Fitch Keeps Croatia's Credit Rating

By , 15 Jul 2017, 11:40 AM Business
Fitch Keeps Croatia's Credit Rating Source: Pixabay

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Fitch has kept Croatia's rating at BB, with a stable outlook.

Fitch credit rating agency has kept Croatia's rating at BB with a stable outlook, pointing out that the Croatian economy benefits from favourable cyclical conditions, but warning that Agrokor’s restructuring would slow down growth in 2017 to 2.6 percent, reports N1 on 15 July 2017.

Strengthening of the economic growth in Croatia’s trade partners in the region, favorable wage and employment dynamics, strong tourist inflows and improved absorption of EU funds resulted in real GDP growth of 3 percent in 2016 and are likely to support economic performance in 2017 as well, says Fitch. However, they point out that the restructuring of Agrokor will affect economic performance.

Fitch expects that the problems in the largest privately-owned company in Croatia will spread to suppliers and banks. That will have an impact on employment, investments and credit growth, and will slow down GDP growth from last year's 3 percent to 2.6 percent this year, in the case of an orderly restructuring process. Fitch expects a further economic slowdown in 2018.

The agency’s analysts also believe that Croatia's potential economic growth remains relatively low in comparison to similar countries, between 1 and 2 percent, due to negative demographic trends, structural rigidities, current external debt levels and low investment during the recession period from 2009 to 2014. They also note that the growth of the Croatian economy fluctuates more than in comparable countries with the 'BB' rating.

The agency points out that the public finances have improved, leading to the exit from the excessive deficit procedure (EDP) in June. After the sharp fall of the budget deficit in 2016 to 0.8 percent of GDP, the agency estimates that this year it will again grow to 1.7 percent of GDP.

Among the risks, the agency lists potential liabilities, including in the health sector, as well as exchange rate fluctuations, since 76.5 percent of public debt at the end of 2016 was denominated in foreign currencies.

Fitch expects monetary policy to remain expansionary, because inflation is moderate (in May 2017, it stood at 1.1 percent), which could help stimulate credit activity. The agency also believes it is uncertain how long the current ruling coalition will last. Following the fall of a coalition government in April, the main coalition party HDZ has managed to escape early elections by forming a new coalition with HNS in June. However, they point out that the majority of the coalition in the Parliament is just two votes.

Fitch's basic scenario regarding Croatia is a continuation of current economic policies, while the fragility of the government and the risk of early elections could slow down structural reforms.

All three leading credit rating agencies – Fitch, S&P and Moody's – currently keep Croatia’s credit rating two notches below the investment level, with a stable outlook.

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