Moody’s Keeps Croatia’s Negative Outlook as EU Accession Nears

The negative outlook on Croatia’s Baa3 sovereign rating remains unchanged because benefits from the country’s European Union entry in July will be limited, Moody’s Investors Services said.

“In the absence of pro-growth reforms and improvements in the country’s institutional capacity, the anticipated benefits normally expected from EU accession are unlikely to fully materialize,” Moody’s said in a Nov. 16 report. “As a result, the negative outlook remains unchanged.”

The Adriatic Sea nation, which is set to become the bloc’s 28th member, stands to receive about 10 billion euros ($12.7 billion) in EU grants through 2020. The country is struggling to revive its economy and boost investment after three years of recession and stagnation.

Croatia’s budget deficit will widen next year to 3.1 percent of economic output as the government repays debt and begins contributing to the EU’s coffers, Finance Minister Slavko Linic said today as he submitted the 2013 budget to Parliament. The draft forecasts economic growth at 1.8 percent next year, compared with an expected contraction of 1.1 percent in 2012.

Europe’s financial crisis has “highlighted the unsustainability of Croatia’s economic model” which has “relied heavily on private consumption and construction fueled by external credit,” Moody’s said in the report, adding that “high expectations” that the 10-month-old government of Premier Zoran Milanovic would implement changed have not materialized yet.

Croatia is rated an equivalent BBB-, the lowest investment grade, by Standard & Poor’s. Fitch Ratings raised the country’s outlook on Sept. 5 to stable from negative, citing the government’s progress in meeting spending-cut demands and reducing the budget deficit during a recession. It affirmed the long-term foreign currency rating at BBB-, on par with EU members Latvia and Bulgaria.

To contact the reporter on this story: Jasmina Kuzmanovic in Zagreb at jkuzmanovic@bloomberg.net

To contact the editor responsible for this story: James M. Gomez at jagomez@bloomberg.net

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