March 15 (SeeNews) - Moody's said on Thursday Croatia's (Ba2 stable) credit profile balances its fiscal consolidation and EU membership supporting the strengthening of institutions against credit challenges such as the economy's weak potential growth and the slow pace of structural reform.
"Croatia's debt-to-GDP ratio looks likely to have fallen below 80% in 2017, a year earlier than we expected and an improvement of almost 4 percentage points since 2016," Evan Wohlmann, Moody's vice president - senior analyst, said in a rating agency's report on Croatia.
"This prudent budget performance allowed Croatia to exit the EU's Excessive Deficit Procedure in June last year and supports our view that the sovereign will be able to maintain fiscal deficits below 3% going forward", Wohlmann, also the co-author of the report, added.
Moody's said it expects Croatia's growth to remain robust in 2018, decelerating slightly to 2.7%, in line with the second half of 2017, moving closer to its medium-term forecasts of 2%-2.5% GDP growth.
Nevertheless, Moody's noted, the potential for a disorderly restructuring of Agrokor (Ca Negative), Croatia's largest private company, will continue to pose material downside risks to the economy.
Domestic demand will remain the key driver of economic growth, with private consumption supported by further improvements in the labour market, wage rises and a robust consumer confidence.
Moody's said that Croatia's low fiscal strength reflects the country's elevated debt-to-GDP ratio, which stems from relatively low nominal growth, previous high budget deficits and the assumption of state-owned enterprise (SOE) debt, as well as costs relating to the restructuring of SOEs.
However, against the backdrop of a better-than-expected public fiscal performance, Moody's said it believes that Croatia's debt-to-GDP ratio has declined to below 80% of GDP at year-end 2017, and further gradual declines are expected in the coming years.
The ratings agency explained that Croatia's susceptibility to event risk is low, despite some degree of political uncertainty continuing to weigh on the policy environment following the formation of a new coalition government in June 2017.
Banking sector risks also remain low, supported by improving asset quality and increased domestic lending.
Moody's concluded that upward pressure on the country's rating could develop if the government coalition were to introduce economic and fiscal reforms that improved Croatia's long-term economic potential and secured a downward trajectory in public indebtedness closer to the Ba-rated median.
It, however, cautioned that downward pressure might occur if the country is unable to implement a comprehensive structural reform programme in the coming years, given that such a failure would likely lead to weaker growth and increase its public debt in the long term.