On Friday, Fitch Ratings released an updated review of its credit rating for Croatia. In the report, they affirmed Croatia’s status at ‘BBB+’, while improving Croatia’s outlook from Stable to Positive. In this brief summary, we’ll go through the main points of the report.
Fitch Ratings has affirmed Croatia’s Long-Term Issuer Default Rating (IDR) at ‘BBB+’, while improving outlook from Stable to Positive. The key factors influencing their report are the following: an approach to fiscal policy and public finance & monetary and exchange rate policy management remains consistent with that currently disclosed to Fitch. Besides that, Fitch also assumes that the condition of the financial sector of the sovereign issuer is consistent with that currently disclosed to the agency. Further, another assumption made by the agency in this report is the relevant key operating environments (e.g. legal, economic, political, regulatory) will remain consistent with expectations based on historical trends.
Besides providing us with the assumptions made to derive to Croatia’s ratings and outlook, the agency also provided us with factors that could lead to an upgrade or a downgrade.
Starting off with the potential downgrade – it might come due to the lower growth from the structural shocks affecting key sectors, weaker demographics or inflation remaining entrenched at high levels, which could lead to erosion of external competitiveness. Further, a possible downgrade might come from the risk of a sustained increase in general government debt over the medium term, for example, due to a pronounced and long period of fiscal loosening.
Moving on to the potential upgrade – it might come due to the long-lasting inflation decline, sustained GDP growth and confidence in the government’s ability to keep public debt on a downward trajectory through fiscal consolidation. Also, the implementation of structural reforms or positive spillovers from euro adoption, which supports the convergence of GDP per capita, might support the diversification of the economy and enhance productivity.
The entire report can be accessed here.