January 30 (SeeNews) - Fitch Ratings said it has revised the outlook on Croatia's long-term foreign and local currency issuer default ratings (IDR) to stable from negative and affirmed the IDRs at 'BB'.
The country ceiling has been affirmed at 'BBB-' and the short-term foreign currency and local currency IDRs at 'B', Fitch said in a statement late on Friday.
"The issue ratings on Croatia's senior unsecured foreign and local currency bonds have been affirmed at 'BB' and the issue ratings on Croatia's senior unsecured short-term bonds have been affirmed at 'B'", the rating agency noted.
Fitch also said:
"KEY RATING DRIVERS
Croatia's ratings balance strong structural features, including human development and governance indicators, with weak growth potential, high public and private debt and external vulnerabilities.
The revision of the Outlook on the Long-Term IDR to Stable reflects the following key drivers and their relative weights:
MEDIUM
The budget deficit narrowed to an estimated 1.8% of GDP in 2016, much lower than envisaged under the initial budget (2.6%) and narrower than the 'BB' median. Part of the improvement is cyclical, reflecting outperforming growth-induced revenues and under-performance of capital spending. However, the nominal freeze in spending throughout the year also helped contain the deficit. The resulting primary surplus has driven public debt down, to an estimated 84.8% of GDP, for the first time since 2007. Fitch expects the deficit to remain around 2% of GDP over the forecast horizon, maintaining a downward trajectory of public debt.
Political risks have receded following the formation of a new coalition government in October 2016. HDZ and Most have allied again, but this coalition could be more stable given the change in HDZ management and the larger majority in parliament. A tax reform and the 2017 budget have been passed without major tensions in recent months, and the government remains committed to its structural reform agenda. Regional elections could raise tensions within the coalition and postpone some structural reforms, but the political agenda will be clearer afterwards until 2020.
Real GDP growth picked up in 2016 to an estimated 2.8% (2015: 1.6%). The rebound is partly cyclical after a long recession, but it also reflects better EU fund absorption, a record tourism season following years of rising investment in the sector and further growth in goods exports, which we expect will drive growth in the range of 2.5%-3.0% again in 2017.
Croatia's 'BB' IDRs also reflect the following key rating drivers:
The level and composition of general government debt remains a key rating weakness. It accounted for an estimated 84.8% of GDP at end-2016, much higher than 'BB' median of 51.4%, and around 70% was denominated in foreign-currency (BB median: 51.3%). Structurally high annual refinancing needs will peak this year, when the government has to refinance 16% of GDP of debt. Fitch expects public debt to gradually decline over the forecast horizon, but it will remain a long-term weakness.
Macroeconomic performance compares unfavourably with 'BB' peers, despite the recent rebound in growth. Real GDP growth and volatility are worse than medians, and the unemployment rate is particularly high, at an estimated 13.6% at end-2016. Medium-term potential, currently at 1%-2%, remains low for a country at Croatia's income level, reflecting adverse demographics, structural rigidities, high private indebtedness and low investment during the six-year recession in 2009-2014. The economy is also heavily exposed to the tourism sector. Fitch expects real GDP growth to remain below the peer median over the forecast horizon, but some upside potential could follow private sector deleveraging, and the implementation of some envisaged reforms, including the public administration reform or simplified procedures for absorption of EU funds, which remain under-utilised.
Risks from the banking sector appear moderate given strong capitalisation and liquidity metrics, as well as large foreign ownership. NPLs are still high, at 14.7% of gross loans at September 2016, particularly in the corporate sector, but continue declining (2015:16.7%) and banks have become net external creditors since 2015 following steady deleveraging. The central bank intends to maintain its accommodative monetary policy, providing banks with long-term kuna liquidity, which could help credit growth to gradually recover after it declined by another 3% in 2016. However, the economy's high euroisation renders the banking sector very dependent on the stability of the exchange rate (82.7% of deposits were denominated in foreign currency at September 2016).
Despite running a current account surplus since 2013, at around 3% of GDP at end-2016, Croatia's net external debt remains twice as high as the 'BB' median (42.3% of GDP at end-2016 against 20.2%). This reflects a legacy of high corporate and government external debt. Fitch expects its decline to continue over the forecast horizon as the current account remains in surplus, but external interest and debt service ratios are particularly high, exposing the country to refinancing and exchange rate depreciation risk. The risk is somewhat mitigated by the strength of the peg, supported by strong reserves, accounting for more than six months of current account payments at end-2016.
Croatia's structural features are strong for a country in the 'BB' rating category, underpinning higher debt tolerance than peers. Human and financial development indicators, as well as governance and doing business indicators, compare favourably with both 'BB' and 'BBB' medians.
SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO)
Fitch's proprietary SRM assigns Croatia score equivalent to a rating of 'BBB-' on the Long-Term FC IDR scale.
Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to rated peers, as follows:
- Public finances: -1 notch, to reflect non linearity of public debt at high levels not captured in the SRM and the high related refinancing needs
- External finances: -1 notch, to reflect the high net external debt (which is not captured in the SRM)
Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.
RATING SENSITIVITIES
The Stable Outlook reflects Fitch's assessment that the upside and downside risks are broadly balanced.
The main factors that, individually or collectively, could trigger positive rating action are:
- Continued fiscal consolidation ensuring a material reduction in the public debt ratio.
- Strengthening of growth prospects and competitiveness, including through the implementation of structural reforms.
The main factors that, individually or collectively, could trigger negative rating action are:
- A reversal of fiscal consolidation, leading to unfavourable public debt dynamics.
- Deterioration in growth prospects.
KEY ASSUMPTIONS
Fitch assumes that world growth will reach 2.9% in 2017 and 2018, while the eurozone is expected to grow by 1.4% in both years.
Fitch expects Croatia's track record of monetary and exchange rate stability to continue, minimising the risks to household, corporate and government balance sheets, all of which are heavily euroised."