Croatia May Issue Dollar Bond by Year’s End Despite Rating Cut
Croatia will probably shake off last week’s downgrade to junk by ratings company Fitch and issue a dollar bond to tap investor appetite fueled by Federal Reserve stimulus, analysts in London and Croatia said.
Facing 2 billion euros ($2.7 billion) in payments for debt maturing by next April, the European Union’s newest member could benefit from the Fed’s surprise decision last week to refrain from paring back its bond-buying program, said Abbas Ameli-Renani, an emerging-markets strategist at Royal Bank of Scotland Group Plc. The Finance Ministry in Zagreb didn’t immediately respond when asked for comment today.
“I expect Croatia to issue a 1-billion to 1.5-billion dollar bond before year’s end,” Ameli-Renani said in e-mailed response to Bloomberg questions. “The next big maturity comes in April so they could wait until early 2014 if they wanted to, but the market is unlikely to be as generous with its cash in 2014 as it is now.”
The Adriatic nation has struggled to keep public finances in check during the economic crisis, which has knocked more than 10 percent off economic output and squeezed foreign direct investment by 80 percent since 2008. In its downgrade, Fitch said it expected Zagreb to overshoot its 2013 budget gap target.
Croatia’s 10-year borrowing costs, which fell below 6 percent earlier this month, rose today. The yield on the country’s 2023 dollar bond increased 12 basis points, or 0.12 percentage point, to 5.819 at 12:33 p.m., the highest since Sept. 18. Croatia last tapped international markets in March, selling $1.5 billion of 10-year bonds at 5.625 percent.
Any failure of the economy to recover will put further strain on public finances and could lead to more downgrades, Fitch said last week. It said Croatia should trim its bloated public sector to exit a recession and improve potential growth over the medium term. The government is expected to release fiscal guidance for the short and medium term on Sept. 26.
“The timing is good for Croatia to look at a new Eurobond, as it faces sizable maturities in 2014,” Hrvoje Stojic, the chief economist at the Croatian unit of Hypo Alpe-Adria-Bank International AG, said by phone from Rovinj, Croatia. “But as it can’t come to investors empty-handed, the government should clearly demonstrate commitment to reforms in the fiscal guideline plan later this week.”
Zagreb planned to offer 5 billion kuna in bonds on the domestic market, Assistant Finance Minister Miljenko Ficor said in May. That would be unnecessary if it sells bonds abroad.
Zdeslav Santic, the chief economist at Soc-Gen Splitska Banka d.d., said by phone from Zagreb that Croatia may issue $1 billion to $1.5 billion in bonds “around November.”
Fitch cut Croatia’s long-term foreign-currency debt rating to BB+, one level below investment grade, from BBB- with a stable outlook. It shaved its local currency rating to BBB- from BBB, citing worsening fiscal prospects.
It said Croatia’s fiscal deficit would slide to 4.7 percent of gross domestic product this year, wider than its previous estimate of 3.9 percent. The gap probably surpassed the government’s full-year goal of 3.4 percent of GDP in the first six months of the year, according to the Finance Ministry.
The government expects 0.7 percent growth this year, compared with the European Commission’s estimate of a 1 percent contraction.
The downgrade to junk followed similar moves from Standard & Poor’s and Moody’s Investors Service, putting Croatia on par with Portugal and Hungary. Fitch also raised its estimate on public debt, saying it would peak at 66 percent of GDP in 2016, rather than 62 percent.
Because the downgrade was the last by the main three rating companies, the impact on Croatia’s borrowing costs would be limited, Ameli Renani said.
“From the market’s perspective, Fitch’s rating downgrade is largely irrelevant,” he said, adding he doesn’t expect a sell-off beyond the initial reaction on Sept. 20.
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