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Ratings agency unexpectedly improved Croatia's economic outlook from negative to stable on Wednesday, reafirming Croatia's current BBB rating and cheering the government.
"The outlook revision reflects the government's progress in developing a medium-term plan to address the country's fiscal challenges," Fitch agency said in a statement published by Reuters news agency.
"Fitch views positively the government's efforts to improve tax compliance and to fight tax avoidance. Such efforts have been well-targeted and have borne fruit in a short-time frame," it continued, urging the government to "make the public sector wage bill more flexible" by changing the labour laws and collective agreements.
Fitch said that it assumed that the government was on its way to "reduce expenditures by 1 per cent of GDP each year until a primary balance is achieved in line with the fiscal responsibility law.
"Under this scenario, public debt peaks at 58 per cent of GDP in 2015 and declines from 2016," the agency predicted.
The agency sees Croatian membership of the EU, predicted to start next July, as a positive sign, which will "strengthen the country's governance and, over the medium-term, unlock substantial external financing sources.
"EU membership is also supportive of an increase in inward foreign direct investment and will provide an anchor for fiscal policy," Fitch added.
But challenges remains, the agency continued, especially in terms of low growth.
"The country has been unable to return to growth since the 2008 crisis," Fitch noted, calling for structural reforms.
The ratings agency's evaluation was a pleasant surprise for the Croatian government, which had feared that its rating would be lowered.
Officials have expressed hope that two other global rating agencies, Moody's and Standard and Poor's, will follow Fitch's evaluation.
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