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RPT - Fitch cuts Croatia's long-term foreign currency issuer default rating
September 20, 2013 / 4:30 PM / 4 years ago

RPT - Fitch cuts Croatia's long-term foreign currency issuer default rating

Sept 20 (Reuters) - (The following statement was released by the rating
agency)
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 
financing flexibility.

- 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.

RATING SENSITIVITIES 

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 
term.

- 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.

KEY ASSUMPTIONS

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.

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