'Intel·ligència Financera d'Andorra) have
expanded their resources. Banks are adopting International Financial Reporting
Standards-9 (IFRS-9) from 2018 to make their financial reports comparable with
international peers'.

In our view, convergence with international norms and transparency standards 
will tend to lower the risk arising from the banking sector. At the same time,
we believe it may test the business model of Andorra's banks, which will have 
to compete on an even field with much larger global players.

Despite improving standards, we continue to view the international footprint 
of Andorran banks as a potential source of risk. We estimate the banks' 
activity outside Andorra is continuing to grow as a proportion of the total 
banking sector.

Our view of Andorra's creditworthiness remains constrained by the country's 
lack of an independent monetary policy, given its use of the euro as the 
official currency since 2011. While Andorra lacks a lender of last resort, we 
recognize that Andorran banks have indirect access to liquidity from the 
European Central Bank through their subsidiaries in the eurozone.

Because of a lack of sufficient external data, we evaluate Andorra's external 
position starting from our view on Spain, the country to which its economy is 
most closely tied, and we then adjust our view to reflect the lack of data. We
understand the Andorran statistics agency is actively working to produce 
external data. On Nov. 30, 2017, Andorra's parliament approved the Law of 
Statistic Plan for 2018-2021, with specific targets in data production from 
2018.

Key Statistics

Table 1

Ratings Score Snapshot

Table 2

Related Criteria And Research

Related Criteria

Criteria - Governments - Sovereigns: Sovereign Rating Methodology - 
December 18,2017
General Criteria: Methodology: Criteria For Determining Transfer And 
Convertibility Assessments - May 18,2009
General Criteria: Use Of CreditWatch And Outlooks - September 14,2009
General Criteria: Methodology For Linking Long-Term And Short-Term Ratings
 - April 07,2017

Related Research

Global Sovereign Rating Trends 2018 - January 10, 2018
Sovereign Ratings History - January 05, 2018
Banking Industry Country Risk Assessment Update: January 2018 - January 
04, 2018
Credit FAQ: What's New In S&P Global Ratings' Updated Sovereign Rating 
Methodology? - December 18, 2017
Sovereign Risk Indicators - December 14, 2017. An interactive version is 
also available at http://www.spratings.com/sri.
Credit Trends: 2016 Sovereign Ratings Update: Outlook And CreditWatch 
Resolutions – April 18, 2017
Default, Transition, and Recovery: 2016 Annual Sovereign Default Study And
Rating Transitions - April 3, 2017
Sovereign Debt 2017: Global Borrowing To Drop By 4% To US$6.8 Trillion – 
February 23, 2017

In accordance with our relevant policies and procedures, the Rating Committee 
was composed of analysts that are qualified to vote in the committee, with 
sufficient experience to convey the appropriate level of knowledge and 
understanding of the methodology applicable (see 'Related Criteria And 
Research'). At the onset of the committee, the chair confirmed that the 
information provided to the Rating Committee by the primary analyst had been 
distributed in a timely manner and was sufficient for Committee members to 
make an informed decision.

After the primary analyst gave opening remarks and explained the 
recommendation, the Committee discussed key rating factors and critical issues
in accordance with the relevant criteria. Qualitative and quantitative risk 
factors were considered and discussed, looking at track-record and forecasts.

The committee agreed that the key rating factors were unchanged.

The chair ensured every voting member was given the opportunity to articulate 
his/her opinion. The chair or designee reviewed the draft report to ensure 
consistency with the Committee decision. The views and the decision of the 
rating committee are summarized in the above rationale and outlook. The 
weighting of all rating factors is described in the methodology used in this 
rating action (see 'Related Criteria And Research').

Ratings List

                                           Rating                             
                                           To                 From            
Andorra (Principality of)
 Sovereign Credit Rating                                                      
  Foreign and Local Currency               BBB/Stable/A-2     BBB/Stable/A-2  
 Transfer & Convertibility Assessment      AAA                AAA             

Certain terms used in this report, particularly certain adjectives used to 
express our view on rating relevant factors, have specific meanings ascribed 
to them in our criteria, and should therefore be read in conjunction with such
criteria. Please see Ratings Criteria at www.standardandpoors.com for further 
information. Complete ratings information is available to subscribers of 
RatingsDirect at www.capitaliq.com. All ratings affected by this rating action
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