Frankfurt am Main, November 13, 2020 -- Moody's Investors Service ("Moody's") has today upgraded the Government
of Croatia's senior unsecured and long-term issuer ratings in foreign
and local currency to Ba1 from Ba2 and changed the outlook to stable from
positive.
Moody's decision to upgrade Croatia's ratings to Ba1 reflects
the following key drivers:
• Enhanced institutional capacity and policymaking as the country
enters a critical phase of euro area accession;
• Croatia's reduced exposure to foreign-currency debt
risk.
The stable outlook reflects balanced credit strengths and challenges at
the Ba1 rating level. Stronger-than-peers'
institutions and low susceptibility to event risk support the credit profile.
While Croatia's fiscal strength is weighed down by its relatively
high debt load, the government's debt affordability is strong
and its exposure to foreign-currency debt risk has declined.
Finally, Croatia's much higher-than-peers'
GDP per-capita is somewhat offset by the country's relatively
small size and volatile economic growth.
Croatia's long-term local currency bond and deposit ceilings have
been raised to A3 from Baa1. The long-term foreign currency
bond ceiling was also raised to Baa1 from Baa3 and the long-term
foreign currency deposit ceiling to Ba2 from Ba3. Finally,
the short-term foreign currency bond ceiling has been raised to
Prime-2 from Prime-3, while the short-term
foreign currency deposit ceiling is unaffected by this rating action and
remains at Not-Prime (NP).
RATINGS RATIONALE
RATIONALE FOR THE UPGRADE TO Ba1
FIRST DRIVER: ENHANCED INSTITUTIONAL CAPACITY AND POLICYMAKING AS
THE COUNTRY ENTERS A CRITICAL PHASE OF EURO AREA ACCESSION
The first driver of the upgrade is based on Croatia's progress towards
euro-area accession and the associated strengthening of institutional
capacity and policy making. On 10 July 2020, the euro-area
finance ministers, the President of the European Central Bank (ECB)
and the finance ministers and central bank governors of Denmark and Croatia
formally approved Croatia's entry into Exchange Rate Mechanism II (ERM
II), which is one of the final steps prior to becoming a member
of the euro area. The announcement amid the coronavirus disruption
came against the background of Croatia's comprehensive reform programme.
As of July 2020, Croatia had fully completed the actions to which
the country committed in six key areas: (1) banking supervision,
(2) macroprudential framework, (3) anti-money laundering
framework, (4) the collection, production and dissemination
of statistics, (5) public sector governance, and (6) the reduction
of the financial and administrative burden on the economy. In parallel,
the European Central Bank (ECB) and the Croatian National Bank (CNB) have
established a close cooperation.
In Moody's view, the successful completion of the reform programme
speaks to the credibility of Croatia's ambition to join the euro
area. Moody's believes that Croatia's policy effectiveness
has strengthened over the recent years. The government and the
central bank have provided a more predictable and stable framework for
economic activity in a very uncertain environment. The policy response
to mitigate the impact of the coronavirus pandemic has been timely and
efficient, with the central bank providing targeted support at times
of market volatility.
Moody's expects Croatia to continue to pursue sound economic and
financial policies, as entering the euro area will require both
sustainable economic convergence and readiness to participate in the banking
union. On economic convergence, compliance with the convergence
criteria is already advanced, as noted in the ECB's 2020 convergence
report.
From a macroprudential and banking perspective, Moody's believes
that the close cooperation between the ECB and the CNB and the inclusion
of eight of the largest banks operating in Croatia under the ECB's
supervision will further enhance the system's regulatory environment
and promote the adoption of best practices. Finally, Croatia's
legal framework will be strengthened as national legislation adapts to
fully comply with Article 131 of the Treaty in the areas of central bank
independence and legal integration into the Eurosystem.
SECOND DRIVER: CROATIA'S REDUCED EXPOSURE TO FOREIGN CURRENCY
DEBT RISK
The second driver for the upgrade relates to Croatia's strengthened
fiscal credit profile despite the negative impact of the coronavirus pandemic.
Under Moody's Sovereign Ratings Methodology, a high share
of foreign-currency denominated debt lowers fiscal strength considering
the currency-depreciation risk that would trigger a sudden rise
in interest costs and debt stock relative to GDP. In the case of
Croatia, the tightly managed floating kuna-euro exchange
rate already mitigates this risk. Entering ERM II has further decreased
this risk, as it brings Croatia closer to its predominant currency
of issuance, the euro. In 2019, 71.4%
of Croatia's general government debt was denominated in euros,
down from 73.8% in 2016. By contrast, the share
of kuna-denominated bonds rose from 22% to 28.4%.
Moody's expects to fully eliminate the adjustment once Croatia effectively
joins the euro area. Given the very uncertain environment and the
need for Croatia to implement post-ERM II reforms, Moody's
believes Croatia could join the euro area towards 2025.
Regarding the government's balance sheet, 2020 will mark a
reversal in the declining debt trend against the backdrop of the coronavirus
pandemic. Moody's expects Croatia's real GDP to contract
by 8.6% this year, as both domestic and external demand
are affected by the coronavirus pandemic. Accounting for 25%
of GDP when considering direct and indirect effects, the Croatian
tourism sector is strongly being affected by travel restrictions.
As a result, Moody's expects the fiscal deficit to reach 7.5%
of GDP in 2020. This, in turn, is expected to push
the debt-to-GDP ratio to 88.5% in 2020 and
debt-to-revenues to 192.5%.
However, Moody's expects the sharp deterioration in the debt
metrics to be temporary and forecasts a gradual decline starting in 2021,
when debt-to-GDP is expected to reach 86.7%,
followed by 85.9% in 2022. The gradual reduction
in public debt will be supported by a gradual economic recovery and a
prudent fiscal stance as the government targets convergence towards the
Maastricht criteria. Furthermore, the higher debt load will
be partly offset by strong and improving affordability metrics,
as Moody's forecasts a decline in interest payments-to-GDP
from 2.2% in 2019 to 2.0% in 2021.
Similarly, interest payments-to-revenues are expected
to fall from 4.7% in 2019 to 4.2% in 2021.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook reflects balanced credit strengths and challenges at
the Ba1 rating level. Stronger- than-peers'
institutions and low susceptibility to event risk support the credit profile.
Croatia's fiscal strength combines a higher debt load compared to
peers, while debt affordability is strong and foreign currency debt
risk is declining with ERM II entrance. In terms of economic strength,
Croatia's much higher-than-peers' wealth per-capita
is somewhat offset by the country's relatively smaller size,
slower growing and more volatile economy.
The stable outlook also reflects Moody's balanced view of the country's
prospects going forward. Croatia's improved economic fundamentals
and enhanced institutional capacity will provide resilience at the Ba1
rating level. At the same time, the stable outlook captures
heightened risks for permanent scars with respect to Croatia's economic
and fiscal strength against the backdrop of the coronavirus' new
infection wave, with potentially a negative impact on both domestic
and external demand.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
Moody's takes account of the impact of environmental (E), social
(S) and governance (G) factors when assessing sovereign issuers' economic,
institutional and fiscal strength and their susceptibility to event risk.
In the case of Croatia, the materiality of ESG to the credit profile
is as follows.
Environmental considerations are not material to Croatia's credit
profile although the March 2020 earthquake in Zagreb reflects some exposure
to physical risk.
Social risks affect Croatia's credit profile, given spending pressure
on pensions and health-care due to an ageing population and net
migration outflows. Similarly, prime-age participation
and employment rates remain clearly below the EU average. We regard
the coronavirus pandemic as a social risk under our ESG framework,
given the substantial implications for public health and safety,
and that the pandemic will have a transitory adverse economic and fiscal
impact.
Governance considerations form an integral part of our credit analysis
for Croatia and are material to the credit profile. Croatia's
fiscal and monetary policy effectiveness have remained strong over the
past years, supporting the country's entry into ERM II.
GDP per capita (PPP basis, US$): 29,828 (2019
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 2.9% (2019 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 1.3%
(2019 Actual)
Gen. Gov. Financial Balance/GDP: 0.4%
(2019 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: 2.6% (2019 Actual) (also
known as External Balance)
External debt/GDP: 75.3% (2019 Actual)
Economic resiliency: baa1
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 10 November 2020, a rating committee was called to discuss the
rating of Croatia, Government of. The main points raised
during the discussion were: The issuer's institutions and governance
strength, have not materially changed. The issuer's fiscal
or financial strength, including its debt profile, has materially
increased. Other views raised included: The issuer's economic
fundamentals, including its economic strength, have not materially
changed.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Upward pressure on Croatia's outlook and, potentially,
ratings, would arise from a steady economic recovery and improving
fiscal metrics following the coronavirus shock. Similarly,
a clear and sustained convergence path towards the euro area would also
be credit positive.
Conversely, a marked and permanent deterioration in Croatia's
long-term economic prospects affecting the government's balance
sheet would exert downward pressure on Croatia's rating. In addition,
any signs of a weakening in the institutional framework would also be
credit-negative and could lead to a negative outlook and ultimately
to a downgrade of the rating.
The principal methodology used in these ratings was Sovereign Ratings
Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631.
Alternatively, please see the Rating Methodologies 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 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 at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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 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 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 www.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://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
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.
Olivier Chemla
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Yves Lemay
MD-Sovereign/Sub Sovereign
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
