ZAGREB, July 15 (Xinhua) -- Fitch Ratings has kept Croatia's rating at BB with a stable outlook, pointing out that Croatia's economy is benefiting from "favourable cyclical conditions", including its membership in the EU, but at the same time warning that the restructuring of its largest private company Agrokor will slow down growth in 2017 to 2.6 percent.
"The Croatian economy is benefiting from favourable cyclical conditions. Strengthening growth in regional trading partners, favourable wage and employment dynamics, robust tourism receipts and improved absorption of EU funds, resulted in real GDP growth rising to three percent in 2016 (the fastest since 2007), and are likely to support performance in 2017", local media quoted latest Fitch report on Saturday.
However, Fitch analysts believe, the problems surrounding Agrokor will affect economic performances. Agrokor was placed into state administration in April and had debt of around 12 percent of GDP at the end of the first quarter this year.
Fitch expects the Agrokor fallout will extend to the company's suppliers and banks and that it will impact employment, investment and credit growth, and cause real GDP growth to slow to 2.6 percent in 2017 in the event of an orderly restructuring, with a further slowdown projected for 2018.
According to Fitch, Croatia's potential growth remains relatively weak in comparison to similar countries, at one to two percent, due to negative demographic trends, structural rigidity, on-going external debit levels and low investment during the 2009-2014 recession.
The report released on Friday nevertheless underscores that Croatia's public finances have improved, leading to the lifting of the Excessive Deficit Procedure by the EU in June.
Fitch forecasts that, after a sharp narrowing in the budget deficit in 2016 to 0.8 percent of GDP, the deficit is to widen to an estimated 1.4 percent of GDP in 2017 as revenues are affected by recent tax reform and the 2016 spending freeze ends.
Credit rating agency anticipates moderate deficits to 2019 as the authorities stick to their medium-term target of a structural deficit of 1.75 percent of GDP in line with the EU Growth and Stability Pact, commensurate with a primary surplus.
Fitch also projects "a decline of external indebtedness over the forecast horizon as robust tourism revenues support continued current account surpluses."
The rating agency points to the banking sector's strong capitalization with the capital adequacy ratio of 22.5 percent at the end of 2016, high liquidity and net external creditor position which will help absorb spillover effects from Agrokor.