Economic Conditions Andorra

Overview

Andorra is a small landlocked country in Western Europe, located in the eastern Pyrenees Mountains and bordered by Spain and France. The mainstay of the country's economy is tourism, which accounts for about 80 percent of GDP. About 9 million tourists -- drawn to the country's duty-free status and its summer and winter resorts -- visit Andorra on an annual basis. Andorra's banking sector also enjoys a tax-haven status. With only two percent of its land being arable, agricultural production is limited and Andorra needs to import most food. The livestock sector includes raising sheep, cattle, goats, and horses while the country's manufacturing sector mainly consists of cigarettes, cigars, and furniture.

Andorra lacks a currency of its own and had used that of its two surrounding nations prior to 1999 - the French franc and the Spanish peseta, which have since been replaced by a single currency, the euro. In 2011, the government signed a monetary agreement with the European Union, which officially authorizes the use of euro and issuance of euro coins by Andorra but does not grant Andorran banks direct access to European Central Bank financing facilities. It appears that many Andorrans support the government's reform initiatives and believe the country must, to some degree, integrate into the European Union in order to continue to enjoy its prosperity. Andorra is a member of the EU Customs Union and is treated as an EU member for trade in manufactured goods (no tariffs) and as a non-EU member for agricultural products.

Given its high dependence on tourism, Andorra's economy was significantly affected by the global economic crisis with real GDP growth turning negative in 2009. Slower growth in Spain and France has further stalled Andorra's prospects. In 2010 and 2011 a drop in tourism led to a contraction in GDP and a deterioration of public finances, prompting the government to implement several austerity measures. In December 2011, ratings agency Standard & Poor's affirmed its long-and short-term sovereign credit ratings on Andorra at A/A-1. The agency said that while Andorra faces economic challenges, it has a relatively prosperous economy and budgetary consolidation is ongoing. S&P also noted that the government has also proposed key economic, fiscal and monetary reforms, including the introduction of a corporate income tax and VAT. Looking ahead, S&P said Andorra's outlook was negative, mainly because of the weak economic environment that Europe as a whole was facing.

To bring in new revenue and diversify future sources of economic growth, the government approved in July 2012 a new foreign investment law opening investment to foreign capital. Once implemented, it was hoped the new legislation would diversify the economy. In December 2012, ratings agency Standard & Poor's lowered its long-and short-term sovereign credit ratings on Andorra. Its outlook on the country remained negative. The agency said it expected Andorra's growth outlook to remain weak due to declining domestic demand and key trading partners' difficult economic environments. The Andorran economy contracted in 2012 - the fifth consecutive year of negative growth. Meanwhile, unemployment was up about 14 percent since 2006 with the construction sector particularly hard hit.

In June 2013, the Andorran government unveiled plans to introduce a personal income tax for the first time. The move was in response to pressure from its European neighbors to combat tax evasion. EU finance ministers had agreed to start talks with Andorra - along with Switzerland, Liechtenstein, Monaco, and San Marino - on swapping bank account information.

Then, in June 2014, Fitch Ratings said it expected Andorran GDP would start growing moderately in 2014. Fitch also said it expected pressure on banks' asset quality to ease, but that asset quality ratios would likely deteriorate further, albeit at a significantly slower pace.

In March 2015, Andorra was embroiled in a shocking bank scandal. Banca Privada D'Andorra (BPA), was declared a "foreign financial institution of primary money laundering concern" by the United States. This designation came alongside accusations that the bank had processed funds linked to criminals in Russia, China and Venezuela, according to the Financial Times.

"The country is shocked," Xavier Cornella, head of the Association of Andorran Banks (ABA), was quoted by FT as saying. "We are not accustomed to this sort of thing. It's incredible, unbelievable. This is a quiet country, a working country."

Later in the month, Andorra imposed a 2,500 euros per week withdrawal limit on depositors in BPA, which it took under state control following the allegations that the bank had laundered money for international criminal organizations including Venezuelan gangs defrauding state-owned oil companies. Meanwhile, Standard & Poor's cut Andorra's credit rating to two levels above junk citing "uncertainty" over the implications of scandal for Andorra's banking system and finances.

According to Reuters, Standard & Poor's said the problems at BPA - a lender which it said represented about a fifth of all assets and liabilities in the Andorran banking system - could strain national finances.

In March 2016, Fitch Ratings affirmed Andorra's long-term foreign currency Issuer Default Rating (IDR) at 'BBB' with a stable outlook.

The Andorran authorities intervened swiftly to address the scandal and to assure stakeholders of confidence in the Andorran financial system. The authorities accelerated legislation of the EU's bank resolution and recovery directive, applying it to BPA. In February 2016, the U.S. Department of Treasury said it withdrew a finding that the Andorran bank, BPA, was a conduit for laundering money. The Treasury's Financial Crimes Enforcement Network, or FinCEN, said it withdrew a finding against BPA, saying it "no longer operates in a manner that poses a threat to the U.S. financial system," according to the Wall Street Journal. So by early 2016, the BPA crisis appeared to have had a limited adverse impact on the viability of the other three large domestic banks.

In April 2016, for the first time ever, the country introduced an income tax. While it was at a lower rate than in many EU countries, it was still an important move. Overall, the economy grew by an estimated 1.2 percent in 2016, and was projected to grow by 1.6 percent in 2017.

In July 2017, Bloomberg reported that Andorran private bank Andbank was hoping to expand its business in Brazil. It also was growing its Latin America private-banking business in Miami in 2017, with the goal of targeting wealthy Brazilians living in the Florida city. Then in August 2017, Fitch Ratings affirmed Andorra's long-term foreign-currency Issuer Default Rating (IDR) at 'BBB' with a positive outlook. The agency said the country's wealth, relatively strong public finances and political stability were balanced by the economy's small size ($2.9 billion in 2016), the risks associated with a large banking sector and weak economic data quality.

Officials have introduced legislation implementing EU directives on prevention of money-laundering and terrorist financing, the incorporation of the recommendations of the Financial Action Task Force on Money Laundering (FATF), as well as regulatory provisions for insurance and reinsurance companies. The coverage of the criminal law code has also been expanded to cover tax offenses.

In November 2017, US News & World Report said that Andorrans often ranks highest in life expectancy at an average of 81.2 years, according to data by the Institute of Health Metrics and Evaluation. Meanwhile, the World Health Organization said Andorrans live to an average of 83 years, while children below 5 years of age face only a 2.8 percent probability of death.

In January 2018, Standard & Poor's said it expected Andorra's real GDP growth to average 1.5 percent over the following two years, following the expected economic recovery of its main trading partners, Spain and France. At the same time, S&P affirmed its BBB/A-2 long-and-short term ratings on the country with a stable outlook.

In its view, Standard & Poor's said that Andorra's economic performance and sound fiscal performance would support continuing improvement in its net creditor position over the following two years.

In February 2019, the government of Andorra announced that it would implement blockchain technology in the country's higher education system. The goal was to create "a more secure registry processes, wherein academic degree data recorded via blockchain becomes harder to tamper with," according to CoinTelegraph.

Then in August 2019, Andorra Telecom entered into partnership with Spanish digital economy-focused nonprofit Alastria "to integrate blockchain technology into its internal processes," Spanish-language news outlet Diari d'Andorra reported as cited by CoinTelegraph.

In late April 2020, S&P revised its outlook for Andorra to stable from positive as the coronavirus pandemic caused deficits to spike, which was expected to lead to a "substantial rise" in government debt. The agency projected that Andorra's economy would contract in 2020, before recovering in 2021.

By July 2020, Fitch Ratings had affirmed Andorra's long-term foreign-currency Issuer Default Rating (IDR) at 'BBB+' with a stable outlook. This was based on Fitch's expectation that Andorra's public debt ratio, which was relatively low at the onset of the pandemic, would stabilize in 2021 at a level still below the 'BBB' peer median, and return to a downward trajectory over the medium term.

Overall, the country was projected to experience a deep recession in 2020. Specifically, Fitch forecast real GDP to contract by 11.4 percent in 2020 from 1.8 percent growth in 2019.

The agency noted: "We expect GDP to recover only gradually as the pandemic will continue to weigh on growth prospects in neighbouring countries and tourism inflows. Under our baseline scenario, the economy will recover to 4.3% in 2021 and 3.4% in 2022. However, the recent resurgence of the coronavirus in Catalonia pose downside risks to the outlook, and uncertainty around Andorra's growth trajectory remains high."

As a result of virus containment measures, particularly border closures by Spain and France, the number of visitors to Andorra dropped by a staggering 71 percent in the second quarter of 2020, according to Fitch.

Updated in 2020

Supplementary Sources: International Monetary Fund, Financial Times, CoinTelegraph, US News & World Report, Standard & Poor's, Bloomberg, Wall Street Journal, BBC News and Reuters

Special Entry

Summary of 2008 credit crisis

A financial farrago, rooted in the credit crisis, became a global phenomenon by the start of October 2008. In the United States, after failure of the passage of a controversial bailout plan in the lower chamber of Congress, an amended piece of legislation finally passed through both houses of Congress. There were hopes that its passage would calm jitters on Wall Street and restore confidence in the country's financial regime. With the situation requiring rapid and radical action, a new proposal for the government to bank stakes was gaining steam. Meanwhile, across the Atlantic in Europe, a spate of banking crises resulted in nationalization measures for the United Kingdom bank, Bradford and Bingley, joint efforts by the Netherlands, Belgium and Luxembourg to shore up Fortis, joint efforts by France, Belgium, and Luxembourg to shore up Dexia, a rescue plan for Hypo Real Estate, and the quasi-bankruptcy of Iceland's economy. Indeed, Iceland's liabilities were in gross excess of the country's GDP. With further banks also in jeopardy of failing, and with no coordinated efforts to stem the tide by varying countries of the European Union, there were rising anxieties not only about the resolving the financial crisis, but also about the viability of the European bloc.

On Sept. 4, 2008, the leaders of key European states -- United Kingdom, France, Germany, and Italy -- met in the French capital city of Paris to discuss the financial farrago and to consider possible action. The talks, which were hosted by French President Nicolas Sarkozy, ended without consensus on what should be done to deal with the credit crisis, which was rapidly becoming a global phenomenon. The only thing that the four European countries agreed upon was that there would not be a grand rescue plan, akin to the type that was initiated in the United States. As well, they jointly called for greater regulation and a coordinated response. To that latter end, President Nicolas Sarkozy said, "Each government will operate with its own methods and means, but in a coordinated manner."

This call came after Ireland took independent action to deal with the burgeoning financial crisis. Notably, the Irish government decided days earlier to fully guarantee all deposits in the country's major banks for a period of two years. The Greek government soon followed suit with a similar action. These actions by Ireland and Greece raised the ire of other European countries, and evoked questions of whether Ireland and Greece had violated any European Union charters.

Nevertheless, as anxieties about the safety of bank deposits rose across Europe, Ireland and Greece saw an influx of new banking customers from across the continent, presumably seeking the security of knowing their money would be safe amidst a financial meltdown. And even with questions rising about the decisions of the Irish and Greek government, the government of Germany decided to go down a similar path by guaranteeing all private bank accounts. For his part, British Prime Minister Gordon Brown said that his government would increase the limit on guaranteed bank deposits from £35,000 to £50,000.

In these various ways, it was clear that there was no concurrence among some of Europe's most important economies. In fact, despite the meeting in France, which called for coordination among the countries of the European bloc, there was no unified response to the global financial crisis. Instead, that meeting laid bare the divisions within the countries of the European Union, and called into question the very viability of the European bloc. Perhaps that question of viability would be answered at a forthcoming G8 summit, as recommended by those participating in the Paris talks.

A week later, another meeting of European leaders in Paris ended with concurrence that no large institution would be allowed to fail. The meeting, which was attended by leaders of euro zone countries, resulted in an agreement to guarantee loans between banks until the end of 2009, with an eye on easing the credit crunch. The proposal, which would apply in 15 countries, also included a plan for capital infusions by means of purchasing preference shares from banks. The United Kingdom, which is outside the euro zone, had already announced a similar strategy.

French President Nicolas Sarkozy argued that these unprecedented measures were of vital importance. The French leader said, "The crisis has over the past few days entered into a phase that makes it intolerable to opt for procrastination and a go-it-alone approach."

Europe facing financial crisis as banking bail-out looms large

In early 2009, according to the European Commission, European banks may be in need of as much as several trillion in bailout funding. Impaired or toxic assets factor highly on the European Union bank balance sheets. Economist Nouriel Roubini warned that the economies of Ukraine, Belarus, Hungary, Latvia and Lithuania appeared to be on the brink of disaster. Overall, Eastern European countries borrowed heavily from Western European banks. Thus, even if the currencies on the eastern part of the continent collapse, effects will be felt in the western part of Europe as well. For example, Swiss banks that gave billions of credit to Eastern Europe cannot look forward to repayment anytime soon. As well, Austrian banks have had extensive exposure to Eastern Europe, and can anticipate a highly increased cost of insuring its debt. German Finance Minister Peer Steinbrueck has warned that as many as 16 European Union countries would require assistance. Indeed, his statements suggested the need for a regional rescue effort.

European Union backs financial regulation overhaul

With the global financial crisis intensifying, leaders of European Union countries backed sweeping financial regulations. Included in the package of market reforms were sanctions on tax havens, caps on bonus payments to management, greater hedge fund regulation, and increased influence by the International Monetary Fund. European leaders also backed a charter of sustainable economic activity, that would subject all global financial activities to both regulation and accountability by credit rating agencies.

These moves were made ahead of the Group of 20 summit scheduled for April 2, 2009, in London. It was not known whether other countries outside Europe, such as the United States, Japan, India and China, would support the new and aggressive regime of market regulation. That said, German Chancellor Angela Merkel said in Berlin that Europe had a responsibility to chart this track. She said, "Europe will own up to its responsibility in the world."

Leaders forge $1 trillion deal at G-20 summit in London

Leaders of the world's largest economies, known as the "G-20," met in London to explore possible responses to the global financial crisis. To that end, they forged a deal valued at more than US$1 trillion.

Central to the agreement was an infusion of $750 billion to the International Monetary Fund (IMF), which was aimed at helping troubled economies. Up to $100 billion of that amount was earmarked to assist the world's very poorest countries -- an amount far greater than had been expected. In many senses, the infusion of funding to the IMF marked a strengthening of that body unseen since the 1980s.

In addition, the G-20 leaders settled on a $250 billion increase in global trade. The world's poorest countries would also benefit from the availability of $250 billion of trade credit.

After some debate, the G-20 leaders decided to levy sanctions against clandestine tax havens and to institute strict financial regulations. Such regulations included tougher controls on banking professionals' salaries and bonuses, and increased oversight of hedge funds and credit rating agencies. A Financial Stability Board was to be established that would work in concert with the IMF to facilitate cross-border cooperation, and also to provide early warnings regarding the financial system.

Aside from these measures, the G-20 countries were already implementing their own economic stimulus measures at home, aimed at reversing the global recession. Together, these economic stimulus packages would inject approximately $5 trillion by the end of 2010.

United Kingdom Prime Minister Gordon Brown played host at the meeting, which most concurred went off successfully, despite the presence of anti-globalization and anarchist protestors. Prime Minister Brown warned that there was "no quick fix" for the economic woes facing the international community, but he drew attention to the consensus that had been forged in the interest of the common good. He said, "This is the day that the world came together to fight back against the global recession, not with words, but with a plan for global recovery and for reform and with a clear timetable for its delivery."

All eyes were on United States President Barack Obama, who characterized the G-20 summit as "a turning point" in the effort towards global economic recovery. He also hailed the advances agreed upon to reform the failed regulatory regime that contributed to the financial crisis that has gripped many of the economies across the globe. Thusly, President Obama declared the London summit to be historic saying, "It was historic because of the size and the scope of the challenges that we face and because of the timeliness and the magnitude of our response."

Ahead of the summit, there were reports of a growing rift between the respective duos of France and Germany and the United States and the United Kingdom. While France and Germany were emphasizing stricter financial regulations, the United States and the United Kingdom were advocating public spending to deal with the economic crisis. Indeed, French President Nicolas Sarkozy had threatened to bolt the meeting if his priority issues were not addressed. But such an end did not occur, although tensions were existent.

To that end, President Obama was hailed for his diplomatic skills after he brokered an agreement between France and China on tax havens. The American president played the role of peacemaker between French President Sarkozy and Chinese Premier Hu Jintao, paving the way for a meeting of the minds on the matter of tax havens.

French President Nicolas Sarkozy said the concurrence reached at the G-20 summit were "more than we could have hoped for." President Sarkozy also credited President Obama for the American president's leadership at the summit, effusively stating: "President Obama really found the consensus. He didn't focus exclusively on stimulus ... In fact it was he who managed to help me persuade [Chinese] President Hu Jintao to agree to the reference to the ... publication of a list of tax havens, and I wish to thank him for that."

Meanwhile, German Chancellor Angela Merkel also expressed positive feedback about the success of the summit noting that the new measures would give the international arena a "clearer financial market architecture." She noted the agreement reached was "a very, very good, almost historic compromise." Finally, Chancellor Merkel had warm words of praise for President Obama. "The American president also put his hand into this," said Merkel.

Note: The G-20 leaders agreed to meet again in September 2009 in New York to assess the progress of their agenda.

Special Entry

Update on the Euro Zone Debt Crisis

Due to its geographical location, Andorra has engaged the European Union. A customs union agreement between Andorra and the EU was reached in 1990 and implemented in 1991, and Andorra uses the euro as currency.

Accordingly, Andorra -- like many European countries -- has been affected by the situation affecting the euro zone. Specifically, the stability of the euro zone and the European Union has become a major concern in recent years, largely emanating from the Greek debt crisis, but extending regionally. Indeed, in late 2011, there were calls for serious changes to Europe's governing treaties, aimed at ameliorated economic governance for the 17 countries that make up the euro currency bloc.

Included in their proposal were: (1) the creation of a monetary fund for Europe, (2) automatic penalties for countries that exceed European deficit limits, and (3) monthly meetings of European leaders. Meanwhile, the European Stability Mechanism (ESM), which was intended to replace the European Financial Stability Facility in 2013 (an entity intended as a rescue mechanism for struggling European economies), would be advanced earlier in 2012. Ideally, the new treaty would be ratified by all 27 member states of the European Union. However, if concurrence at that level proved impossible, then the 17 states of the euro zone would have to approve it.

Special Entry

Andorra introduces income tax

At the start of June 2013, under pressure from other European countries to deal with its status as a haven for tax evasion, the government of Andorra decided to introduce personal income tax. Prime Minister Antoni Marti, the head of the Andorran government, informed French President Francois Hollande that a bill establishing income tax would be introduced for debate before the end of the month. At the time the legislation was advanced in mid-2013, no income tax was being applied to either individuals or corporations in Andorra.

Accordingly, the executive branch of Andorra was making it clear that the principality would "gradually meet international tax standards." Left unsaid was the precise understanding of the notion of "gradual" movement towards international standards. Indeed, in 2009, in response to increased scrutiny and international pressure with regard to its tax policy, Andorra had said that it would conform to international standards of tax reporting. At the time, the Andorran government said measures were being undertaken to end banking secrecy as part of its policy aimed at removing the country from the list of tax havens. But obviously, further efforts were still in the offing, as shown by this move to introduce income tax for the first time.

In the latter part of 2013, the parliament of Andorra was preparing to introduce personal income tax to ensure the country's compliance with Europe's financial system. The new tax would apply to persons living in the principality for at least 183 days in a calendar year. The first 24,000 euros of income would be tax free; the next 16,000 euros would be taxed at five percent; the balance of income exceeding that initial 40,000 euros would be taxed at ten percent -- a level still markedly less than most European countries. Prime Minister Antoni Marti hs made it clear that personal income tax would be introducted at the start of 2015, pending parliamentary approval.

Note: The issue of tax evasion has become an increasingly significant one as countries in Europe suffer from debt-GDP crises, in many cases exacerbated by tax evasion.