Croatia Won’t Seek IMF Funding After Rating Cut to Junk

Croatia Won’t Seek IMF Help After Rating Downgrade to Junk
Croatia is struggling to return to growth after the economy shrank in four consecutive quarters. Photographer: Oliver Bunic/Bloomberg

Croatia won’t seek a loan from the International Monetary Fund after Standard & Poor’s cut the country’s sovereign-debt rating to junk, Prime Minister Zoran Milanovic said.

The credit rating company on Dec. 14 lowered Croatia’s long-term credit rating to BB+, the highest non-investment level, saying the country’s structural and fiscal overhaul is insufficient to promote growth and make government finances more sustainable. Central bank Governor Boris Vujcic said yesterday Croatia should continue to borrow both abroad and domestically, adding there is no need for the release of foreign-currency reserves to aid borrowing.

“We believe we can do it alone,” Milanovic said on private Nova TV late yesterday. “The situation is difficult, but not catastrophic, and it will prompt us to look at our decisions.”

The Adriatic Sea nation is struggling to return to growth after the economy shrank in four consecutive quarters. The government on Nov. 19 said the budget deficit will widen as the Cabinet repays debt and begins contributing to EU coffers after its entry in July 2013. It also cut the 2012 gross domestic product forecast to a 1.1 percent contraction, citing an investment drought due to Europe’s debt crisis.

The kuna was 0.3 percent weaker at 7.54 against the euro at 10:28 a.m. in Zagreb. The yield on the government bond due July 2020 rose to 4.741 percent from 4.631 percent on Dec. 14, the highest level this month.

Stable Kuna

Vujcic said the kuna will remain stable, “as a devaluation would deepen the recession and lead to a further decline in gross domestic product.”

Croatian public debt, estimated at 172 billion kuna ($30 billion) at the end of June, will increase to 55 percent of gross domestic product next year, while state borrowing will total 27 billion kuna, according to government figures. The government expected to sell about $2.5 billion of debt in January on the U.S. and European markets, with a second round later in 2013 on Asian markets.

Croatia can probably finance itself next year without a foreign-currency debt sale even without IMF aid as its financing needs for 2013 are “quite modest,” with no external bonds maturing, Abbas Ameli-Renani, an emerging-markets strategist at Royal Bank of Scotland Group Plc, said by e-mail.

“Croatia should have no difficulty borrowing abroad next year, despite the downgrade, as countries with much worse fundamentals and considerably lower credit ratings have been able to borrow in foreign currency this year,” London-based Ameli-Renani said.

Borrowing Costs

Finance Minister Slavko Linic said after the rating cut that Croatia may seek cooperation with the IMF and abandon debt sales abroad next year to avoid rising borrowing costs. The government won’t cut pensions and public sector wages as that would further reduce consumption, he added.

“While officials are floating differing views on potential relations with the IMF, we think a quick clarification of the policy stance and contingency budget plan must be dealt promptly,” Hrvoje Stojic, chief economist at Hypo Alpe Adria Bank d.d., a Croatian unit of Austria’s Hypo Alpe-Adria-Bank International AG, said by e-mail.

“Otherwise, downgrades from two other major rating agencies within the next two months cannot be ruled out,” he said.

Short-Term Rating

S&P also cut Croatia’s short-term grade one notch to B. The ratings carry a stable outlook, indicating that S&P is more likely to keep them unchanged than cut or raise them.

The downgrade puts Croatia’s credit rating on par with Romania and Indonesia. Fitch Ratings on Nov. 29 lowered its outlook for the former Yugoslav country’s debt, which it rates at the lowest investment grade, to negative from stable. Moody’s Investors Services on Nov. 19 confirmed an equivalent Baa3 credit rating, with a negative outlook.

“Structural and fiscal reforms implemented so far have been insufficient to foster economic growth and place public finances on a more sustainable path,” S&P said in the statement. “Policy inertia and opposition from vested interests that benefit from long-entrenched entitlements have contributed to wage and price rigidities, the low participation rate, and loss of economic competitiveness.”

Economic Contraction

The economy will contract 2 percent this year and stagnate in 2013, recovering gradually to trend growth of 2 percent by 2015, according to S&P.

The 11-month-old Cabinet of Prime Minister Zoran Milanovic, which has vowed to reduce public spending and remove obstacles to investment to speed up the sale of state companies, predicts the budget deficit will widen to 3.1 percent of GDP next year, while the economy will grow 1.8 percent.

Unemployment in the country of 4.2 million reached 19.6 percent in October, while there were no reductions in the public sector, which employs about 17 percent of the workforce.

After joining the EU, Croatia will benefit from structural and cohesion funds from the bloc, along with higher foreign-direct investment, S&P said. Still, prospects “for major growth- and competitiveness-enhancing reforms” are limited, it said.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE