Country risk: Agrokor’s failings should not overshadow Croatia’s strong credentials


Jeremy Weltman
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The sovereign borrower’s investment grade should be handed back, even allowing for the enforced restructuring of the food producer and retailer.


Pot of gold: Investors should look to the rainbow, not the rating agencies’
cloudy outlook, in Zagreb

Fitch kept its BB rating on Croatia unchanged with a stable outlook last week.

It was not unexpected, but deputy prime minister Martina Dalić argued that all the credit rating agencies should soon start to think about upgrading Croatia.

Her pleas are not without substance, not least endorsed by Euromoney’s crowd-sourcing country risk survey.

In January, the survey results prompted Croatia’s move back into the third of five tiered categories, broadly commensurate with an investment-grade rating.

Since then, the borrower has held firm, in 65th place in the global risk rankings, while gaining slightly in terms of risk points, moving onto 50.6 out of 100.

That puts Croatia virtually on a par with Indonesia, which was upgraded by Standard & Poor’s in May, and was already an investment grade according to Fitch and Moody’s.

It also means Croatia is not as risky on Euromoney’s survey metrics compared with the Bahamas, Kazakhstan, Mauritius, Morocco, Namibia and Russia, all of which are rated investment grade by at least one of the agencies.


Positive factors

Kristina Pukšec, head of fixed income and money market at InterCapital Securities, and one of Euromoney’s survey contributors, believes there are several positive factors that bode well for Croatia’s macroeconomic risk. They include stronger exports, a healthier labour market and better absorption of EU funds for co-financing investments.

“Public spending might loosen up this year, but without endangering the stability of public finances,” she says.

Just this month, the finance minister Zdravko Marić declared that tax revenues were 2.7% above year-earlier levels, prompting him to predict a full-year general government deficit that is less than the target of 1.3% of GDP for 2017.

Although that is larger than last year’s 0.8% of GDP, the government originally foresaw a deficit of 1.6% for this year, later reducing it to 1.3% in April.

That should ensure the sovereign debt burden, presently around 82% of GDP, continues falling in line with the European Commission’s forecasts.

The government finances score is one of two – along with employment/unemployment – which has further improved this year, although all five economic risk factors are on a higher score compared with a year ago.

Several political factors have also been upgraded, along with the rating for capital access.

“It certainly looks like a credit rating upgrade is on the cards for Croatia, although we’ll probably first have to wait for the Agrokor restructuring process to reveal all of its direct and indirect consequences for the economy,” says Pukšec.

Agrokor process

Agrokor is the largest domestic company and was placed under state management in April, but Ante Ramljak, the firm’s trustee nominated by the government, has issued positive statements on the restructuring process, which is expected to take around 18 months to complete.

ECR expert Aljoša Šestanovic, professor at Effectus – the university college for law and finance in Zagreb – says it will have only a small impact on GDP growth, “dragging it down by just 0.2 to 0.3 percentage points”.

Otherwise, economic prospects are favourable, buoyed by tourism and an expansionary monetary policy, with the central bank recently upping its forecast for real GDP growth this year from 2.8% to 3%, with growth rates of investment and exports exceeding 6%.

Inflation is moderating too; it peaked at 1.4% earlier this year, but has since fallen to 0.7% in June.

Moreover, strong growth is lowering the unemployment rate. It fell from 15% in January to 10.8% in June, and that will in turn help the fiscal improvement.

If the government continues to manage the Agrokor crisis efficiently, it could still be – indeed should be – Croatia’s year.

This article was originally published by ECR. To find out more, register for a free trial at Euromoney Country Risk.