August 30 (SeeNews) - Japan's Rating and Investment Information (R&I) said on Thursday it has affirmed Croatia's foreign currency issuer rating at BBB- and changed the rating outlook to stable from negative.
"Croatia's economy remains on a solid recovery path. With its fiscal balance moving into surplus in 2017, outstanding government debt is on a downward trajectory," R&I said in a statement.
The rating agency noted that the restructuring of the country's ailing Agrokor concern is not undermining the country's economic and fiscal recovery, and that this will unlikely change.
Additionally, Croatia's has shown a decline in external debt mainly driven by consistent current account surpluses and domestic deleveraging, it said.
R&I also said:
"Real gross domestic product (GDP) returned to positive growth in 2015 and grew 2.9% in 2017. The drivers of the economy are private consumption primarily boosted by fiscal measures to invigorate the labor market and cut income tax, and the buoyant tourism sector. With this trend continuing into 2018, the central bank projects 2.8% growth for 2018 and 2019. The restructuring plan of the Agrokor Group, the country's largest private company in financial distress, was approved in July 2018, which is a major step toward resolution of the issue. Given the appeal filed by some creditors opposing the plan, it appears to take time before the plan is implemented. Even so, the risk of the issue derailing the economic recovery has receded.
The current account balance remains positive, with a surplus of 3.9% of GDP in 2017. The current account surplus widened from a year earlier as a result of a narrowing in the primary income deficit, which was attributable to the Agrokor crisis. Going forward, the country is expected to run smaller surpluses than in 2017. External debt is on a declining trend, standing at 82% of GDP at end-1Q 2018. Since foreign reserves exceed the external debt maturing within a year, foreign currency liquidity will not be a concern for the foreseeable future. That said, external debt is high, as suggested by a large negative net international investment position. R&I must be mindful of the country's vulnerability to global financial market volatility.
With the ratio of non-performing loans falling moderately, the banking sector enjoys solid earnings. Its liquidity coverage and capital adequacy ratios are both well above requirements. R&I considers that the financial system remains stable. As domestic currency loans to households are growing, securing longterm domestic currency funding sources is a challenge facing banks. Despite the central bank's support measures such as offering long-term liquidity facilities, the duration mismatch between domestic currency assets and liabilities will unlikely be fixed, unless residents' deposit behaviors change fundamentally.
The general government fiscal balance turned into a surplus of 0.8% of GDP in 2017. The improvement of more than 2 percentage points from the initial projection was brought by the tax revenue growth and expenditure restraint that exceeded assumptions. The government projects fiscal deficits of 0.5% and 0.4% of GDP for 2018 and 2019, respectively, which incorporate an increase in spending and the effect of a new tax cut package to be introduced in 2019. Because the realized fiscal balance in 2017 is not taken into account, however, the actual fiscal balance will most likely outperform the projections. R&I expects the government to maintain its sound fiscal position for the foreseeable future, backed by the strong economy and political stability. In tandem with improvement in the fiscal balance, the outstanding general government debt to GDP ratio has been decreasing, amounting to 78% at end-2017. While the decline in government debt is a positive factor, the government's heavy indebtedness still warrants attention.
Although the economic recovery continues, efforts to address the structural issues that caused a prolonged economic slump have not well progressed. According to the European Commission's estimate, the Croatian economy's potential growth rate is 1-2%, one of the lowest among non-euro European Union countries. Given the ongoing outflow of labor from Croatia, a delay in reinforcement of the supply side of the economy could harm economic growth in the medium to long term. The government's National Reform Programme calls for reforms designed to boost the competitiveness of the national economy, make the education system congruent with the needs of the labor market, and make public finances sustainable. R&I will keep an eye on whether the Plenkovic administration is able to exhibit its ability to carry out the reforms."