Finance Minister Zdravko Marić emphasized on Saturday that Croatia has received positive news from Standard&Poor’s (S&P) for the second time in less than a year and believes that the upgrade in outlook suggests a forthcoming improvement in credit rating.
The Standard & Poor’s (S&P) agency maintained Croatia’s long-term credit rating at ‘BB’ and short-term at ‘B’ on Friday, but raised the outlook from stable to positive as the Croatian economy continues to grow, while the debt burden decreases.
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“In less than a year, Croatia is receiving positive news from S&P for the second time,” Marić said in a statement to Hina, recalling that in December the agency raised the rating outlook from negative to stable. “Since 2007, we have not received any improvements in either our outlook or rating from rating agencies, so I consider this news good,” he added.
S&P’s expectations of reducing the public debt-to-GDP ratio to 75 percent by 2020 are considered completely realistic, “This is our important scenario, and we will do everything to be even better than that,” Marić said.
He noted that some domestic analysts, following financial markets, particularly the issuance of domestic bonds and their attractive prices and yields in the secondary market, reasonably expected that there could be an upgrade in the rating by one notch at this step.
“However, S&P analysts decided to suggest in two steps through the upgrade of our outlook that Croatia is very close to that next step – an upgrade in rating,” Marić stated.
He highlighted that S&P recognized that Croatia is on a stable growth trajectory of 3 percent, for which the credit goes largely to the Croatian economy, but also to the government, which is striving to make that growth more sustainable and stronger than current rates.
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“I am pleased that in this report, the efforts and results achieved in the area of public finances have been recognized again. This is no longer a short-term trend. We already have two years of continuously good indicators in public finances – historically low levels of deficit, in the first half of this year even a slight surplus in the general government budget, and we continue the trend of reducing public debt,” said the finance minister.
We want to dictate the rules ourselves and be persistent in our intention to reduce the deficit and public debt.
He also pointed out that S&P clearly stated that Croatia is doing well regarding external imbalances, which have been a significant problem for years, especially high current account deficits. “Now Croatia is achieving a surplus on the current account when looking at imports and exports of goods and services, i.e., tourism,” Marić said.
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He adds that S&P pointed out the next steps that Croatia must take towards structural reforms that will enhance the potential of the Croatian economy, making economic growth more stable and sustainable, which will consequently improve public finances further.
The budget for 2018 assumes a deficit of 0.8 percent and a public debt ratio below 80 percent of GDP
In response to a question about the budget for next year, Marić emphasized that he sees the budget deficit next year within 1 percent and further reduction of the public debt ratio, from this year’s 81.1 percent of GDP by an additional 2.5 percentage points lower.
“We want to dictate the rules ourselves and be persistent in our intention to reduce the deficit and public debt. For 2018, we assume that the general government deficit will be within 1 percent of GDP, the working assumption is 0.8 percent, and we expect the continuation of the reduction of the public debt ratio to GDP – by the end of this year, we expect that ratio to fall to 81.1 percent of GDP, and next year to be an additional 2.5 percentage points lower,” says Marić.
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S&P’s expectations of reducing the public debt-to-GDP ratio to 75 percent by 2020 are considered completely realistic, “This is our important scenario, and we will do everything to be even better than that,” Marić said, recalling that the government’s program states that the public debt ratio aims to be reduced by 10 percentage points over four years, or an average of 2.5 percentage points per year. “Already in the first year, and I believe in this second year as well, we are showing that we have better results than those estimates,” concluded Marić.
All three leading rating agencies – Fitch, S&P, and Moody’s – continue to hold Croatia’s credit rating two notches below investment grade. However, while Fitch and Moody’s maintain stable outlooks, S&P now holds a positive outlook, which means that its next move could also be an upgrade of the rating itself.
“We could raise Croatia’s rating if the economic recovery is sustained, while the government continues to demonstrate the ability and willingness to implement structural reforms and adheres to its fiscal consolidation plan, which will lead to sustainable consolidation of public finances,” S&P states.
They add that they could consider raising the rating if external imbalances improve faster than their baseline scenario as a result of stronger foreign deleveraging or faster growth in balance of payments receipts.
