Fitch affirms Croatia rating at BBB-; outlook stable

At $11,600, its per capita income compares well against the ‘BBB’ range median of $6,800. Offsetting this support is Croatia’s large and widening current account deficit, which is driving the growth of an already high level of external debt. “Croatia’s ratings balance its relatively rich economy and solid governance indicators against a high, albeit declining, government debt burden and weak external finances,” David Heslam, director at Fitch Ratings, said in a statement.

Fitch is forecasting a widening of Croatia’s current account deficit to over 10% of GDP in 2008, from 8.6% in 2007, owing to a slowdown in Croatia’s key euro area trading partners and higher energy prices. The size of Croatia’s current account deficit is modest when compared with some new EU member states such as the Baltic countries, Bulgaria and Romania, many of which have experienced double-digit current account deficits for a number of years.

However, most of these countries have been running a tighter fiscal policy and have a lower government debt burden than Croatia. Moreover, Croatia’s external debt stock is already high relative to levels in most of these countries and compares poorly against the broader ‘BBB’ group.

Beyond 2008 the government will have to address its high social spending if it is to continue to narrow the budget deficit, Fitch said. “A stronger business environment could encourage greater inflows of green-field foreign direct investment and improve the economy’s capacity to generate export receipts. An acceleration of negotiations with the EU over the past year is an encouraging sign that these reforms are progressing,” Heslam said. Fitch also affirmed Croatia’s long-term local currency IDR ‘BBB+’ and short-term foreign currency IDR ‘F3’. The country ceiling is ‘BBB+’. (Reuters)