Fitch has doubts about whether the next Croatian government will be any more stable than the previous one.
Fitch Ratings confirmed on Friday the current long-term credit rating of Croatia in foreign and local currency at BB and the short-term credit rating at B. It also maintained its negative outlook, reports Index.hr on July 30, 2016.
According to the statement, the current rating reflects the balance between the external debt burden and weak performance in economic growth on the one hand, and budget indicators and relatively high GDP per capita on the other side. The agency points out that last year’s budget deficit of 3.2 percent of GDP was better than their expectations, and was helped by improved tax collection and the return to the economic growth. This year, they predict a further reduction of the budget deficit to 2.6 percent of GDP. However, the agency notes that public debt remains high, estimating that in 2018 it could be at the level of 86.3 percent of GDP.
Fitch also points out that the political risk has increased since its last revision of the Croatia’s rating in January this year. “The government of Tihomir Orešković has made little progress in planning key reforms, which would allow the new government to act quickly. Also, local elections in May 2017 could delay difficult political reforms. In addition, it is quite unlikely that HDZ or SDP will achieve absolute victory. Fitch expects that the next government will be a coalition between one of the two major parties and MOST. It could implement significant reforms, but it is possible that it will not last long, just like the previous government of HDZ and MOST”, say Fitch analysts.
The agency estimates that short-term and long-term prospects for economic growth are still a weakness when it comes to credit rating. They claim that last year’s growth rate of 1.6 percent was rather weak. This year, they expect growth of 1.8 percent, and in the period 2017-2018 they expect the average rate of 1.9 percent. “Potential growth is estimated at 1-2 percent per year, which is a very low rate for a country with Croatian level of incomes”, assesses Fitch and warns that Croatia could continue to lag behind the countries of Central and Eastern Europe.
The negative outlook reflects Fitch’s opinion that the rating might be reduced in the event that there is no sustainable reduction in the public debt to GDP ratio. On the other hand, Fitch might revise the outlook to stable if there is progress in fiscal consolidation, which would strengthen confidence that in the medium term there would be the reduction of public debt to GDP ratio.
Two weeks ago, Standard & Poor’s confirmed the current credit rating of Croatia, while also maintaining a negative outlook. All three leading international rating agencies – Standard & Poor’s, Moody’s and Fitch – have Croatia’s credit rating two levels below the investment levels and have a negative outlook.
