Fitch has kept Croatian credit rating at “BB”, but now says that the outlook is stable.
Fitch credit rating agency announced late on Friday that it would keep the current Croatia’s long-term credit rating at “BB” and short-term at “B”, but it upgraded the outlook from negative to stable, which is the first positive step that the agency has taken on the issue of Croatian credit rating since 2003, reports N1 on January 28, 2017.
The current investment credit rating, according to the agency, is balanced by strong structural characteristics of the country, including indicators of human development and management, together with weak growth potential, high public and private debt, and external vulnerabilities.
Fitch explained the upgrade in the credit rating outlook with the reduction in the budget deficit to an estimated 1.8 percent of GDP in 2016, which is much less than the 2.6 percent deficit which was originally planned in the budget. The agency points out that it is partly a cyclical improvement, from better-than-expected revenue growth and lower-than-expected capital spending. The result is the primary surplus which led to the reduction of the public debt to an estimated 84.8 percent of GDP.
The agency expects that the general government deficit will remain at about 2 percent of GDP in the coming period, which will support the trend of public debt reduction.
As a reason for improving the outlook, Fitch also explains that, after the formation of a new coalition government in October 2016, political risks have become less pronounced. HDZ and MOST are again in a coalition, but this time the coalition could be more stable, due to a change in the HDZ leadership and the increased majority in Parliament.
The tax reform and the 2017 budget were adopted without major tensions, and the government remains committed to its agenda of structural reforms, claims Fitch. However, it notes that local elections in May could increase tensions within the coalition and delay some of the structural reforms. Therefore, the political agenda by 2020 will be clearer after the local elections.
“Real GDP growth in 2016 reached estimated 2.8 percent, which is partly cyclical, after a long recession, but also reflects better absorption of EU funds, a record tourist season after years of increasing investment in the sector, and further growth of goods exports, which will in 2017 increase the growth rate to between 2.5 and 3.0 percent”, said Fitch.
It added that the level and composition of the general government debt remained a key weakness of the Croatian credit rating. Although Fitch expects the public debt to be reduced gradually, it will remain a long-term weakness for the country.
Fitch is the second credit rating agency which in the past month and a half has improved outlook for Croatian rating – Standard & Poor's upgraded the outlook from negative to stable in mid-December last year. All three leading international rating agencies – Fitch, Standard & Poor's and Moody's – continue to keep Croatia’s credit rating two notches below the investment level, but now only Moody’s has a negative outlook, while Fitch and Standard & Poor’s have changed it to stable.
