October 24 (SeeNews) - Japan's Rating and Investment Information (R&I) said on Tuesday it has affirmed Croatia's foreign currency issuer rating at BBB-, while at the same time maintaining its negative outlook on the country.
R&I explained in a statement that the rating outlook will be changed to stable if it is ascertained that the restructuring process at Croatia's largest private company Agrokor will take place in an orderly manner without causing excessive stress on the economy and fiscal position.
The agency issued the following statement:
"Croatia's economy remains on a solid recovery path. Its fiscal deficit is narrowing at a pace faster than initially expected, and outstanding government debt is on a downward trajectory. The stability of the financial system will also likely be intact. The country's political situation has stabilized for now, and the coalition government led by Prime Minister Andrej Plenkovic is poised to push ahead with economic and fiscal reforms. Although sizable government debt and external debt are of concern, the likelihood of a rapid deterioration in the funding environment is low, given the improving economy and fiscal position. In consideration of these factors, R&I has affirmed the Foreign Currency Issuer Rating at BBB-.
The Rating Outlook continues to be Negative, because R&I judged that it needs to confirm developments in the restructuring of the Agrokor Group, the country's largest private company struggling with a debt crisis. The Rating Outlook will be changed to Stable, if it is ascertained that the restructuring will take place in an orderly manner without causing excessive stress on the economy and fiscal position.
Real gross domestic product (GDP) returned to positive growth in 2015 and grew as much as 3.0% in 2016. The economy keeps solid in 2017. The International Monetary Fund forecasts that a full-year growth rate will be almost flat with a year earlier. A downside risk to the economic forecast is future developments in the Agrokor Group's debt crisis. As of end-2016, the group's total debt was equivalent to around 16% of Croatia's GDP. Procedures for the restructuring are currently underway, led by the government-appointed extraordinary administration. While many believe that the economy's recovery trend will be maintained as long as the restructuring is orderly, attention should be paid to what impact it will have during that process, given the group's presence in the economy.
The current account balance remains positive, with a surplus of 2.6% of GDP in 2016. The country is expected to run a surplus going forward. External debt is high, standing at 86.1% of GDP as of end-2Q 2017. Moreover, its net international investment position is significantly negative, with external financial liabilities exceeding external financial assets. Since foreign reserves are almost at the same level as the external debt maturing within a year, concern about foreign currency liquidity is small for the time being. Even so, R&I must be mindful of the vulnerability of the country's funding environment to global financial market volatility.
The general government fiscal deficit in 2016 narrowed to 0.8% of GDP, much lower than anticipated. In response to this, the European Council decided to close excessive deficit procedures for Croatia. The government plans to reduce the fiscal deficit for 2017 to 1.3% of GDP. This is higher than a year earlier, but is lower than the level projected under the convergence program in the previous year. As part of the tax reforms implemented at end-2016, rates of personal income tax and corporate tax were reduced. Such measures work against revenues, but the government intends to curtail fiscal deficits by continuing efforts to rein in expenditures. In light of the solid economy, R&I considers the risk of the fiscal balance deviating substantially from the government plan as low.
After peaking in 2015, outstanding general government debt began to decrease, amounting to 84.2% of GDP at end-2016. On the back of a primary surplus and higher nominal GDP, debt will likely keep falling. While the decline in government debt is a positive factor, the government's heavy indebtedness still warrants attention.
Although an economic recovery continues, efforts to address the structural issues that caused the prolonged economic slump have not well progressed. A delay in the reinforcement of the supply side of the economy could cap economic growth in the medium to long term. The government is keen on tackling key reform areas, including public sector efficiency, the labor market, the education system and healthcare. R&I will keep an eye on whether the government is able to exhibit its ability to carry out the reforms by capitalizing on the European Union's framework for bolstering economic governance."