S&P Upgrades Outlook for Croatia, Credit Rating Unchanged

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After nine years, first good news for Croatia’s credit rating.

Standard & Poor’s (S&P) rating agency announced on Friday that it will keep the current long-term credit rating of Croatia at “BB” and short-term credit rating at “B”, but it upgraded the outlook from negative to stable, which is the first positive move for the Croatian rating in nine years, reports Novi List on December 17, 2016.

The change in outlook is explained with better than expected economic growth and fiscal outcome in 2016, since adverse effects of political upheavals and early elections were not as pronounced as the agency expected. Moreover, S&P analysts expect continuation of favourable trends in 2017, because the political uncertainty has been decreased after a stable result of early elections which took place in September 2016. “However, our credit rating remain limited by high general government deficit”, says the agency.

Although early elections in September 2016 resulted in the same coalition government of HDZ and MOST, according to analysts the current coalition is more stable. Better result of centre-right HDZ, which now has 61 seats in parliament, along with the support of other smaller parties, give the ruling coalition a comfortable majority of 91 MPs, reports the agency.

At the same time, the economy shows greater resistance to domestic political shocks than the agency expected, so analysts increased their estimate of economic growth for 2016 from 1.7 to 2.7 percent. The record-high tourist season, together with the strengthening of domestic demand as a result of improvements in the labour market, real disposable income growth and investment projects co-financed from EU funds have helped the economic recovery, says the agency.

S&P analysts expect that the growth over the next few years will average at about 2.5 percent. At the same time, they warn that Croatia remains vulnerable to adverse external economic shocks and its dependence on the tourism sector, which contributes about 20 percent to GDP. Moreover, Croatian growth prospects depend on the ability of the government to address long-term structural challenges, such as dominant and ineffective role of the government and weaknesses in the business environment.

Public finances have been significantly improved, says S&P and adds it has therefore revised downward its previous estimates of the general government deficit for 2016 to 1.8 percent. In July, it estimated that the deficit would amount to 2.9 percent of GDP. Despite early parliamentary elections, the government has held costs under control, while revenues were better than expected due to the structure of growth which is favourable to the growth of tax revenues.

The agency also expects that lower deficits will result in a reduction of the public debt burden. They estimate that, after having reached a peak of 87 percent of GDP in 2015, it will gradually fall to less than 84 percent of GDP by 2019.

The stable outlook related to Croatian credit rating reflects the opinion of S&P that the economic growth will continue next year, albeit somewhat slower. “We could upgrade the Croatian credit rating if economic recovery is continued, and the new government continues to express the ability and willingness to carry out structural reforms and stick to its agenda related to fiscal consolidation, which will lead to faster consolidation of the budget deficits than expected. On the other hand, the credit rating could be downgraded if effects of structural reforms are slowed down, leading to slower economic growth and higher-than-expected deficit”, concluded S&P.

The decision to upgrade outlook is the first positive move regarding Croatian credit rating after six years of recession. The last time the outlook was improved was in 2007, when Moody’s upgraded outlook from stable to positive.

All three leading international rating agencies – Standard & Poor’s, Moody’s and Fitch – continue to keep Croatia’s credit rating two notches below investment level. But, while Moody’s and Fitch have kept negative outlook, Standard & Poor’s outlook is now stable.


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