Moody’s Upgrades Croatia’s Credit Rating Outlook

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Credit rating itself has remained unchanged.

Moody’s credit agency announced on Friday that it has kept the current long-term credit rating of Croatia in foreign currency at “Ba2” and in local currency at “Baa1”, and that it has upgraded the credit rating outlook from negative to stable, which is the first positive move that the agency has taken on the issue of Croatian rating since 2007, reports on March 11, 2017.

Moody’s explained the move with stronger medium-term growth of the economy than expected. It expects the economy to achieve average growth in the next few years of 2.5 percent, which is lower than the average of 4.5 percent in the pre-crisis years between 2000 and 2007, but only slightly lower than the 2.8 percent growth expected in comparable countries in central and eastern Europe in the same period.

The agency believes that the improved prospects for growth will have a positive impact on fiscal performance and contribute to the reduction of the general government debt. “These credit trends are significantly different from those Moody’s analysts forecast a year ago, when they assigned a negative outlook to the Croatian rating”, says the report.

They point out that the momentum of the economy has strengthened after the economy pulled out of the six-year recession in 2015. The real annual growth rate accelerated to 2.9 percent in 2016, significantly outstripping the growth in 2015 of 1.6 percent. “The growth has become broad based, reflecting good performance in exports of goods and services, an increase in household consumption and investments, as well as good results in public spending”, said Moody’s.

“We expect the Croatian economic growth to further strengthen this year, with additional support from the government’s loose fiscal policies. Private consumption will probably continue to rise thanks to the tax cuts that the government introduced in 2017 and further improvements in the labour market”, says Moody’s. Economic growth will also be supported by public investments, which will benefit from increased absorption of EU funds. Reduction of domestic political uncertainties, following the confirmation of the new government in the second half of 2016, will also have a positive impact on the economy.

Moody’s notes that Croatia entered the global financial crisis with the public debt of around 39 percent of GDP, which rapidly increased to 86.7 percent of GDP in 2015. However, due to better than expected performance of public finances, the debt to GDP ratio has fallen to 84 percent. They expect further gradual decline of debt to 82.9 percent in 2017 and 81.4 percent of GDP in 2018.

“It is expected that Croatia will leave the EU’s excessive deficit procedure (EDP) by the end of this year, given that the government has managed to significantly reduce the fiscal deficit last year to an estimated 1.8 percent of GDP, which is in line with the recommendations of the EU”, says Moody’s.

However, Moody’s warns that there is still structural weakness of the Croatian economy because there have been no comprehensive reforms. As an example, it states that the unemployment rate has been falling due to aging population and emigration, leading to a reduction in workforce. Also, the current high budget spending and rigid expenditure structure remain a weakness – social benefits, pensions and salaries account for about 60 percent of total expenditures – which results in a limited flexibility of public finances.

Moody’s is the last of the three leading international rating agencies which have improved the outlook for Croatian credit rating in recent months. Standard & Poor’s upgraded the outlook from negative to stable in mid-December last year, while Fitch did it in late January this year. All three leading rating agencies still keep the credit rating two notches below the investment level, but now all have a stable outlook.


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