S&P Keep Croatia’s Credit Rating at BB, Outlook Improved to Positive

Lauren Simmonds

Croatia’s rating could be raised even more if economic recovery continues.

“Croatia’s rating could be raised if economic recovery continues, while the government continues to demonstrate its ability and readiness to implement structural reforms and maintain its fiscal consolidation plan, which will lead to the sustainable consolidation of state finances,” S&P state.

As Poslovni Dnevnik reports on the 23rd of September, 2017, Standard & Poor’s (S&P) Agency kept on the long-term credit rating for Croatia at ”BB” and short-term on ”B” on Friday, but raised the prospects from stable to positive, as the Croatian economy continues to grow, reducing the burden of debts.

As we previously reported and as S&P estimates, this year, the Croatian GDP will rise by 3%, owing to strong domestic demand and strong exports, which will help the government maintain a stronger budgetary position than before and continue to reduce its significant debt burden.

Positive prospects reflect S&P’s expectation that Croatia’s economic growth will continue, which will help further consolidate public finances, while external imbalances will benefit from further undermining, and the potential weakness of the Agrokor situation remains limited. As mentioned, if recovery persists on such a path, it will be possible to increase the rating even more.

The agency also states that although this is good news, prospects could once again be reduced to stable if Croatia’s obligations, such as lawsuits against the state, result in an increase in the burden on state debt or if efforts are made to implement structural reforms that would lead to lower economic growth or higher than expected fiscal deficits.

In addition, S&P advise to closely follow the efforts to restructure Agrokor and may consider taking a negative action if unfair restructuring undermines economic performance or leads to significant fiscal costs.

The Croatian rating supports the reduction of the budget deficit and the reduction of external borrowing. At the same time, the rating for Croatia is still limited by the high burden of the country’s debt, overall low income levels compared to other European countries, as well as continued political volatility.

Following the reconstruction of the coalition, the focus has fallen heavily upon structural reform plans. Favourable external and internal development of the situation has strengthened, and the overflow of Agrokor’s current restructuring remains limited, according to S&P.

However, S&P warns that the situation in Agrokor, which led to a reconstruction of the coalition, could call the government’s ability to continue on with its reform agenda into question. But it seems that the negative impacts caused by the ongoing Agrokor crisis are now drastically reduced and limited.

A mix of both foreign and domestic factors continue to stimulate the Croatian economy. Therefore, S&P expects growth of 3% in 2017, backed by strong exports, particularly in the tourism industry. Additionally, domestic demand contributes positively to growth as investments recover.

Despite the good news, S&P does expect structural factors to take their own toll on the Croatian economy. They argue that the Croatian business environment, especially with regard to the opening up of businesses and companies, remains weaker than in comparable regional countries, and there are also discrepancies and shortcomings as far as employment goes, despite the very high unemployment rate.

As mentioned, the effects of the current restructuring of Agrokor appear, at least currently, to be limited despite the natural worsening of consumer confidence.

Negative economic risks could make themselves an unpleasant reality if Agrokor’s disastrous restructuring ends up having a more negative effect on its suppliers, mainly small and medium-sized businesses and farms, resulting in financial pressure.

“However, we understand that Agrokor is currently serving all of its debt obligations, including its payments to suppliers, and has taken steps to avoid [negative] impacts on its suppliers. Thus, we consider the negative risks to the Croatian economy as a result of the earthquake in Agrokor to be limited, we’ll continue to monitor the situation, including the financial and operational restructuring and the potential impact of those factors on the Croatian economy,” S&P state.

The agency further states that following the political dissolution of the coalition with MOST earlier this year, when HDZ formed a new coalition with HNS, the episode highlighted the political volatility that limits the government’s ability to resolve long-standing structural issues. This includes, among other things, unemployment and a somewhat weaker business environment when compared with other European countries.

With the strengthening of recovery, public finances have also appeared to improve. Following a smaller than expected general government deficit of 0.8% in 2016, S&P expects this year’s deficit to grow slightly to 1.1%. It should be noted, however, that analysts state that it does not include the fiscal impact of the crisis in Agrokor. Still, a slight increase in the fiscal deficit is expected by the year 2020.

The large exposure of the Croatian banking sector to the state, among many other factors, continue to limit the rating of the country, say S&P. Improved debt management practices and potentially better management of state property could improve the government sector’s debt profile. Faster economic growth and lower fiscal deficits should lead to a faster decline in public debt-to-GDP ratio, while the nominal terms of general government debt could continue to grow.

Improvements in the Croatian banking sector, which indicate the recovery of profitability, rising lending, and shrinking loans, could be endangered by the financial stress caused by Agrokor, S&P warns.

“The final write-off of Agrokor’s debt could be somewhat larger than the reserve, implying additional bank losses, and while the capitalisation levels of large banks should be sufficient to withstand this impact, some smaller banks may be forced to raise additional capital. A large part of Agrokor’s direct liabilities are with foreign banks and therefore should not affect the stability of the Croatian banking system. However, this year we expect lower profitability from this sector as a whole,” S&P analysts have said.

They add that this impact could be more pronounced, and that this depends entirely upon how much Agrokor’s debtors will be affected by the debt restructuring. They also point out that the group has taken steps to reduce the impact on their suppliers, especially since a comfortable 50% of debt to suppliers has already been resolved.

S&P also states that the Croatian National Bank is committed to maintaining the kuna-to-euro exchange rate, which limits the flexibility of monetary policy, as well as the highly ”euroed” economy. As of June 2017, more than 50% of loans and deposits were denominated in foreign currency or linked to it, mostly to the euro.

In December of last year, S&P saw Croatia’s credit rating rise from negative to stable, which was the first positive breakthrough for the country’s ratings for almost a decade. In March this year, the agency maintained the existing rating of Croatia on ”BB”, with stable prospects, and now the prospect has increased to positive.

All three leading rating agencies – Fitch, S&P and Moody’s continue to hold Croatia’s credit rating below the investment level. But while Fitch and Moody’s are keeping their prospects stable for Croatia, S%P is now holding positive prospects, which means that its next move could be to increase the rating itself.


Translated from Poslovni.hr


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