Moody’s Downgrades Croatia’s Credit Rating

Total Croatia News

Bad news for the government, just one day after the 2016 budget is presented.

Moody’s rating agency has lowered its long-term credit rating of Croatian debt, citing as the key reasons the high public debt and the continuation of poor prospects for economic growth in the medium term, It has also kept the negative outlook for Croatian rating. Moody’s lowered the credit rating for debts in the foreign currency from Ba1 to Ba2, and in the local currency from A3 to Baa1, reports Večernji List on March 12, 2016.

One of the key reasons for such action is a large and growing burden of public debt, which at the end of 2015 stood at about 86 percent of GDP, but analysts estimate that by 2018 it will exceed 90 percent. As pointed out, that greatly exceeds the average in comparable countries with the Ba1 rating, which is around 45 percent of GDP. It is not likely that the trends will be reversed by the end of the decade.

Moody’s believes that the process of fiscal consolidation will be slow and expects that this year’s budget deficit will reach 3.9 percent of GDP. This trend, accompanied by the expected moderate levels of real economic growth, is likely to raise the debt burden above the level of 90 percent of GDP by 2018. Moody’s also notes that the cost of debt financing is worsening.

Another key reason for lowering the credit rating is the continuation of the weak medium-term prospects for economic growth, resulting from historically low levels of investment and structural rigidities, including a low rate of the labour force participation, as well as the bottlenecks in the absorption of EU funds. Despite the recent exit from recession, Moody’s believes that the potential rate of Croatian economic growth is below 1 percent, which is low for an economy that is converging, and is below other economies which are “catching up”. The agency estimates that this year economic growth rate will be around 1.5 percent.

According to Moody’s, given Croatia’s dependence on tourism, events related to the refugee crisis could have an impact on Croatian tourism which could also hamper growth. Moody’s expects that Croatia could grow by an average of 1.7 percent in the next four years, which is significantly lower than before the crisis.

The Agency expects that the new government will face significant challenges in implementing its reform agenda, aimed at stopping the growth of public debt and improving the prospects for growth. In particular, Moody’s notes that the current coalition in parliament between the Patriotic Coalition and MOST has a very narrow majority, especially after the departure of four MPs from MOST. A wide range of political views within the coalition and the relative inexperience of MOST’s MPs at the central government level increase the risk that the new government will not be able to retain its majority support in Parliament for economic and fiscal reforms. Some of the proposed reforms, such as streamlining of the public administration system, already face resistance from different parts of the coalition, notes the agency.

Now all three leading international rating agencies – Moody’s, Fitch and Standard & Poor’s – have set Croatia’s credit rating two notches below the investment level and all have a negative outlook.


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