ZAGREB, March 16, 2018 – Croatia’s (Ba2 stable) credit profile balances its fiscal consolidation and EU membership supporting the strengthening of institutions against credit challenges which include the economy’s weak potential growth and the government’s slow pace of structural reform, reflected in weak absorption of European Union structural funds, Moody’s Investors Service said in a report on Thursday.
“Croatia’s debt-to-GDP ratio looks likely to have fallen below 80% in 2017, a year earlier than we expected and an improvement of almost four percentage points since 2016,” said Evan Wohlmann, a Moody’s Vice President — Senior Analyst and co-author of the report. “This prudent budget performance allowed Croatia to exit the EU’s Excessive Deficit Procedure in June last year and supports our view that the sovereign will be able to maintain fiscal deficits below 3% going forward.”
Moody’s expects Croatia’s growth to remain robust in 2018, decelerating slightly to 2.7%, in line with the second half of 2017, moving closer to Moody’s medium-term forecasts of 2%-2.5% GDP growth. Nevertheless, the potential for a disorderly restructuring of Agrokor d.d., Croatia’s largest private company, will continue to pose material downside risks to the economy.
“Domestic demand will remain the key driver of economic growth, with private consumption supported by further improvements in the labour market, wage rises and a robust consumer confidence,” the rating agency said.
“Croatia’s susceptibility to event risk is low, despite some degree of political uncertainty continuing to weigh on the policy environment following the formation of a new coalition government in June 2017. Banking sector risks also remain low, supported by improving asset quality and increased domestic lending,” it added.
Moody’s said that upward pressure on the country’s rating could develop if the coalition were to introduce economic and fiscal reforms that improved Croatia’s long-term economic potential and secured a downward trajectory in public indebtedness closer to the Ba-rated median.
It warned that downward pressure might occur if the country is unable to implement a comprehensive structural reform programme in the coming years, given that such a failure would likely lead to weaker growth and increase its public debt in the long term.
Moody’s is scheduled to issue its next report on Croatia in August.
In January, the Fitch rating agency upgraded Croatia’s rating from ‘BB’ to BB+’, with a stable outlook on the back of stable economic growth, a strong tourist season and improved public finances. It was the first upgrade of the country’s credit rating since 2004.
Of the three leading rating agencies, Fitch keeps Croatia’s rating one notch below investment grade, while Standard & Poor’s and Moody’s maintain it two notches below investment grade. Moody’s maintains a stable outlook and Standard & Poor’s a positive outlook. Standard & Poor’s is expected to release its report on Croatia this month.
