Saturday, 16 July 2022

Moody's Raises Croatia's Credit Rating to Investment Grade

ZAGREB, 16 July 2022 - Moody's on Friday raised Croatia's credit rating by two levels to an investment grade and assessed that Croatian economy's outlook is stable following to the formal completion of the decision-making for Croatia's entry into the euro area.

On 12 July, the Economic and Financial Council of the European Union (Ecofin) gave the final approval for Croatia's admission to the euro zone on 1 January 2023 when the country is switching to the euro.

According to a press release issued by this international credit rating agency, "Moody's Investors Service ("Moody's") has today upgraded the Government of Croatia's foreign- and domestic-currency long-term issuer ratings and foreign-currency senior unsecured debt ratings to Baa2 from Ba1."

"The outlook has been changed to stable from ratings under review. This concludes the review for upgrade that was initiated on 24 June 2022."

"The upgrade of the ratings to Baa2 is driven by the adoption of the legal acts formalizing Croatia's adoption of the euro by the EU Economic and Financial Affairs Council (ECOFIN) on 12 July 2022. Croatia will adopt the euro as its domestic currency on 1 January 2023, thereby eliminating any foreign currency risk for the government's largely euro-denominated debt burden and reducing government liquidity risk.

Moody's also sees euro adoption as credit positive for Croatia's economic strength as it will remove foreign currency risk and transaction costs also for the private sector, spurring further economic integration of Croatia with the euro area.

Ability of Croatia's institutions to complete rigorous process towards euro adoption on time

Furthermore, the ability of the country's institutions to complete the rigorous process towards euro adoption within the planned time frame also supports Moody's assessment of the strength of Croatia's institutions and governance.

Stable outlook balances continued strength of Croatia's economic and fiscal recovery

"The stable outlook balances the continued strength of Croatia's economic and fiscal recovery from the initial shock of the coronavirus pandemic against risks to the macroeconomic and geopolitical environment in Europe stemming from rapidly rising inflation, concerns around the stability of the EU's energy supply and the Russian invasion of Ukraine (Caa3 negative)," reads the press release.

The long-term country ceilings of Croatia for local and foreign currency bonds have been raised to Aa2 from A2. This reflects the fact that for euro area countries, as Croatia will be from 1 January 2023 on, a six-notch gap between the local currency ceiling and the local currency rating, as well as a zero-notch gap between the local currency ceiling and foreign currency ceiling, is typical, reflecting benefits from the euro area's strong common institutional, legal and regulatory framework, as well as liquidity support and other crisis management mechanisms. It also is in line with our view of de minimis exit risk from the euro area.

Rationale for upgrading Croatia's ratings

"Most notably, the adoption of the euro reduces Croatia's share of government debt denominated in foreign currency from over 70% at present to close to zero, as this debt is almost wholly denominated in euros. This, in turn, has a significant positive impact on Moody's assessment of the government's fiscal strength as it eliminates the risk of a sudden and potentially significant increase in the local currency value of government debt relative to GDP in the event of a devaluation of the local currency relative to the euro," reads the press release.

Fiscal strength is one of the four factors of Moody's assessment of a sovereign's creditworthiness.

"Croatia's economy is already highly integrated with that of the euro area, and the country has maintained a managed float of its domestic currency in a narrow band against the euro since 1999. Nevertheless, we expect that euro adoption will have additional positive effects on Croatia's economic strength over the medium to long term by reducing transaction costs and eliminating any remaining foreign currency risks for transactions between Croatia and the euro area, which already accounts for more than half of all of Croatia's imports and exports. This is likely to spur further economic integration and foreign direct investment into Croatia, supporting its longer term growth potential.

"Furthermore, Croatia's adoption of the euro will also reduce foreign currency risks for the banking sector, and will also have a positive impact on our assessment of government liquidity and external vulnerability risks. As a euro area member, Croatia would in a future crisis stand to benefit from potential European Central Bank (ECB) support programmes such as the asset purchase programmes that were first introduced in 2015, while membership of the European Stability Mechanism (ESM, Aaa stable) will also support the government's ability to fund itself in a crisis situation.

Lastly, the ability of the Croatian institutions to steer the country into the euro only two years after joining ERM II - the antechamber of the currency bloc - supports our assessment of the effectiveness and strength of the country's institutions and governance.

Agency expects Croatia's GDP growth to remain robust at 3% in 2022

The stable outlook balances the continued strength of Croatia's economic and fiscal recovery from the initial shock of the coronavirus pandemic against risks to the macroeconomic and geopolitical environment in Europe over the coming 12 to 18 months as well as country-specific challenges that include the effective absorption of EU funds and adverse demographic trends.

The Croatian economy has continued to recover strongly from the sharply negative impact of the coronavirus pandemic on the country's tourism sector and overall economy in 2020.

In its baseline scenario, the agency expects Croatia's GDP growth to remain robust at 3% in 2022 while the debt burden will continue to decline at a more moderate pace, although the continued strength of the tourism sector's rebound from the pandemic could produce outcomes that are stronger than our baseline forecast this year.

However, there are prominent risks to the economic and fiscal outlook for Croatia stemming from a deteriorating macroeconomic environment in Europe. Such risks tied to rapidly rising inflation and concerns about the stability of the energy supply of several EU member states are in large part also linked to geopolitical risks and heightened uncertainty stemming from Russia's invasion of Ukraine and the on-going military conflict. Although the direct risks of a potential energy supply shock are limited for Croatia, in an adverse scenario, the euro area could enter a recession over the next 12 to 18 months, which would also have material negative implications for the economic and fiscal outlook for Croatia.

Moreover, Croatia's relatively weak track record of absorbing EU investment funds raises question marks around whether the country's economy will be able to derive the full benefits of the very substantial funding available for Croatia under NGEU and the EU's regular budget for 2021-2027. Croatia's medium to long term growth potential also continues to face significant challenges from the projected decline of the country's working age population.

Upward pressure could build on the ratings if Croatia manages to maintain a strong economic performance and growth potential as well as a continued reduction of the government debt burden over the coming years. This would notably be supported by evidence of effective implementation of the investments and reforms tied to the EU's post-pandemic recovery fund Next Generation EU, which would support economic growth in the near term but also growth potential over the longer term.

Possible negative pressure tied to resurgence of pandemic-related complications or to fallout of Russia's invasion

Negative pressure could build on the ratings in the event of a sharp deterioration of Croatia's growth potential relative to Moody's expectations, most likely tied either to a resurgence of pandemic-related complications for the tourism industry or to the economic and political spillover effects from the Russian invasion of Ukraine. A failure to effectively implement the investments and reforms of Next Generation EU would also weigh negatively on Moody's assessment of Croatia's growth potential and the strength of its institutions and governance, says the agency.

All three major agencies raise Croatia's credit rating to highest level in history

The Fitch agency raised Croatia's credit rating to BBB+ on Wednesday, and on Thursday, Standard & Poor's upgraded its credit rating by two levels - from BBB- to BBB+, with a stable outlook.

Until the first half of 2019, Croatia had a non-investment rating from both Fitch and S&P, and now the country is at the third level of the investment rating, its highest level in history.

A regular review of the rating by S&P was scheduled for September, but due to the importance of the confirmation of Croatia's entry into the euro area S&P decided to raise the rating earlier.

Saturday, 27 April 2019

Moody's Changes Croatia's Outlook to Positive, Affirms Its Credit Rating

ZAGREB, April 27, 2019 - Moody's Investors Service on Friday changed Croatia's outlook to positive from stable, and affirmed the country's long-term local and foreign currency issuer and senior unsecured debt credit rating at Ba2.

The credit rating agency recalls that in 2017 Croatia recorded the first budgetary surplus of 0.8% of GDP and that the positive momentum "was confirmed in 2018, although the surplus was lower (0.2% of GDP), in large part due to the activation of the state guarantee regarding the Uljanik shipyard."

Moody's underscores that "the improved fiscal performance is mainly attributable to a significant reduction in the structural deficit, meaning that public finances are strengthening in a durable way."

The agency expects a solid surplus of the primary balance to be maintained in the coming years.

It notes that the government's debt reduction has progressed steadily since the 2014 peak (84% of GDP).

"Under its base case scenario, Moody's expects that continued fiscal prudence and positive economic growth will allow public debt to continue its downward trend and reach around 70% of GDP in 2020," reads the report on Croatia.

The document recalls that the set of measures contained in the new Fiscal Responsibility Act which was approved by the Croatian Parliament at the end of 2018 should strengthen the existing fiscal framework. All that will bring Croatia's framework closer to the European standards.

"Furthermore, in the medium-term, the pension reform enacted in late 2018 will contribute to the fiscal sustainability of the system while ensuring better pension adequacy. The acceleration in the planned increase in the statutory retirement age to 67, coupled with the equalization of retirement age for men and women, will support the decrease in public pension expenditure expected by the European Commission's 2018 Ageing report (- 3.8% of GDP in 2070 compared to 2016). The supplement granted to multi-pillar pensioners will help to improve the low pension adequacy," Moody's says.

Finally, the resolution of the Agrokor retail conglomerate crisis "removes a significant source of uncertainty for the economy and a potential contingent liability for the State."

The credit rating agency also underscores that the growth prospects may benefit from recent reforms.

Following a 6-year long recession between 2009 and 2014, the Croatian economy rebounded in 2015, with real GDP growth averaging 2.9% since.

"Moody's expects positive economic growth to continue in the coming years, although GDP growth will decelerate somewhat against the backdrop of a more challenging international environment.

"Forecasted to reach 2.4% on average in 2019-2020, real GDP growth will be in line with potential, which has strengthened in the recent years. This positive economic backdrop should support the country's efforts to reduce public indebtedness looking ahead.

Moody's believes that economic activity will also benefit from the future euro area formal candidacy application, as this will continue to support sound macroeconomic policies and stronger institutions, providing a policy anchor.

The agency also perceive tourism as a key element in the country's economic recovery. Over the past decade Croatia's tourist sector "has performed above the average of the other Northern Mediterranean EU countries in increasing its international tourism revenues, non-resident tourists' overnight stays and arrivals from abroad."

"The rating affirmation reflects Croatia's relatively high per capita income, while institutions benefit from the EU membership and the strong commitment of the Croatian National Bank towards achieving kuna/euro stability," the agency says.

"At the same time, Croatia is constrained by its small-sized economy and relatively volatile economic growth as well as its low potential growth relative to peers. While fundamentals are now stronger than prior to the recession, Croatia still faces significant challenges that weigh on the country's growth prospects."

The agency warns Croatia's below the EU average participation and employment rates in the labour market and this "is compounded by ageing and increasing migration outflows since the EU accession in 2013 that are unlikely to be reversed in the near future."

"In addition, while gross investment has rebounded since 2015 thanks to revitalized private investment, its level is still below pre-crisis figures because of historically low public investment, which is penalized by a low absorption rate of EU funds, although Moody's expects that this rate will pick up in the next two years."

Croatia's rating would likely be upgraded should Moody's conclude that positive economic and fiscal trends are to be sustained and that the high debt burden will continue its steady, downward trend, the agency says.

Moody's report ensues after in March Standard & Poor's raised its sovereign credit ratings on Croatia to 'BBB-/A-3' from 'BB+/B', putting the country's rating after six years back into the investment category owing to an improved situation in the budget and economic recovery.

Fitch is giving a speculative grade to Croatia's, describing the country's outlook as positive.

More credit rating news can be found in the Business section.

Friday, 16 March 2018

Moody's Publishes Economic Report on Croatia

ZAGREB, March 16, 2018 - Croatia's (Ba2 stable) credit profile balances its fiscal consolidation and EU membership supporting the strengthening of institutions against credit challenges which include the economy's weak potential growth and the government's slow pace of structural reform, reflected in weak absorption of European Union structural funds, Moody's Investors Service said in a report on Thursday.

Thursday, 5 October 2017

How Agrokor Crisis Caused Earthquake in Government and Entire Croatian Economy

Agrokor has been the ''talk of the town'' this year, but what exactly happened and how did we end up here?

Friday, 7 July 2017

Moody's Compares Croatian and Serbian Economies

Both countries share high levels of debt.

Tuesday, 11 April 2017

Moody’s Again Downgrades Agrokor’s Credit Rating

It seems that Moody’s is not too confident in government’s newly-appointed commissioner.

Saturday, 11 March 2017

Moody's Upgrades Croatia’s Credit Rating Outlook

Credit rating itself has remained unchanged.

Saturday, 25 February 2017

Moody’s Downgrades Agrokor’s Credit Rating Outlook

Agrokor is Croatia’s largest privately-owned company.

Saturday, 14 January 2017

Despite Moody’s Decision, Government Preparing to Issue Bonds

Unlike S&P, Moody’s has kept a negative outlook for Croatia’s credit rating.

Sunday, 13 March 2016

Economists React to Credit Rating Downgrade

Analysts say that the main problem is that there are no structural reforms being implemented

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