Four months after a new coalition was formed, the economy is brightening, but Croatia remains mired in a political crisis weighing on its country risk rating.
|Taking the plunge in Croatia: but whose political parachute will open in time?|
Croatia shed points in Euromoney’s risk survey in Q1 2016, and is odds on to lose some more in Q2, with contributing experts still losing faith in a borrower that remains unconvincing compared with other countries in the region.Bulgaria, Hungary and Romania, all tier-three sovereigns, are improving in the survey, but preliminary data for Q2 2016 show Croatia marked down again as the tier-four sovereign moves further from the possibility of investment grade.
Yet Croatia is still junk status, with all three agencies attaching a negative outlook:
Economic growth returned last year for the first time since the financial crisis struck in 2008, and tourism is booming partly due to the fact terrorism-affected MENA markets are now off-limits; although, to be fair, Croatia has also built-up its own reputation in the summer holiday market.The country is running a current-account surplus, supported by tourism receipts and EU funds for investment. The fiscal deficit has narrowed, too, from the 5% of GDP level in previous years to 3.2% in 2015, aided by budget cuts to wages, subsidies and public-sector capital spending pushing the primary balance into surplus.
“The political situation in Croatia is still unclear and it is very hard to make any sound predictions. The probability of early elections is clearly on the rise, but a reshuffle of the government would be more rational for coalition parties HDZ and Most, as both could be strongly hit in snap elections.”
This political conflict is taking place against the backdrop of anxiety over the nationalist tone the government is taking. Popular protest against the government meddling in education reforms has seen tens of thousands take to the streets of Zagreb and other provincial cities amid fears of a purge of the media with anti-liberal leanings.Kristina Pukšec, at InterCapital Securities, believes the political uncertainty will soon be settled, with snap elections the most likely scenario.
Things should eventually settle down, but once again Croatia is demonstrating its ability to produce political risk even when the economy is at last beginning to show more favourable trends.
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