Standard & Poor’s Ratings Services said it affirmed its ‘BBB/A-3’ foreign currency and ‘BBB+/A-2’ local currency sovereign credit ratings on the Republic of Croatia. The outlook is stable.
“The ratings on Croatia are supported by its strong record of reform and structural economic improvement over the past few years, by the policy anchor provided by EU integration, and by the economy’s good growth prospects, ” said Standard & Poor’s credit analyst Remy Salters. “These factors are offset by Croatia’s high, albeit stabilizing, private sector net external debt burden, by the need for further structural reforms, and by significant reliance on the performance of the tourism sector. ”
Croatia’s negotiations for EU membership underpin the strength of the policy anchor provided by EU integration. The government is steadily pursuing structural reforms, in particular by restructuring the remaining loss-making public enterprises. EU integration will further spur efforts to modernize the legal, regulatory, and judicial systems, and to improve corporate governance standards. Real economic growth is forecast at 4.5%-5.0% per year in the medium term.
The government remains committed to steady medium-term fiscal consolidation, with plans to lower the general government deficit to 1.5% of GDP by 2009 (ESA 95 definition), which is a realistic medium-term goal. Further structural adjustments lie ahead, however, including more sustainable cuts in the public wage bill, further reductions in subsidies and transfers, public enterprise restructuring, more far-reaching health care reforms, and better targeting of social benefits. The general election, scheduled for November 2007, is not expected to lead to major changes in economic policy, but might delay fiscal consolidation temporarily.
Although financial sector net external debt is expected to continue rising in the medium term, the progression should slow as credit growth abates, dampening the background risks to the economy and contingent liabilities for the government. Croatia’s total external debt is expected to remain broadly stable over the period to 2010, at about 130% of current account receipts.
“Ongoing improvements to fiscal and external accounts are counterbalanced by the need for structural changes to make these improvements sustainable in the long term,” said Mr. Salters.
An upgrade will require continued fiscal consolidation and sustained progress with structural reforms. Conversely, a loosening of fiscal consolidation, or a lasting reversal of the ongoing stabilization of external debt dynamics, could create downward pressure on the ratings.
