ZAGREB, December 8, 2018 – Fitch Ratings has affirmed Croatia’s long-term foreign-currency Issuer Default Rating (IDR) at ‘BB+’ and maintained the country’s outlook positive, saying that Croatia’s credit rating is balanced by strong structural features, including human development and governance indicators and high GDP per capita, with weak growth potential, high public sector debt and external vulnerabilities.
The positive outlook reflects Fitch’s expectation that the combination of persistent primary budget surpluses, low interest and healthy GDP growth will contribute to a continued marked reduction in gross general government debt.
In addition, Fitch expects Croatia to outperform its budget target for the third consecutive year in 2018, with a deficit forecast of 0.2% of GDP, compared with the government’s deficit target of 0.5%. “Croatia’s fiscal performance continues to benefit from strong revenue growth and expenditure restraint,” Fitch said.
“This outperformance is despite the materialisation of contingent liabilities stemming from troubled shipyard company Uljanik, which we expect to amount to approximately 0.6% of GDP for this year,” the rating agency said.
Fitch also forecasts the general government budget will remain broadly balanced in 2019-20, against the small deficits projected by the authorities. “Positive fiscal dynamics are underpinned by favourable nominal growth, the government’s commitment to meeting its expenditure rules as well as the incentive of joining the eurozone,” Fitch said.
The agency also forecasts general government debt/GDP to fall to 74.1% of GDP at end-2018, down from 84% at end-2014, and to 68.3% by 2020 and 61.9% by 2023 on the back of primary surpluses. “This would still be well above the historical ‘BB’ median of 38.3% of GDP,” Fitch said.
External deleveraging continues at a rapid pace, supported by surpluses in the balance of payments.
Fitch forecasts the current account to post an average surplus of 2.3% of GDP in 2018-20, as services exports led by tourism and current transfers remain robust, offsetting a slowdown in tradable exports. This will support a build-up of foreign reserves and further strengthen the sovereign’s net external creditor position, helping to limit external vulnerabilities.
The economy is set to maintain a moderate rate of expansion, averaging 2.5% in 2018-20, supported by private consumption growth and price/exchange rate stability.
The report also notes that medium-term economic prospects are limited by adverse demographic trends and structural weaknesses, with potential growth estimated at around 2%.
The main downside risks include a sharper-than-expected slowdown in GDP growth in key European markets and/or a slowdown in tourist inflows given the importance of the sector for growth, employment and external finances.
The banking sector remains stable with ample liquidity and capital levels well above the regulatory minimum (22.6% 3Q18). “Unlike the Agrokor fallout in 2017, banks have felt no impact from the troubles at Uljanik,” Fitch said in its report, adding that profitability is set to increase only modestly, as aggregate credit demand remains muted.
The report also says that Croatia’s structural features are much stronger than ‘BB’ peers. “GDP per capita is 60% above the ‘BB’ median and the country scores better than ‘BB’ and ‘BBB’ peers in terms of governance indicators and human development, thanks in part to EU membership. The coalition government, installed in June 2017, has been able to implement its agenda relatively smoothly despite its small majority,” Fitch said in the report.
For more on Croatia’s credit rating, click here.
