As Frenki Lausic/Novac writes on the 30th of May, 2020, on Friday night, the credit rating agency Standard and Poor's (S&P) reaffirmed the Croatian credit rating as ''minus BBB'' with a stable outlook, despite the fact that it expects a nine percent drop in gross domestic product this year.

''The reason why we expect a nine percent decline in the Croatian economy is because of the strict measures against the spread of the new coronavirus in Croatia and abroad,'' reads a statement from the aforementioned credit rating agency.

Nevertheless, they believe that the reduction of macroeconomic imbalances in recent years has helped Croatia to be in a better position and better withstand the temporary shock without lasting negative consequences for government borrowing conditions, according to the S&P report, which kept Croatia's investment rating.

The fact that Croatia is highly dependent on tourism, which accounts for twenty percent of Croatia's GDP, is particularly noteworthy, but it is emphasised that the Croatian National Bank (CNB/HNB) has sufficient foreign exchange reserves and a so-called ''swap line'' with the European Central Bank (ECB) which allows for the alleviattion of pressures on the liquidity of the financial system.

It was also added that S&P believes that the Croatian National Bank has enough strength to maintain a stable exchange rate of the kuna against the euro.

''Despite the traditional uncertain political circumstances, Croatia's aspiration to join the Eurozone will have a positive impact on the implementation of some structural reforms in the next two or three years. Progress in improving the business climate, the public sector, the judiciary and productivity could thus result in an increase in income relative to the European Union (EU) average and slow down emigration,'' the report on the Croatian credit rating said.

For more information on the Croatian credit rating and much more, follow our business section.

ZAGREB, June 9, 2019 - Finance Minister Zdravko Marić said that Fitch's decision to raise Croatia’s credit rating was very good news and that he hoped Croatia would never again fall below the investment-grade level.

"We can all be satisfied, both the Republic of Croatia and all its citizens, entrepreneurs, taxpayers. It's more good news from international financial circles. Fitch is the second credit rating agency which, after many years, has restored Croatia's credit rating to the zone it belongs, the investment credit rating zone," Marić told reporters.

Fitch Ratings on Friday upgraded Croatia's long-term foreign-currency issuer default rating to BBB- from BB+ with a positive outlook.

Marić said it was necessary to see to it that Croatia did not fall below the investment-grade level ever again because "we know well what the sub-investment zone meant and what effects it had also on the cost of debt and capital."

Marić said he was very pleased and proud that the results in the fiscal policy had been recognised again, noting that they were one of the main reasons for the credit rating upgrade.

Certain risks, such as the ailing Uljanik shipyard, have been recognised too but we have adequately addressed all those risks, he said, noting that Croatia has been recording a budget surplus for two and a public debt reduction for three years in a row.

Marić said he was pleased the Fitch report recognised the idea of introducing the euro and the good macroeconomic indicators.

That's positive news which suggests that Fitch is saying very clearly that the rating can be even better if we continue to deliver results, notably in public finance, macroeconomy and euro introduction, he added.

He noted, however, that one must not turn a blind eye to the things Fitch indicated could be challenges, such as the enterprise and business climate, the state and the public administration, notably public companies and their corporate management, the energy sector and healthcare.

If we want completely sustainable public finances, and we do, we must deliver additional results in those areas, said Marić.

Asked if now was the right time to issue an international bond, he said he would say everything when the time came. He recalled that two bonds were due for refinancing this year, one of 1.5 billion dollars on the international market and one of 1 billion euro on the domestic market.

We are making preparations, always looking two steps ahead, following the situation on the markets, and we believe this will be a positive incentive both on financial markets and the price and yield of our bonds, said Marić.

He noted that a credit score upgrade was always related to the cost of debt and capital, not just the cost paid by taxpayers from the state budget, but the cost paid by all entrepreneurs and each citizen.

We are carefully preparing everything and will choose the right time. This will be another year in which we will record a significant decrease of the total interest cost, Marić said, adding that the amount paid on interest was reduced by almost 3 billion kuna in three years, to 9 billion kuna.

More news about Croatia’s credit rating can be found in the Business section.

ZAGREB, June 8, 2019 - Fitch Ratings raised Croatia’s credit rating to investment-grade level on Friday, by one notch to BBB-, with a positive outlook, from BB+.

"Croatia outperformed its budget target for the third year in a row in 2018, with the general government posting a surplus of 0.2% of GDP... despite the materialisation of contingent liabilities from troubled shipyard company Uljanik," the agency said.

"Fiscal developments have been underpinned by expenditure restraint, increased revenue... lower interest costs and favourable macro conditions," it added.

"Croatia's structural features are generally more favourable than 'BBB' peers. GDP per capita is 30% above the 'BBB' median and the country scores better than peers in governance indicators and human development, thanks in part to EU membership," said Fitch.

"The coalition government, installed in June 2017, has been able to implement its agenda relatively smoothly despite its small majority," it added.

"Croatia continues to face important structural challenges that limit medium-term growth to 2%. These include shortcomings in the business environment, a complex public sector framework, weak corporate governance, still high corporate debt and legacy issues in key sectors such as energy and healthcare," Fitch said.

"Limited progress has been achieved in tackling these issues in recent years, but there is some scope for improvement as potential prior actions for joining ERM2," it added. "Croatia benefits from low and stable inflation... The banking sector has maintained solid levels of capitalisation."

The positive outlook signals that Fitch could raise Croatia's rating again in a year or two.

Until now Fitch kept Croatia's credit score in the speculative category at BB+ with a positive outlook.

The latest rating followed after Moody's upheld Croatia's Ba2 speculative credit rating in late April, upgrading the outlook from stable to positive as a result of improved fiscal metrics and reforms the agency believes will have a positive impact on the economic growth outlook.

In March, Standard&Poor's raised Croatia's rating to BBB-/A+, including it in the investment category after more than six years thanks to an improved budget situation and economic recovery.

More news about Croatia’s credit rating can be found in the Business section.

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.

ZAGREB, April 19, 2019 - Raiffeisenbank Austria (RBA) analysts expect Croatia to end this year with growth rates similar to those in 2018 and, in their latest analysis, they comment on the restoration of Croatia's investment credit rating.

For now, Croatia's investment rating has been restored only by Standard & Poor's, but the other two rating agencies are expected to follow suit and confirm that, after nearly a decade, Croatia is back among countries with adequate credit quality, the analysis says.

It adds that such assessments will be a consequence of solid fiscal policy indicators, lower external vulnerability, continued economic growth, and preserved political stability.

RBA analysts note that Standard & Poor's restored Croatia's investment rating shortly after the European Commission's decision that Croatia no longer had excessive imbalances.

The strategic commitment to adopting the euro as the sole means of payment certainly also impacted the decision, they say, adding that according to announcements, the government and the central bank will send a letter of intent to Brussels, expressing interest to enter the euro area.

The central part of that envelope would be a list of reform measures to which Croatia would commit in order to make the nominal meeting of economic criteria viable.

The importance of reform measures is reflected in the Commission's latest report on Croatia, which says the recommended and necessary measures for sustainable and stronger growth are implemented partly and slowly, RBA analysts say.

The poor and slow resolving of internal structural problems can explain why Croatia, despite growth, lags behind comparable member states and why there are no major improvements on competitiveness rankings, they add.

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

ZAGREB, March 24, 2019 - Standard & Poor's raised its sovereign credit rating 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.

The BB+/B rating describes a country's debt securities as speculative investment, while BBB-/A-3 is an investment category. In December 2012, S&P downgraded Croatia's rating to a non-investment category. The outlook now is stable.

"The upgrade reflects Croatia's improving fiscal metrics, underpinned by its recent economic recovery thanks to tax-rich domestic demand, but also fiscal consolidation measures implemented by the authorities.

"The general government has run primary fiscal surpluses since 2015, including of 3% of GDP on average in 2017-2018, with public debt as a share of GDP declining by 10 percentage points between 2015 and 2018.

"Risks to GDP performance, public finance, and financial stability emanating from the bankruptcy of Croatia's largest food retailer Agrokor have abated. We also view the likelihood of fiscal slippages – from the payment of state guarantees against Uljanik shipyard's debt liabilities – as reduced," S&P says.

"Croatia's recent economic performance has been solid and balanced. Growth has been accompanied by recurring current account surpluses, driven by buoyant tourism-related inflows, allowing net external leverage to reduce severalfold to just 13% of GDP in 2018.

"The stable outlook balances the potential for a reform-driven faster income convergence with wealthier trading partners against risks emanating from external uncertainties.

"We could raise the ratings over the next two-to-three years if Croatia's economic growth proves resilient to Europe's cyclical slowdown, allowing continued convergence with EU average income levels and possibly aided by removing structural impediments to growth. If public debt reduced faster than we currently anticipate, this could also prove positive for the ratings.

"We could lower the ratings if we observed a material economic downturn, possibly driven by a significant weakening in the external environment, which would reverse recent fiscal gains. An emergence of higher-than-expected contingent liabilities could also put pressure on the ratings if such liabilities caused a sizable fiscal drain or a drag on the economy.

"External debt has declined amid ongoing export growth and persistent current account surpluses. Recent fiscal improvements also support the ratings," S&P says.

After in 2018 Croatia's economy grew by 2.6%, S&P expects economic growth to moderate to around 2.5% on average in 2019-2022. "The government has implemented tax and pension reform this year, but demographic trends will continue to weigh on the public purse."

"Croatia's economy has seen resilient growth since emerging from recession in 2015. In its flagship tourism sector, tourist arrivals have almost doubled since 2010 to around 20 million visitors in 2018.

"While tourism-related revenues amount to almost 20% of GDP, manufacturing as well as other services such as transportation are also important contributors to GDP," S&P says, noting that personal consumption will remain strong, helped by rising employment and wages as well as tax reforms.

"Investment should benefit from increasing EU fund absorption, public infrastructure investments such as the Pelješac bridge, soaring construction activity generally, and the effects of recent tax reforms.

"Net exports will detract from growth in 2019-2022 as domestic demand pulls in imports. Goods exports already started decelerating in 2018, which could worsen if there is a sizable and protracted slowdown in key trading partners such as Italy or Germany."

"Croatia has made progress on important structural reforms. The third round of taxation reform took effect in January 2019, among other things reducing the VAT rate for certain items. This in turn is set to stimulate disposable incomes, while reduced labour costs for employers could support investment activity."

"According to preliminary estimates, Croatia posted a general government surplus in 2018 for the second year in a row. This was supported by higher tax revenues but also expenditure savings, for example on the interest bill."

"The 2018 fiscal results could have been even better if the government guarantee for the struggling Uljanik shipyards had not been activated," says S&P.

S&P analysts estimate that the net general government debt will decline to just below 60% of GDP by 2022 from the 75% peak in 2015. They also estimate that inflation will be contained at about 1.5% on average over the coming two to three years.

They note that Croatia will be chairing the Council of the EU in the first half of 2020 and that it hopes to join the Exchange Rate Mechanism (ERM II) that same year.

Since early 2018 the country's rating or outlook have been upgraded by the world's three leading rating agencies, with S&P now having raised the country's rating to the investment category.

Fitch is keeping Croatia's rating one grade below and Moody's two grades below the investment category, with Fitch describing the country's outlook as positive and Moody's as stable.

More news on Croatia’s credit rating can be found in the Business section.

In late March, the first of the three world's leading credit rating agencies, S&P, will publish a revision of the Croatian credit rating, and local economic experts believe that this announcement will bring a return of the credit rating to the investment level, reports Večernji List on February 17, 2019.

S&P was also the first agency to drop the country's credit rating to the junk bond status in 2012 after it saw the government's lack of control over public finances and its lack of capacity for structural reforms. Seven years later, Croatia has not really implemented any reforms, but it does better manage its public finances, reducing the public debt and reaching a positive budget balance.

Many local economic experts believe that rating agencies are too strict in assessing Croatian situation, with the current rating being underestimated. “For almost two years, Croatia has been in a situation where financial markets value its debt at the investment level, while official ratings of the agencies are a step (or even two steps) behind the market,” said bond expert Goran Pavlović.

According to Pavlović, credit rating agencies should take into account the fact that Croatia has remained one of few transition countries that did not nationalize private pension savings, which means that the public finances are not much worse than those in neighbouring countries. If Croatia had nationalised its pension system according to the Hungarian model (complete abolishment), it would formally meet the Maastricht fiscal criteria in 2016 (public debt below 60% of GDP) and if it were to apply a milder Polish model in 2017.

The Economic Institute analyst Željko Lovrinčević agrees. “Regardless of the fact that the markets are already behaving as if we had investment rating, it is important that this also happens formally in order to distinguish ourselves from a group of countries that are perceived as risky if the situation in the European and global economies turn for the worse,” says Lovrinčević.

The improvement in the credit rating would also bring further reduction in interest rates, as well as the reduction of regulatory costs for the banking and insurance industries. Pavlović explains that some institutional investors are not allowed to invest in bonds issued by issuers who do not have an investment credit rating. Demand for bonds which do not have an investment rating is much weaker, which is normally offset by higher interest rates.

Bank analyst Zdeslav Šantić believes that the rating improvement will not immediately affect the price of borrowing because the market already behave as if this has happened but the future risk perception will be significantly reduced as Croatia approaches the euro. "I believe that the decision to keep the non-investment level has been affected by the situation in Agrokor, but that has largely been eliminated as a risk," concludes Šantić.

Translated from Večernji List (reported by Ljubica Gatarić).

More news about Croatia’s credit rating can be found in the Business section.

ZAGREB, December 8, 2018 - Fitch Ratings has affirmed Croatia's long-term foreign-currency Issuer Default Rating (IDR) at 'BB+' and maintained the country's outlook positive, saying that Croatia's credit rating is balanced by strong structural features, including human development and governance indicators and high GDP per capita, with weak growth potential, high public sector debt and external vulnerabilities.

The positive outlook reflects Fitch's expectation that the combination of persistent primary budget surpluses, low interest and healthy GDP growth will contribute to a continued marked reduction in gross general government debt.

In addition, Fitch expects Croatia to outperform its budget target for the third consecutive year in 2018, with a deficit forecast of 0.2% of GDP, compared with the government's deficit target of 0.5%. "Croatia's fiscal performance continues to benefit from strong revenue growth and expenditure restraint," Fitch said.

"This outperformance is despite the materialisation of contingent liabilities stemming from troubled shipyard company Uljanik, which we expect to amount to approximately 0.6% of GDP for this year," the rating agency said.

Fitch also forecasts the general government budget will remain broadly balanced in 2019-20, against the small deficits projected by the authorities. "Positive fiscal dynamics are underpinned by favourable nominal growth, the government's commitment to meeting its expenditure rules as well as the incentive of joining the eurozone," Fitch said.

The agency also forecasts general government debt/GDP to fall to 74.1% of GDP at end-2018, down from 84% at end-2014, and to 68.3% by 2020 and 61.9% by 2023 on the back of primary surpluses. "This would still be well above the historical 'BB' median of 38.3% of GDP," Fitch said.

External deleveraging continues at a rapid pace, supported by surpluses in the balance of payments.

Fitch forecasts the current account to post an average surplus of 2.3% of GDP in 2018-20, as services exports led by tourism and current transfers remain robust, offsetting a slowdown in tradable exports. This will support a build-up of foreign reserves and further strengthen the sovereign's net external creditor position, helping to limit external vulnerabilities.

The economy is set to maintain a moderate rate of expansion, averaging 2.5% in 2018-20, supported by private consumption growth and price/exchange rate stability.

The report also notes that medium-term economic prospects are limited by adverse demographic trends and structural weaknesses, with potential growth estimated at around 2%.

The main downside risks include a sharper-than-expected slowdown in GDP growth in key European markets and/or a slowdown in tourist inflows given the importance of the sector for growth, employment and external finances.

The banking sector remains stable with ample liquidity and capital levels well above the regulatory minimum (22.6% 3Q18). "Unlike the Agrokor fallout in 2017, banks have felt no impact from the troubles at Uljanik," Fitch said in its report, adding that profitability is set to increase only modestly, as aggregate credit demand remains muted.

The report also says that Croatia's structural features are much stronger than 'BB' peers. "GDP per capita is 60% above the 'BB' median and the country scores better than 'BB' and 'BBB' peers in terms of governance indicators and human development, thanks in part to EU membership. The coalition government, installed in June 2017, has been able to implement its agenda relatively smoothly despite its small majority," Fitch said in the report.

For more on Croatia’s credit rating, click here.

ZAGREB, September 22, 2018 - Standard&Poor's (S&P) has affirmed its 'BB+/B' long- and short-term local and foreign currency ratings on Croatia but it has revised its outlook on the country to positive from stable, owing to expectations that the country's economy will continue to grow and fiscal indicators will continue to improve.

ZAGREB, July 8, 2018 - Croatian Prime Minister Andrej Plenković said on Saturday that the latest report by the rating agency Fitch was "very encouraging" and that it recognised Croatia's efforts.