Moody’s Investors Service changed Croatia’s outlook to positive from stable, and affirmed the country’s long-term local and foreign currency issuer and senior unsecured debt credit rating at Ba2.
The credit rating agency recalls that in 2017 Croatia recorded the first budgetary surplus of 0.8% of GDP and that the positive momentum “was confirmed in 2018, although the surplus was lower (0.2% of GDP), in large part due to the activation of the state guarantee regarding the Uljanik shipyard.”
Moody’s underscores that “the improved fiscal performance is mainly attributable to a significant reduction in the structural deficit, meaning that public finances are strengthening in a durable way.”
The agency expects a solid surplus of the primary balance to be maintained in the coming years.
It notes that the government’s debt reduction has progressed steadily since the 2014 peak (84% of GDP).
“Under its base case scenario, Moody’s expects that continued fiscal prudence and positive economic growth will allow public debt to continue its downward trend and reach around 70% of GDP in 2020,” reads the report on Croatia.
The document recalls that the set of measures contained in the new Fiscal Responsibility Act which was approved by the Croatian Parliament at the end of 2018 should strengthen the existing fiscal framework. All that will bring Croatia’s framework closer to the European standards.
“Furthermore, in the medium-term, the pension reform enacted in late 2018 will contribute to the fiscal sustainability of the system while ensuring better pension adequacy. The acceleration in the planned increase in the statutory retirement age to 67, coupled with the equalization of retirement age for men and women, will support the decrease in public pension expenditure expected by the European Commission’s 2018 Ageing report (- 3.8% of GDP in 2070 compared to 2016). The supplement granted to multi-pillar pensioners will help to improve the low pension adequacy,” Moody’s says.
Finally, the resolution of the Agrokor retail conglomerate crisis “removes a significant source of uncertainty for the economy and a potential contingent liability for the State.”
The credit rating agency also underscores that the growth prospects may benefit from recent reforms.
Following a 6-year long recession between 2009 and 2014, the Croatian economy rebounded in 2015, with real GDP growth averaging 2.9% since.