Croatia Credit Rating Cut to Junk by Fitch on Budget Deficit

Croatia had its credit rating cut to junk by Fitch Ratings, which cited a deterioration in the newest European Union member’s fiscal outlook.

Fitch lowered the country’s long-term foreign-currency debt assessment to BB+, one level below investment grade, from BBB-, and its local currency rating to BBB- from BBB, the company said today in an e-mailed statement from London. The outlook on the ratings is stable. The move leaves Croatia on par with Portugal and Hungary.

“A structurally weak growth outlook has impaired the prospects for fiscal consolidation and the attainment of public debt sustainability,” Fitch said in the statement. “Measures to clamp down on tax evasion and improve compliance have borne fruit, but revenues have fallen this year, whilst pressures continue to build on the expenditure side.”

The government of the former Yugoslav nation, which became the EU’s 28th member in July, is struggling to keep public finances in check after the economy shrank more than 10 percent since 2008, during which time foreign direct investment has plunged 80 percent. Gross domestic product will fall 0.9 percent in 2013, Fitch predicted, lowering a previous forecast of 0.3 percent.

The yield on Croatia’s 2023 dollar bond rose to 5.646 percent from 5.559 percent at 7:10 p.m. in Zagreb, snapping a six-day decline. The kuna weakened 0.1 percent against the euro to 7.6131.

Growth Outlook

The economy, which hasn’t posted growth since 2008, shrank 0.7 percent in the second quarter from a year earlier as declines in investment and consumption persisted. GDP will grow 0.7 percent this year, the government predicted in February, trimming a previous 1.8 percent forecast. That compares with the European Commission’s projection of 1 percent contraction.

“Failure of the economy to recover would put further strains on the public finances and could lead to negative rating action,” Fitch said. “Conversely, restoring economic growth and anchoring fiscal policy would be rating positive. Structural reforms could improve potential growth over the medium term.”

Fitch, which followed Standard & Poor’s and Moody’s Investors Service in downgrading Croatian debt to junk, raised its 2013 budget-gap forecast to 4.7 percent of economic output from 3.9 percent and said public debt will peak at 66 percent of GDP in 2016 rather than 62 percent.

The deficit will widen to 4.7 percent his year and to 5.6 percent in 2014 from 2.4 percent in 2012, the commission forecasts.

“Failure to implement a credible medium term fiscal consolidation strategy would further impair public debt sustainability,” Fitch said. “This would ultimately lead to a further negative rating action. By contrast, greater progress on fiscal reform and deficit-reduction would put positive pressure on the rating over the medium term.”

To contact the reporter on this story: Agnes Lovasz in London at alovasz@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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