Croatia’s credit rating is well-supported after Fitch Ratings cut its outlook to negative from stable over the government’s forecast for a wider budget gap next year, an executive with the ratings company said.
“The rating is underpinned by a number of factors, such as high GDP per capita, low inflation, well-capitalized banks, European Union accession in the near future, and improved government over the last 10 years,” Michele Napolitano, an associate director at Fitch’s Emerging Europe Sovereign team in London, said today in a teleconference.
Fitch on Nov. 29 lowered Croatia’s outlook to negative from stable, saying the 2013 budget proposal reduces the credibility of its fiscal consolidation plan. It also affirmed the country’s sovereign debt rating at BBB-, the lowest investment grade.
Croatia, which is set to become the European Union’s 28th member in July 2013, is struggling to emerge out of a renewed recession. The government on Nov. 19 said the budget deficit will widen as the Cabinet repays debt and begins contributing to EU coffers after entry in July.
It also cut the 2012 forecast to a 1.1 percent contraction, citing an investment drought due to Europe’s sovereign debt crisis.
The 2013 budget proposal remains “a negative surprise for us,” Napolitano said. The budget “disappoints in areas of fiscal credibility, its impact on debt dynamics, and its unexpected increase of expenditures.”
The 11-month-old Cabinet of Prime Minister Zoran Milanovic, needs to push through a “more rapid” fiscal consolidation and undertake public sector reforms, as well as to stabilize public debt and start to reduce it, Napolitano said.
Fitch on Sept. 5 raised Croatia’s outlook to stable from negative, citing the government’s progress in cutting costs and narrowing the budget deficit.
“We were clear in September on what the plan was, and we are a bit uncertain of what the current plan of the government is, and we’d like to see a more coherent strategy to reduce public debt levels,” Napolitano said.
Napolitano also said the government may spend less in capital investment than it had planned, which would contribute to narrowing the budget gap.
Fitch said Croatia’s public debt will peak in 2016 at 62 percent of gross domestic product, while the government said it will peak in 2014 at 56 percent of GDP.
“Croatia is somewhat punished by the government presenting the consolidated, rather than the stand-alone, budget, as many countries in the region do not fully budget for extra-budgetary users such as Croatian Highways or Croatian Waters,” said Petr Grishin, a chief economist for central Europe at Moscow-based VTB Capital. These state companies are responsible for half of the additional deficit expected in 2013, in comparison to the previous plan, Grishin said by e-mail.
The International Monetary Fund on Nov. 13 said Croatia’s economy will shrink 1.5 percent this year, urging the government to remove barriers to investment and employment in order to return to growth in 2013. The European Commission said on Nov. 7 the economy will contract 1.9 percent in 2012.
Croatia is rated an equivalent Baa3 at Moody’s, the lowest investment grade, level with Latvia and Romania. It is rated BBB- by Standard & Poor’s.