Fitch upgrades Croatia's outlook to positive and affirms its rating at 'BB+'

Fitch Ratings has affirmed Croatia's long-term foreign-currency Issuer Default Rating (IDR) at 'BB+' and revised the country's outlook to positive from stable on the grounds of a budget surplus and steady economic growth.

This credit rating agency predicts Croatia's budget surplus of around 0.4% of GDP this year, following a surplus of 0.8% in 2017.

Fitch expects "the combination of persistent primary budget surpluses (2.9% of GDP in 2018), low interest rates and healthy GDP growth to contribute to a continued marked reduction in gross general government debt."

The agency recalls that in 2017 public debt/GDP fell by 2.7percentage points to 77.5%, from a peak of 84% at end-2014, and Fitch projects it to fall to around 71% by end-2019.

The agency underscores that "the Croatian economy and banking sector are proving resilient to the financial problems at Agrokor, the country's largest company, which was placed into administration in April 2017, although some downside risks remain."

Bank profits have been hit by provisioning against Agrokor-related exposures. Nevertheless, the sector has remained profitable, and risk-weighted capital adequacy is strong at 23.8% at end-2017. Non-performing loans have declined to 11.4% at end-March, from a peak of 17.3% in mid-2015, helped by economic recovery and non-performing loans sales. 

As regards the developments surrounding Agrokor, the agency says that "the Agrokor case has created some political fallout, with the resignation in May of Deputy PM and Minister of Economy Martina Dalic over an alleged conflict of interest related to the drafting of Lex Agrokor and debt restructuring plans."

"The HDZ-led government coalition has proved resilient since July 2017, despite a slim majority with 77 out of 151 seats in parliament, but structural reforms may be challenging and a change in its composition cannot be ruled out.

Fitch projects Croatia's economic growth at 2.6% in 2018

Fitch forecasts Croatia's GDP growth of 2.6% in 2018 and 2.5% in 2019, on the back of "strong tourist arrivals, rising real earnings, tax cuts, accommodative monetary policy and a pick-up in EU project execution."

This January the Fitch agency upgraded Croatia's credit rating from 'BB' to BB+', with outlooks being stable on the back of the excellent tourism season and improved public finances, and this was the first upgrade in the country's credit rating since 2004.

Out of the three major credit rating agencies, Fitch  and S&P keep Croatia's credit rating a notch below investment grade, whereas Moody's keeps it two notches below investment grade. Fitch assesses Croatia's outlook as positive, and the other two agencies see the outlook as stable.