News on Croatia’s latest credit rating.
Fitch Ratings Agency confirmed on Friday the current Croatian long-term credit rating in foreign currency at “BB” and in local currency at “BB+”, maintaining a negative outlook. The similar decision was made two weeks ago by Standard & Poor’s agency. Explaining its decision, Fitch said that the rating reflects the balance between high public and external debt, large fiscal deficits and low growth on the one hand, and quite favourable structural features on the other hand, reports N1info on January 30, 2016.
Gross general government debt reached 89 percent of GDP in 2015, which is well above the average of 43.6 percent in the other countries with the “BB” rating. Fitch expects further growth of the debt and its peak at 92.4 percent in 2017. However, structural features, including per capita income, human resource development and management indicators, are significantly above the average in comparable countries.
The new coalition government made up of HDZ and the new pro-reform party MOST has announced the reduction of public debt and reforms which should remove many structural barriers to growth, which have already been identified by the European Commission. “However, there are doubts about the ability of the government to achieve these goals and the unity of the coalition. In addition, the new technocratic Prime Minister Tihomir Orešković has no experience in Croatian politics”, says Fitch.
The agency estimates that the general government deficit in 2015 was reduced to 5.0 percent of GDP, compared to 5.6 percent in 2014, mainly due to stronger revenue growth based on the economic recovery. But, there is a large degree of uncertainty regarding fiscal estimates for 2016 and 2017 due to the arrival of the new government.
At present, there is no overall budget for 2016, and its draft should be presented to the Parliament by the end of March. According to the latest convergence program from April 2015, the government is committed to correcting the excessive deficit below 3 percent of GDP by 2017. “The new government has announced plans to reduce the share of the deficit by 1.5 percentage points this year, but this seems optimistic. Fitch’s baseline scenario is that the fiscal deficit in 2016 will be reduced to 4.5 percent of GDP, and to 4 percent in 2017”, says the agency.
Fitch estimates that in 2015 the economy grew by 1.7 percent, after six years of recession. Growth was driven by strong tourist season and by increase in real incomes, thanks to the reduction of income tax and low oil prices. Fitch estimates that this year the economy will grow by 1.4 percent and in 2017 by 1.8 percent, while tourism should remain an important driver of growth, thanks to increased political and security risks in many competitive markets.
Oil prices will remain low, which will support real income growth, while the labour market should continue to recover. However, high levels of corporate debt which exceed 100 percent of GDP prevent recovery of investment growth and hinder the redirection of resources into more productive parts of the economy, warns Fitch.
Fitch notes that “negative” outlook reflects the risks which could lead to a reduction in the credit rating, which could be a further escalation of public debt to GDP ratio. On the other hand, Fitch could increase the outlook to “stable”, if there is progress in fiscal consolidation which would lead to greater confidence that the ratio of public debt to GDP will stabilize in the medium term. Fitch further noted that the stability of the monetary and exchange rate policy should remain intact, which would minimize risks to the public, corporate and household sectors.
Croatian “BB” rating in foreign currency by Fitch is two notches below investment level. S&P agency has the same rating for Croatia, as well as a negative outlook, while Moody’s keeps Croatian rating one notch below investment level, also with a negative outlook.
