The rating remains at “BB”, with a stable outlook.
Standard & Poor’s (S&P) announced on Friday that it would keep the current long-term credit rating of Croatia at ‘BB’ and short-term at ‘B’, with a stable outlook. It estimates that economic growth this year will be faster than last year, while the public debt will fall, reports N1 on March 25, 2017.
The agency explained that the credit rating was supported with reduction of the general government deficit, although its slight growth is expected this year, and with gradual reduction of external debt, primarily due to continued deleveraging of the banking sector. At the same time, Croatia’s rating remains limited with the still high debt levels, low income levels compared to other European countries, and relatively recent attempts at implementation of structural reforms and consolidation of public finances by the new government.
S&P expects that in 2017 Croatia’s economic growth will accelerate to just over 3 percent, compared to 2.9 percent in 2016. The export growth should remain strong, because it is likely that the positive momentum in the tourism industry will be continued. At the same time, the growth of exports is becoming more diversified, including in pharmaceutical and shipbuilding industries. The agency emphasizes that domestic demand remains strong. The tax reform, which came into force this year and includes changes in taxes on incomes and profits, will have a positive impact on disposable household income and lead to continuing investments in the corporate sector.
However, the agency expects that the economic growth in the medium term will slow down to around 2.5 percent, due to structural factors such as population aging and still comparatively weak business environment, which is reflected in the sixth lowest position among EU member states in the World Bank’s “Doing Business” rankings.
S&P estimates the general government deficit decreased significantly last year, to 1.3 percent of GDP, compared to 3.3 percent in 2015. The improvement is likely a result of strengthening of budget revenues. “We expect slight loosening of the fiscal policies in 2017 due to the recent agreement on public sector salaries and stronger payments for EU co-financed investment projects. By 2020, the deficit is expected to fall back below 2 percent”, said the agency.
Croatian smaller-than-expected general government deficit also means that the still high debt level will fall for the first time since 2007, to an estimated 84.1 percent of GDP. “By 2020, we expect its further gradual reduction to 79 percent of GDP”, announced S&P. However, Croatia has a high share of debt denominated in foreign currency – with more than two-thirds of its debt denominated in foreign currencies, mainly the euro. “That makes Croatia sensitive to changes in global monetary conditions, which could lead to higher interest rates and result in higher costs of servicing debts, eroding the progress made in achieving the primary surplus in the budget”, said S&P.
In mid-December last year, S&P increased credit rating outlook from negative to stable, which was the first positive move on Croatian rating in the last nine years. Since Fitch and Moody’s later also improved the outlook for the Croatian credit rating from negative to stable, now all three leading rating agencies – Fitch, Standard & Poor’s and Moody’s – have Croatia’s credit rating two notches below investment level, with a stable outlook.