March 30 (SeeNews) - Croatia's Ba2 rating with a stable outlook balances relatively high per capita income and the benefits of its European Union (EU) membership against its weak fiscal position and high government debt burden, Moody's Investors Service said in a report on Thursday.
"Croatia has recently experienced positive economic and fiscal trends, with stronger than expected medium-term economic growth," said Simon Griffin, a Moody's senior vice president - senior analyst and co-author of the report. "We expect the economy to continue to grow by 2.5% each year on average over the next few years, whilst its debt-to-GDP ratio is expected to fall this year."
Earlier this month, the ratings agency changed Croatia's outlook to stable from negative and affirmed its Ba2 senior unsecured bond and Ba2 long-term issuer ratings.
In its latest report on the country, Moody's said credit challenges for Croatia include its weak fiscal position and its high government debt burden, the slow pace of structural reform and unsustainable growth dynamics. "Its rating continues to be constrained at the Ba2 level by structural weaknesses in its economy, given the absence of a structural reform agenda," it noted.
Failure to implement a comprehensive structural reform programme could exert downward pressure upon the rating as this would be likely to lead to weaker growth and to increases in its public debt in the longer-term, Moody's commented.
"Given the lack of fiscal space, a weakening in the growth outlook based upon both domestic and external factors would be negative. Pressure might also result from an assessment that the external vulnerability metrics of Croatia have deteriorated to an extent that they fall significantly below those of Ba2-rated peers," it added.
Moody's commented that upward pressure upon the Ba2 rating might occur if the coalition government were to use the more stable political environment to advance its programme of economic and fiscal reforms in a way that would further the long-term economic potential of Croatia and keep public debt on a downward path.
"As the fiscal deficit will decline again next year, to just under 2% of GDP, Moody's expects the general government debt-to-GDP ratio to maintain its downward trend and reach 78.6% in 2020. The continued integration of Croatia into the EU, in combination with policy efforts to improve the investment climate, might in the longer term support an acceleration in GDP growth," it concluded.