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Fitch Affirms Croatia’s Ratings at BBB-

Croatia had its credit rating affirmed by Fitch Ratings at BBB-, the lowest investment grade, with a negative outlook because of its “sizable” budget deficit and lack of policy steps to consolidate finances.

Risks to Croatia’s creditworthiness “remain on the downside” with public finances “a key concern,” Michele Napolitano, associate director at Fitch’s Emerging Europe Sovereigns team in London, said in a statement today. The rating is on par with Iceland, Latvia, Bulgaria and Romania.

Croatia, which is set to become the European Union’s 28th member in 2013, needs to service a growing external debt and revive its faltering economy. Prime Minister Zoran Milanovic said last month that the economy will grow 0.8 percent in 2012, while central bank Governor Zeljko Rohatinski said in December the country may slide into recession again this year after a modest recovery in 2011.

The government, which took power in January, proposed to cut spending by 4 billion kuna ($700 million) by approving lower subsidies to state companies and clipping the public wage bill.

“Despite some positive initial policy steps by the new government, further fiscal consolidation measures and structural reforms will be required to boost economic growth and stabilize the public finances,” Napolitano said in the statement. “Meanwhile, Croatia’s sizable budget deficit, relatively high public and external debt ratios, and the difficult external financing environment mean that risks to creditworthiness remain on the downside.”

Public Debt

The country’s public debt reached 46 percent of gross domestic product last year. Fitch forecast that it will peak at 56 percent in 2015.

The government plans to revive investment by injecting 8 billion kuna from reconstruction banks and EU funds into infrastructure and the energy industry. The World Bank last month said growth this year will probably remain flat, while Hypo Alpe-Adria-Bank d.d. today predicted a contraction of 2 percent, citing a continued investment drought and high external risks.

These revenue projections are “optimistic,” Napolitano said, adding the government will have to make more cuts to meet its budget deficit target of 3.8 percent of GDP.

“In terms of potential rating triggers, significant fiscal slippage from the government’s targets and a failure to introduce substantive structural reforms to boost growth would lead to a downgrade,” Napolitano said. “Balance of payment pressures that led to a sustained fall in foreign exchange reserves would also put downward pressure on the rating.”

“Huge Expectations”

Finance Minister Slavko Linic said Fitch’s rating affirmation will give “significant support” to measures the government has taken so far and intends to take in the future.

“This also raises huge expectations from the government to continue with the reforms and reduce our debt,” Linic told reporters in Zagreb, adding he expects no change in the borrowing terms for an international bond from Croatia in early April in light of the Fitch decision.

Fitch has given Croatia the “benefit of the doubt” because of the government’s fiscal consolidation program, Timothy Ash, emerging-markets analyst at the Royal Bank of Scotland Plc, wrote today in an e-mailed statement.

“Croatia is not out of the woods, and unless the government can come up with growth-enhancing reforms, they will end up with junk bond status,” he said.

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