novac - kune.jpg
Photograph: HINA/ Dario GRZELJ /ds

Moody's downgrade of Croatia's credit rating is no surprise because this agency kept its ratings one notch above the ratings of the other two leading ratings agencies, analysts say, adding however that this is not a positive sign because of Moody's suspicions regarding the announced implementation of government reforms.

Moody's Investors Service, a ratings agency, on Friday downgraded Croatia's long-term issuer and senior unsecured debtratings to Ba2 from Ba1 and maintained the negative outlook, explaining that the main rationales for the downgrade are a large and increasing public debt and weak medium-term growth prospects.

"This is in fact the adjustment of Moody's ratings with the ratings of the other two agencies. It is not a positive sign, but it is not unexpected either, given that last year Moody's skipped the ratings," said Zrinka Zivkovic-Matijevic, economic research director in Raiffeisenbank Austria.

Now, all three leading ratings agencies -- Moody's, Fitch and Standards&Poor's -- keep Croatia's rating two notches below the investment level with the negative outlook.

Moody's said that one of the key reasons for the lowering was the government's large and increasing debt burden which stood at around 86% of GDP at year-end 2015. Moody's expects it will increase to above 90% by 2018. The government, however, projected in its draft budget that this year's share of  the public debt in GDP would be stabilise and it would go down in the following years.

Moody's believes that the process of fiscal consolidation will be slow and halting, and expects a fiscal deficit of around 3.9% of GDP this year, weaker than the 3% of GDP criteria required to exit the European Union's (EU) excessive deficit procedure. 

"Reasons for the lowered ratings are a high public debt, the general area of the fiscal policy and a weak economic recovery. Moody's underscored that Croatia needs structural reforms which would encourage economic growth and lower the deficit and the public debt," Zivkovic-Matijevic said.

Moody's expects the new government to face significant challenges in implementing its reform agenda, which is designed to arrest the debt increase and to improve growth prospects. The agency also notes that Croatia is faced with continuing weak medium-term economic growth prospects, which derive from historically low investment and structural rigidities, including a low labour force participation rate, as well as bottlenecks in the absorption of EU funds.
In 2016, the agency expects growth of around 1.5%, while the government's draft budget is based on a 2% GDP growth.

"Projections regarding the 2% GDP growth and twice as high absorption of money from EU funds are pretty optimistic. The budget does not show that this government is prepared to implement reform moves which would enable the solving of deficit and public debt problems, as well as other structural disproportions, primarily the labour marker and the education system," said Luka Brkic, a professor at the Faculty of Political Sciences.

He stressed that the latest Moody's ratings did not make Croatia's position any worse than it had been several months ago.

"We are definitely below the investment ratings and this will not easily be changed," Brkic said.

Apart from reducing Croatia's ratings, Moody's has also kept the negative outlook.

In particular, Moody's notes that the current coalition in parliament between the Patriotic Coalition (led by the Croatian Democratic Union, HDZ) and the newly-formed party MOST (which translated as "Bridge") holds only a slim majority, especially following the latter's loss of four MPs.

"The wide range of political views within the coalition and the relative inexperience of MOST's MPs at the central government level increase the risk that the new government will be unable to sustain majority support in parliament for economic and fiscal reforms. While the new government has popular support for reforms as MOST campaigned on a pro-reform platform, some of the proposed reforms (such as the rationalization of the public administration) already face resistance from different parts of the coalition."

Zivkovic-Matijasevic however said that the government had recently announced its plan aimed at eliminating macroeconomic imbalances because of which Croatia risked corrective action from the European Commission. She added that the plan included measures and deadlines by which the government planned to carry out reforms and reduce the deficit and the public debt.

"If the government implements this plan, Moody's said it could upgrade the country's outlook from negative to stable," Zivkovic-Matijevic said.

Related stories

Croatian economy: Positive trends expected to continue

FinMin says gov't won't hesistate and delay reforms

FM: Moody's ratings based on former government's work

Latest news

Thousands of Romanians revive anti-government protests

Thousands of Romanians turned out on Sunday to renew their demands for the government to step down amid accusations it is trying to protect corrupt politicians.

Francis, first pope to visit Anglicans in Rome, weighs S Sudan trip

Pope Francis became the first leader of the Catholic Church to visit the Anglican community in Rome on Sunday, where he said he was considering a trip to famine-struck South Sudan.

Ibrahimovic lifts Man United past Southampton in League Cup final

Zlatan Ibrahimovic scored an 87th-minute winner as Manchester United beat Southampton 3-2 in an exciting League Cup final on Sunday.

London screens Iranian director's film amid Oscars boycott

Thousands of people watched a free screeening of Iranian director Asghar Farhadi's film "The Salesman" in London on Sunday to coincide with the Oscars.

Real Madrid stage comeback to stay top; Messi scores in Barcelona win

Lionel Messi scored the winner as Barcelona beat Atletico Madrid 2-1 on Sunday to move top of the Spanish first division.

Dubrovnik Sun Gardens Hotel member of The Leading Hotels of the World

The Dubrovnik Sun Gardens Hotel has joined the Leading Hotels of the World, Ltd., a global hospitality consortium of more than 375 hotels and resorts in over 75 countries.

Biggest Bosnian Serb party ceases all contact with Izetbegovic over ICJ judjment review request

The main committee of the biggest Bosnian Serb party which makes up the ruling majority in Bosnia and Herzegovina decided o Sunday that its officials would cease all contact with member of the Bosnian President Bakir Izetbegovic until the crisis occurred following the submission of a request to the International Court of justice (ICJ) to review its ruling against Serbia is resolved.

Egypt court adjourns Morsi retrial over prison escape

An Egyptian court adjourned a case against former president Mohamed Morsi until March 29 on Sunday, during the first session of his retrial over orchestrating a prison escape during the 2011 uprising.

Hamas rejects Netanyahu's proposal for international forces in Gaza

The Islamic Hamas movement rejected on Sunday Israeli Prime Minister Benjamin Netanyahu's proposal to send international forces to the Gaza Strip, the coastal enclave that Hamas has been ruling since 2007.

Deloitte: Growing optimism among CFOs

Chief financial officers (CFOs) in Croatia are more optimistic about growth and financial prospects in 2017 than they were last year, with most of them expecting increases in their company's revenue, a survey shows.

Russian agents main suspects for attempted coup in Montenegro

Russian citizens Eduard Shumakov and Vladimir Popoc, suspected of organising terrorist activities in Montenegro and forming a criminal organisation, are agents of Russia's Main Intelligence Agency (GRU), British, U.S. and other intelligence agencies confirmed, the Podgorica-based media reported on Sunday.

Six injured, 96 detained in Berlin fan clashes

Six people were treated in hospital and 96 detained in clashes in Berlin between fans of Hertha Berlin and Eintracht Frankfurt, police said Sunday.