New York, March 21, 2014 -- Moody's Investors Service has today changed the outlook on Croatia's Ba1
government bond rating to negative from stable. Concurrently,
Moody's has affirmed Croatia's Ba1 rating.
The key drivers of today's outlook change are as follows:
(1) Croatia's impaired medium-term economic outlook,
owing to competitiveness challenges, continued deleveraging and
the growth-dampening effect of fiscal consolidation efforts.
(2) The slow pace of fiscal deficit reduction, which will keep government
debt ratios and annual financing needs above those of many similarly rated
peers.
(3) Large external debt-servicing requirements that keep Croatia's
external liquidity position tight.
The key drivers for Moody's affirmation of Croatia's Ba1 government
bond rating are:
(1) Anticipated policies adopted under the European Union (EU)'s
Excessive Deficit Procedure (EDP), which are likely to keep fiscal
metrics from deteriorating as rapidly as they have in the last two years.
(2) Croatia's improved current account balance and foreign-exchange
reserves, which will cushion its balance of payments from global
financial volatility.
(3) Croatia's relatively high per-capita incomes compared
to similarly rated peers, as well as the economic benefits from
Croatia's entry into the EU in 2013.
Croatia's local-currency country risk ceilings remain at
A3, the long-term foreign-currency debt ceiling remains
Baa1, and the short-term foreign-currency debt ceiling
is P2. The long-term foreign-currency bank deposit
ceiling remains Ba2 and the short-term foreign-currency
bank deposit ceiling is Not Prime.
RATIONALE FOR OUTLOOK CHANGE
--FIRST DRIVER: CROATIA'S IMPAIRED MEDIUM-TERM
ECONOMIC OUTLOOK
The first driver of the outlook change is Croatia's impaired medium-term
economic outlook, owing to competitiveness challenges, continued
deleveraging and the growth-dampening effect of fiscal consolidation
efforts. In this context, Croatia is having a weak recovery
from recession, with positive real GDP growth having eluded the
economy since 2009.
Moreover, in the past five years, Croatia's growth has
been weaker than that of similarly rated peers. In addition to
the investment, export and banking sector effects from the euro
area debt crisis, Croatia has suffered from a number of shocks to
the economy, including the restructuring of the shipyard sector
and the loss of export markets following the country's exit from
the Central European Free Trade Agreement due to EU entry.
Croatia's GDP growth is estimated at -1.0%
in 2013, and Moody's expects 2014 growth to remain weak as
private sector deleveraging as well as public sector consolidation efforts
keep domestic demand subdued. The rating agency notes that weak
growth lowers Croatia's resilience to future economic shocks,
and complicates the government's efforts to reduce fiscal deficits
and debt.
--SECOND DRIVER: SUBSTANTIAL RISE IN GOVERNMENT DEBT
LEVELS
The second driver of the outlook change are Croatia's high levels
of government debt ratios and annual financing needs which are higher
than those of many similarly rated peers. Moody's estimates
that Croatia's general government debt has risen to approximately
66% of GDP by the end of 2013 (2008: 29%), owing
to an increase in fiscal deficits as well as the costs of restructuring
certain state owned enterprise debts and calls on government guarantees.
Despite the government's recently proposed measures to increase
revenues and curtail expenditures, the fiscal deficit is unlikely
to decline rapidly over the next two years from an estimated 6.1%
of GDP in 2013. As a result, government debt and deficits
are likely to remain above the 2013 Ba median level of 45.5%
and 3.7% of GDP, respectively.
--THIRD DRIVER: LARGE EXTERNAL DEBT-SERVICE
REQUIREMENTS WILL KEEP CROATIA'S EXTERNAL LIQUIDITY POSITION TIGHT
The third driver of the outlook change is Croatia's substantial
external debt-service requirements. External debt rose to
an estimated 107% of GDP by the end of 2013, from 68.6%
in 2005. The bulk of the increase was due to private sector borrowing
prior to 2009. Although the private sector has reduced its external
borrowing since 2010, the government has continued to borrow externally.
The debt-repayment needs arising from a high level of external
debt constrain the country's external liquidity position.
Coupled with a high degree of euroisation within the country, this
leaves Croatia's economy vulnerable to global financial volatility.
RATIONALE FOR AFFIRMING THE Ba1 RATING
-- FIRST DRIVER: FISCAL CONSOLIDATION EFFORTS UNDER
EXCESSIVE DEFICIT PROCEDURE
The first driver of the affirmation of Croatia's Ba1 government
bond rating is the country's entry into the EU's EDP in 2014,
which mandates policy action to lower fiscal deficits and debt ratios.
The institutional vigilance associated with the EDP is likely to support
policy efforts that keep fiscal metrics from deteriorating at the pace
at which they have done in the past few years.
-- SECOND DRIVER: IMPROVEMENTS IN CURRENT ACCOUNT
AND FOREIGN-EXCHANGE RESERVES
The second driver of the affirmation is the improvement in Croatia's
current account balance to an estimated surplus of 0.5%
of GDP in 2013 from a deficit of 8.7% of GDP in 2008,
owing to lower domestic demand for imports and robust tourism export receipts.
Moody's expects the current account balance to remain in surplus
this year, lowering the country's external financing needs.
While external debt repayment needs are high, a significant portion
is owed as intra-company debt, which limits roll-over
risks.
Moreover, the rating agency expects foreign-exchange reserves,
estimated at $17.3 billion at year-end 2013,
to remain adequate to protect against global financial volatility.
-- THIRD DRIVER: RELATIVELY HIGH PER-CAPITA
INCOMES, AS WELL AS THE ECONOMIC BENEFITS FROM CROATIA'S 2013
EU ENTRY
Croatia's sovereign credit profile is supported by its relatively
high per-capita incomes compared to similarly rated peers globally,
as well as the economic benefits of EU entry.
Relatively high incomes are reflected in Croatia's private sector
savings rate, which supports the sovereign credit profile by providing
a domestic market for government debt. Croatia's income and
savings levels are also expected to cushion, to some extent,
the effect of fiscal consolidation on consumption.
In 2013, the first year of Croatia's EU entry, Croatia's
manufacturing export performance was weak due to the loss of traditional
Central European Free Trade Agreement (CEFTA) export markets and relatively
subdued growth in the EU. However, we expect that Croatia's
integration with the EU, in conjunction with policies to address
domestic competitiveness challenges, will support exports,
investment and growth over the medium to long term. Moreover,
as has been the case with prior EU entrants, institutional developments
in Croatia are also likely to benefit from EU entry.
WHAT COULD MOVE THE RATING UP/DOWN
The rating outlook could return to stable upon signs that a sustained
economic recovery was on the horizon, reflecting an improved medium-term
economic outlook. Materially narrower fiscal deficits and falling
government debt ratios would also exert upward pressure on the outlook.
On the other hand, a downgrade could follow from an assessment that
Croatia's fiscal, growth and external vulnerability metrics will
continue to deteriorate for an extended period and to an extent that they
will fall significantly below those of Ba1 rated peers and to levels inconsistent
with a Ba1 rating.
GDP per capita (PPP basis, US$): 17,753 (2013
Actual) (also known as Per Capita Income)
Real GDP growth (% change): -1% (2013 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 0.3%
(2013 Actual)
Gen. Gov. Financial Balance/GDP: -6.1%
(2013 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: 0.5% (2013 Actual) (also
known as External Balance)
External debt/GDP: 107% (2013 Estimate)
Level of economic development: Moderate level of economic resilience
Default history: At least one default event (on bonds and/or loans)
has been recorded since 1983.*
*Events related to the debts of the Former Yugoslavia.
On 18 March 2014, a rating committee was called to discuss the rating
of the Croatia, Government of. The main points raised during
the discussion were: The issuer's economic fundamentals, including
its economic strength, have materially decreased. The issuer's
fiscal or financial strength, including its debt profile,
has materially decreased.
The principal methodology used in this rating was Sovereign Bond Ratings
published in September 2013. Please see the Credit Policy page
on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this rating action, if applicable.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides certain regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this rating action, and
whose ratings may change as a result of this rating action, the
associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Atsi Sheth
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Bart Oosterveld
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's changes outlook on Croatia's Ba1 government bond rating to negative from stable
