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Rating Action:

Moody's places Croatia's Ba1 ratings on review for upgrade

24 Jun 2022

Paris, June 24, 2022 -- Moody's Investors Service ("Moody's") has today placed the Government of Croatia's Ba1 foreign- and domestic-currency long-term issuer ratings and foreign-currency senior unsecured ratings on review for upgrade.

The decision to place the ratings on review for upgrade was caused by the recommendation of the EU Economic and Financial Affairs Council on 17 June proposing that Croatia adopt the euro as its domestic currency as of 1 January 2023.

The review period which is expected to last until mid-July will allow Moody's to determine whether progress towards formalizing Croatia's membership of the euro area through the adoption of the relevant EU legal acts will take place as expected.  

         

The long-term country ceilings of Croatia for local and foreign currency bonds remain as of now unchanged at A2.

RATINGS RATIONALE / FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

RATIONALE FOR INITIATING THE REVIEW FOR UPGRADE ON CROATIA'S Ba1 RATINGS

The EU's Economic and Financial Affairs Council (ECOFIN) on 17 June issued a recommendation proposing that Croatia should adopt the euro on 1 January 2023, following the European Commission's and the European Central Bank's (ECB) positive assessment of Croatia's fulfilment of convergence criteria published on 2 June. The heads of state and government of the EU gave their assent to the recommendation made by ECOFIN at the European Council on 23-24 June. In light of this, Moody's expects Croatia's membership of the euro area to be formalized with the adoption of the relevant legal acts at the ECOFIN meeting on 11-12 July.

The eventual adoption of the euro would have significant positive implications for Croatia's credit profile. Most notably, it would reduce Croatia's share of government debt denominated in foreign currency from over 70% at present to close to zero, as this debt is almost wholly denominated in euros. This, in turn, would have a significant positive impact on our assessment of the government's fiscal strength as it eliminates the risk of a debt-to-GDP increase in case of a devaluation. It also significantly reduces government funding risks. Fiscal strength is one of the four factors of Moody's assessment of a sovereign's creditworthiness.

Croatia's economy is already highly integrated with that of the euro area and the country has maintained a managed float of its domestic currency against the euro for a number of years. Nevertheless, we expect that euro adoption will have positive effects on Croatia's economic strength over the medium to long term by reducing transaction costs and eliminating any remaining foreign currency risks for transactions between Croatia and the euro area, which already accounts for more than half of all of Croatia's imports and exports. This is likely to spur further economic integration and foreign direct investment into Croatia, supporting its longer term growth potential.

Furthermore, euro adoption will also reduce foreign currency risks for the banking sector, and will also have a positive impact on our assessment of government liquidity and external vulnerability risks. As a euro area member, Croatia would in a future crisis stand to benefit from potential ECB support programmes such as the asset purchase programmes that were first introduced in 2015, while eventual membership of the European Stability Mechanism (ESM, Aaa stable) would also support the government's ability to fund itself in a crisis situation. Lastly, the ability of the Croatian institutions to steer the country into the euro only two years after joining ERM II - the antechamber of the currency bloc - supports our assessment of the effectiveness and strength of the country's institutions and governance.

The review period will allow Moody's to assess whether progress towards formalizing Croatia's euro area accession in EU law will be finalised by mid-July as currently expected. If these expectations are met, Moody's is likely to upgrade Croatia's ratings by two notches to Baa2.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Croatia's ESG Credit Impact Score is neutral to low (CIS-2), reflecting low exposure to environmental and moderate social risks, while European integration is further enhancing institutional and governance capacity.

Croatia's exposure to environmental risks is generally low, although repetition of earthquakes reflect some exposure to physical risk. Its overall E issuer profile score is assessed as neutral to low (E-2).

Croatia's social risks include adverse demographics, net migration outflows and relatively high youth unemployment. Access to basic services is satisfactory. Overall, we assess Croatia's S issuer profile score as moderately negative (S-3).

Croatia's solid institutions and governance strength is reflected in a positive G issuer profile score (G-1). This is underpinned by the government and the central bank's high credibility in managing Croatia's economic policy, which has allowed the country to enter ERM II in July 2020. Resilience is somewhat constrained by the relatively low F3 score, which is nonetheless expected to improve in the coming years as the country prepares to enter the euro area.

GDP per capita (PPP basis, US$): 32,943 (2021) (also known as Per Capita Income)

Real GDP growth (% change): 10.2% (2021) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 5.2% (2021)

Gen. Gov. Financial Balance/GDP: -3.3% (2021) (also known as Fiscal Balance)

Current Account Balance/GDP: 3.3% (2021) (also known as External Balance)

External debt/GDP: 74.6% (2021)

Economic resiliency: baa1

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 21 June 2022, a rating committee was called to discuss the rating of Croatia, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's institutions and governance strength, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. The issuer's susceptibility to event risks has not materially changed.

FACTORS THAT COULD LEAD TO AN UPGRADE OF CROATIA'S RATINGS

Moody's would conclude the review period by upgrading Croatia's ratings to Baa2 if the country's euro area membership is formally confirmed and codified into EU law.

FACTORS THAT COULD LEAD TO A DOWNGRADE OF CROATIA'S RATINGS

Given the review for upgrade, a downgrade of Croatia's ratings is remote.

The publication of this rating action deviates from the previously scheduled release dates in the EU sovereign calendar published on www.moodys.com. This action was prompted by the recommendation by the EU's Economic and Financial Affairs Council on 17 June that Croatia become a full member of the euro area as of 1 January 2023.

The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://ratings.moodys.com/api/rmc-documents/63168. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 credit rating action on the support provider and in relation to each particular credit 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 issuer/deal page for the respective issuer on https://ratings.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.

Please see https://ratings.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 issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.

Petter Bryman
Vice President - Senior Analyst
Sovereign Risk Group
Moody's France SAS
96 Boulevard Haussmann
Paris, 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Alejandro Olivo
MD-Sovereign/Sub Sovereign
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's France SAS
96 Boulevard Haussmann
Paris, 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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