Moody’s Compares Croatian and Serbian Economies

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Both countries share high levels of debt.

Croatia has a larger and more competitive economy than Serbia, as well as stronger institutions thanks to its entry into the European Union, says Moody’s in a comparative analysis of the two economies, predicting that the Serbian economy will be stimulated by structural reforms and a strong turn to exports in the coming years, reports Večernji List on 7 July 2017.

Moody’s has issued the Ba2 credit rating to the Croatian government bonds, with a stable outlook, while Serbia’s government bonds are placed one notch lower, at Ba3, but also with a stable outlook. Still, both countries’ credit ratings are in the speculative territory.

In the comparative analysis “Croatian and Serbian Governments – Better developed economy and institutions in Croatia justify stronger credit profile”, the agency emphasises greater competitiveness of the Croatian economy and the support of the membership in the European Union for the reforms of Croatian institutions.

“The Croatian economy is roughly one-third larger than the Serbian economy, and membership of the European Union has triggered a comprehensive reform of institutions,” notes Moody’s vice president and co-author of the analysis Evan Wohlmann. “On the other hand, the larger reform momentum in Serbia over the past years will support the convergence of incomes, and investments will probably be helped by improvements in the business environment made recently in the country,” he adds.

High debt is one of the similarities between the two nations. However, fiscal consolidation will lead to gradual improvement, claims Wohlmann. The level of debt in the two nations is considerably higher than the average in the group of countries with similar ratings, the report says. Thus, in Croatia, the share of debt in GDP in 2016 was 84.2% and in Serbia 74%, compared to the average of 47.6% for similar countries with the Ba rating.

Moody’s notes that the state-owned enterprise’s sector in Serbia continues to represent a higher fiscal risk despite progress in improving its fiscal position after the financial crisis. Serbia has initiated reforms to reduce the risk of future state-owned companies’ demands towards the state budget, including the restructuring of money-losing businesses.

Serbia, unlike Croatia, is not obliged to respect the European Union’s state aid rules which restrict the prospects for direct state aid and guarantee a certain degree of external oversight, the report says.

Moody’s also notes that unemployment rates in both countries have been reduced, with Serbia’s legislative reforms implemented in 2014 leading to a larger share of active population and stronger employment growth thanks to the private sector.

It points out, however, that declining unemployment also reflects a reduction in the workforce due to population ageing and massive emigration, which is why uncertainties about the long-term prospects for economic growth exist.

“To strengthen the growth potential of both countries, the key is continued integration into the European Union and further efforts to improve the investment climate,” concludes Moody’s.


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