Sept 20 (The following statement was released by the rating
Fitch Ratings has downgraded Croatia's Long-term foreign currency Issuer Default
Rating (IDR) to 'BB+' from 'BBB-', while the Long-term local currency rating has
been downgraded to 'BBB-' from 'BBB'. The Short-term foreign currency IDR has
also been downgraded to 'B' from 'F3' and the Country Ceiling is lowered to
'BBB' from 'BBB+'. The Outlook on the Long-term IDRs is Stable.
KEY RATING DRIVERS
The downgrade of Croatia's IDRs reflects the following key rating drivers, all
of which have been assigned a high weight:-
- Croatia's fiscal outlook has deteriorated since Fitch's previous sovereign
rating review in November 2012. The agency has revised up its forecast for this
year's general government deficit to 4.7% in 2013 from 3.9%, while general
government debt/GDP is now expected to peak at 66% of GDP in 2016, up from our
previous forecast of 62%. Stock-flow adjustments, emanating from the
restructuring of loss-making state-owned enterprises, pose further risks to
public debt sustainability.
- A structurally weak growth outlook has impaired the prospects for fiscal
consolidation and the attainment of public debt sustainability. Real GDP growth
has significantly underperformed 'BBB' and 'BB' medians: the economy has been
mired in recession since 2009, contracting by a cumulative 11%, and unemployment
far exceeds rating peers. Q213 national accounts suggest that the rate of
contraction is declining, but Fitch now expects the economy to contract by a
further 0.9% in 2013, in contrast to our previous expectation of growth of 0.3%.
- Revised budget projections, published in March, point to a mild fiscal
consolidation strategy based on government growth forecasts of 0.7% in 2013 and
2.4% in 2014. Measures to clamp down on tax evasion and improve compliance have
borne fruit, but revenues have fallen this year, whilst pressures continue to
build on the expenditure side. Fitch's projections for growth and general
government balances are materially worse than official projections.
- Limited progress on implementing credible medium-term fiscal consolidation
strategy. The late-2012 announcement of a relaxation of budget targets for 2013
breached a short-lived Fiscal Responsibility Law.
Croatia's 'BB+' foreign currency IDR and Stable Outlook reflect the following
key rating drivers:-
- High per capita income relative to 'BBB' and 'BB' peers, matched by superior
human development and governance metrics. Croatia's recent accession to the EU
could provide the road map for fiscal consolidation within the framework of the
Excessive Deficit Procedure.
- Croatia's rigid labour market and weak business environment undermine
competitiveness and hamper medium term growth, while the near-term outlook for
major trading partners Italy and Slovenia is poor.
- The economy as a whole is relatively highly leveraged, notwithstanding a
balanced current account. Net external debt stood at 62.5% of GDP in 2012.
- Markedly lower and less volatile inflation than peers and a stable real
exchange rate. A well-developed domestic capital market and a strong, majority
foreign-owned banking system also play to Croatia's advantage, enhancing fiscal
- The risk to the public finances is compounded by the extension of public debt
guarantees which amounted to 11.7% of GDP at end-2012. The potential for these
liabilities to crystallise on the government's balance sheet is high:
restructuring of some shipyards in 2012 entailed a transfer of liabilities (and
increase in general government debt) equivalent to 2.8% of GDP.
The Stable Outlook reflects Fitch's assessment that upside and downside risks to
the 'BB+' rating are broadly balanced. Nonetheless, the following risk factors
individually, or collectively, could trigger a rating action:
- Failure to implement a credible medium term fiscal consolidation strategy
would further impair public debt sustainability. This would ultimately lead to a
further negative rating action. By contrast, greater progress on fiscal reform
and deficit-reduction would put positive pressure on the rating over the medium
- Failure of the economy to recover would put further strains on the public
finances and could lead to negative rating action. Conversely, restoring
economic growth and anchoring fiscal policy would be rating positive. Structural
reforms could improve potential growth over the medium term.
Croatia's rating is based on a number of key assumptions:-
- Croatia's track record of monetary and exchange rate stability is assumed to
remain intact, minimising the risks to household, corporate and public sector
balance sheets, all of which are heavily euroised.
- Eurostat ESA95 data revisions, following Croatia's recent accession to the
European Union, do not result in any material upward revisions in public
deficits and debt not previously identified.
- Fitch assumes there will be progress in deepening fiscal and financial
integration at the eurozone level in line with commitments by policy makers. It
also assumes that the risk of fragmentation of the eurozone remains low.