Dagong Upgrades the Sovereign Credit Rating Outlook of the Republic of Croatia to Stable
Dagong Global Credit Rating Co., Ltd.
November 23, 2017
Dagong Global Credit Rating Co., Ltd. (hereinafter referred to as “Dagong”) has decided today to upgrade the outlook for the sovereign credit ratings of the Republic of Croatia (hereinafter referred to as “Croatia”) from negative to stable, while maintaining its local and foreign currency sovereign credit ratings at BB+. Thanks to burgeoning demand at home, Croatia's economy has recovered steadily, its financial deficit has obviously shrunk, and debts have entered into a downward channel. These improvements, coupled with a persistent current account surplus and relatively sufficient foreign exchange reserves, render stable government solvency in both local and foreign currency.
The main reasons for upgrading the sovereign credit rating outlook of Croatia are as follows:
1. Croatia’s debt repayment environment has improved noticeably. September 2017 saw the country’s largest party, the Croatian Democratic Union, reshuffle the government and resolve the defection crisis within the previous ruling coalition. The new government continues to implement the national development strategy of 2016-2020, strives to reduce unemployment, to cut taxes, and to improve the business environment, meanwhile carrying out a stable and prudent fiscal policy as well as reducing public debts. In terms of the country’s credit environment, indicators including capital adequacy, return on assets, return on equity, and the loan to deposit ratio all suggest that the banks’ robustness has improved and the non-performing loan ratio has begun to decline. The short-term loosening monetary policy will continue to improve Croatia's credit supply level.
2. Domestic demand is rising, the economy continues growing, and the economy in the medium term has a relatively high potential. In the short term, fiscal policies aimed at lowering the income tax rate and the corporate tax rate towards promoting the welfare of the residents, and the monetary policy designed to cut the benchmark deposit rate, will all contribute to further boosting consumer demand. This, in combination with the enhanced absorption of EU funds, guides the country’s economic forecast to grow by 3.1% both in 2017 and in 2018. In the medium term, rich natural resources, a superior geographical position, and a higher national education level will render Croatia a country with enormous growth potential, while industrial restructuring and the Belt and Road Initiative will help sustain growth. It is projected that Croatia’s economic growth will average around 3.1% in the medium term.
3. The security of the government’s debt repayment resources has improved significantly. In the short term, on behalf of sustained economic recovery and the ongoing implementation of fiscal consolidation, Croatia's financial situation continues to improve, and the Croatian general government’s fiscal deficit is projected to fall to 1.3% in 2017 and to 1.3% in 2018, while the government financing needs-to-GDP ratio at the same period is predicted at 9.8% and 5.5%, respectively. The medium term will witness financing needs demonstrating a downward trend. This trend, coupled with low financing costs and stable EU funds, yields distinct improvement in the security of government debt repayment sources.
4. Government solvency will remain stable. Thanks to the country’s shrinking deficit, Croatia general government’s debt-to-GDP ratio will decline to 82.2% in 2017 and 80.2% in 2018, and will show a falling tendency in the medium term. This trend, together with lower financing costs and the Kuna’s stable valuation, helps maintain stable government solvency in local currency. In the short term, Croatia’s heavy external debts will decline slowly, down to 96.9% in 2017 and 92.7% in 2018. This decline, paired together with persistent current account surpluses and sufficient foreign exchange reserves, maintains stable government solvency in foreign currencies as well.
The main reasons for maintaining Croatia’s sovereign credit ratings are as follows: first, Croatia’s economy sees heavy external dependence since most of its investment comes from the EU with a single industrial structure, which will sap the country’s growth potential in the long term; second, strongly relying on foreign investment leaves the country’s national financial system with vulnerabilities, while the banking industry is thereby highly Euro-cised; third, the government’s realizable assets are not sufficient to act as a cushion with debt repayment sources highly depending on debt financing and external support. Dagong will continue to monitor changes in Croatia’s rating factors and risks, and thereof makes corresponding adjustments if necessary.