The Croatian government has a credible deficit-reduction plan and is taking a right approach to growth by focusing its efforts on attracting investment and trying to use funds from international institutions and EU funds, Michele Napolitano, associate director at Fitch's emerging-Europe sovereign team in London, said on Tuesday.
The Croatian government "in six months created a budget framework more tailored for a low-growth trajectory, which is what countries with low-growth trajectories need to do. It improved tax compliance and initiate challenges in the legal framework that should make it easier to cut public expenditures in the future. They also have a credible deficit-reduction plan," Napolitano said in an interview with Bloomberg agency.
Fitch Ratings said on Monday in a report entitled "Croatia's Fiscal Policy Key to Maintaining Investment Grade" that Croatia's government had made progress in addressing the country's fiscal challenges and the key challenge facing it would be to further reduce its deficit and implement structural reforms against a backdrop of prolonged low economic growth.
Last week Fitch revised Croatia's outlook to stable from negative while affirming its long-term foreign currency and local currency Issuer Default Ratings at 'BBB-' and 'BBB' respectively.
In its report on Monday Fitch said that "comprehensive labour market reform which tackles rigidities in both the private and public sector is important to improve competitiveness, support medium-term GDP growth potential and preserve Croatia's investment grade rating. The government has carried out changes to the labour laws which tackle the flexibility of wages in the public sector. Nevertheless, in Fitch's view, the low labour participation rate in the economy is a key structural bottleneck."
"Revamping state companies may result in a higher level of unemployment, but hopefully part of the workforce will be absorbed by the private sector when private investment will kick off following EU accession," Napolitano told Bloomberg.
"The government is taking a right approach to growth by focusing its efforts on attracting investment, and trying to use funds from international institutions and EU funds. Our feeling is that the government is aware that there is no time to relax, that it is aware that this is only the start of a very long process, and that significant slippage against fiscal targets would have a rating impact," he added.
Napolitano said that Croatia needed to reduce public debt and achieve sustained economic growth for an upgrade in its rating outlook, "which probably won't happen for a couple of years."
