November 4 (SeeNews) - Moody's Investors Service said on on Wednesday it has assigned its Baa3 rating to Croatia's new $1.5 billion, 10-year global bond issue, with stabile outlook.
Moody's released the following statement:
"[...] Croatia's rating is favourably impacted by its status as an EU candidate and constrained, in part, by high foreign indebtedness, both of the government and the country. The latter requires that the authorities maintain fiscal credibility in order to underpin exchange rate stability given the high level of high euroization of the economy.
"Amongst other things, EU candidacy provides a roadmap of reform that will strengthen economic convergence with the more advanced EU members," said Anthony Thomas, Vice President in Moody's Sovereign Risk Group. "The accession process is also spurring reforms in public administration and the judiciary, which are very supportive of Croatia's ratings over the medium term."
Thomas points out that Croatia's EU prospects were put into question as a result of a long-running border dispute with Slovenia earlier this year, but this strain eased in September when both parties agreed a new approach to resolving their disagreements. As a result Slovenia lifted its veto on Croatia's membership negotiations. There are hopes these could now be concluded by the middle of next year, thereby opening the way for Croatia to join the EU, most probably, in 2012.
"Fiscal credibility was also thrown into doubt as revenue shortfalls intensified several months ago," says Thomas. "Although the Croatian government avoided direct impact from the global credit crunch, as its banks are nearly all foreign owned, the small, open economy is now expected to contract by about 5% this year due to effects of the European recession."
Moody's says the weakness in activity inevitably put pressure on government finances. The government resisted pressure to seek assistance from the IMF, preferring instead to introduce fiscal measures as and when they deemed them necessary. Thomas projects that official deficit targets of a about 3% of GDP this year and 2% next will be overshot even after substantive measures were taken, but only by a small margin.
"In the worst-case scenario, which we believe is unlikely at this stage," adds Thomas, "the EU would probably provide limited support to Croatia given its status as a candidate for membership."
As a consequence, Croatia ends the year with its rating more secure as EU membership talks are back on track and fiscal pressures have stabilised. The kuna has also strengthened on the foreign exchange markets.
Moody's last rating action on the government of Croatia was on 17 April 2009, when the local currency government bond rating was downgraded to Baa3 from Baa2. Moody's also affirmed the Baa3 foreign currency government bond rating at that time, thereby unifying the two ratings at Baa3.”