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Fitch Gives Croatia ‘Benefit of Doubt’ in Maintaining Rating

Croatia’s government must “take action” to make the country’s labor market and tax system more favorable to employers and investors or face a possible downgrade in its BBB- credit assessment, Fitch Ratings said.

The administration of Prime Minister Zoran Milanovic, which came to power after December 2011 elections, also needs to stick to its budget targets and implement growth targets, Michele Napolitano, associate director at Fitch’s Emerging Europe Sovereign team in London, said today in a teleconference. Fitch reaffirmed Croatia’s rating, the lowest investment grade, with a negative outlook on March 5.

“We have decided to give the new government the benefit of the doubt, and we believe there are good reasons for doing it,” Napolitano said. “Fiscal slippage and a lack of reform would lead to a negative grade. We have no specific timing, but we would expect to see some action by the government in the first half of the year.”

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. 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 this year after a modest recovery in 2011.

The government has proposed to cut spending by 4 billion kuna ($700 million) through lower subsidies to state companies and trimming public wages. It also plans to revive investment by injecting 8 billion kuna from reconstruction banks and EU funds into infrastructure projects and the energy industry.

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