Fitch Ratings confirmed the current long-term credit rating of Croatia at ‘BB’ in foreign currency and ‘BB+’ in local currency, but it has changed its outlook from ‘stable’ to ‘negative’, according to a report in Poslovni.hr on August 1, 2015. Two weeks ago, Standard & Poor’s made the same change.
Explaining the decision, Fitch notes that the general government deficit last year reached 5.7 percent of gross domestic product (GDP), 0.3 percent more than in 2013 and 1.3 percent more than the target level defined in the convergence program adopted by the government in April last year.
That was a consequence of lower revenues due to lower than expected inflation and economic growth. “In the convergence program, government predicted a reduction of the budget deficit to 2.7 percent in 2017, but we believe that there is a risk that this will not be achieved”, says Fitch. It says that saving targets in state owned enterprises perhaps will not be met. In addition, the upcoming parliamentary elections could weaken reform efforts until a new government is formed.
At the end of 2014, general government debt reached 85 percent of GDP, while at the end of 2008 it was 39 percent, which is, among other factors, a consequence of the new ESA2010 methodology. Fitch expects that the debt will grow to 90 percent of GDP this year and that it will peak at 94.4 percent in 2017.
“Financing conditions remain favorable, but high budgetary financing needs of about 20 percent of GDP represent a risk to the sustainability of public debt, if there is an unexpected increase in the cost of borrowing”, says Fitch.
Fitch states that “negative” outlook reflects the risks which could lead to a negative change in the credit rating, like further escalation of the debt-to-GDP ratio, regardless of whether it would happen due to budget shortfalls, rising funding costs or weaker GDP growth.
On the other hand, Fitch could change the outlook to ‘stable’ if the budget deficit is reduced as planned in the convergence program, which would increase the confidence that the ratio of public debt to GDP would stabilize in the medium term.
Croatian ‘BB’ rating in foreign currency is two degrees below investment level. S&P has a similar rating for Croatia and has recently also changed the outlook to negative, while Moody’s keeps Croatian rating one notch below investment level, at ‘Ba1’ with a negative outlook.
