In late March, the first of the three world’s leading credit rating agencies, S&P, will publish a revision of the Croatian credit rating, and local economic experts believe that this announcement will bring a return of the credit rating to the investment level, reports Večernji List on February 17, 2019.
S&P was also the first agency to drop the country’s credit rating to the junk bond status in 2012 after it saw the government’s lack of control over public finances and its lack of capacity for structural reforms. Seven years later, Croatia has not really implemented any reforms, but it does better manage its public finances, reducing the public debt and reaching a positive budget balance.
Many local economic experts believe that rating agencies are too strict in assessing Croatian situation, with the current rating being underestimated. “For almost two years, Croatia has been in a situation where financial markets value its debt at the investment level, while official ratings of the agencies are a step (or even two steps) behind the market,” said bond expert Goran Pavlović.
According to Pavlović, credit rating agencies should take into account the fact that Croatia has remained one of few transition countries that did not nationalize private pension savings, which means that the public finances are not much worse than those in neighbouring countries. If Croatia had nationalised its pension system according to the Hungarian model (complete abolishment), it would formally meet the Maastricht fiscal criteria in 2016 (public debt below 60% of GDP) and if it were to apply a milder Polish model in 2017.
The Economic Institute analyst Željko Lovrinčević agrees. “Regardless of the fact that the markets are already behaving as if we had investment rating, it is important that this also happens formally in order to distinguish ourselves from a group of countries that are perceived as risky if the situation in the European and global economies turn for the worse,” says Lovrinčević.
The improvement in the credit rating would also bring further reduction in interest rates, as well as the reduction of regulatory costs for the banking and insurance industries. Pavlović explains that some institutional investors are not allowed to invest in bonds issued by issuers who do not have an investment credit rating. Demand for bonds which do not have an investment rating is much weaker, which is normally offset by higher interest rates.
Bank analyst Zdeslav Šantić believes that the rating improvement will not immediately affect the price of borrowing because the market already behave as if this has happened but the future risk perception will be significantly reduced as Croatia approaches the euro. “I believe that the decision to keep the non-investment level has been affected by the situation in Agrokor, but that has largely been eliminated as a risk,” concludes Šantić.
Translated from Večernji List (reported by Ljubica Gatarić).
More news about Croatia’s credit rating can be found in the Business section.
