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Croatia Rating Affirmed at BBB- With Negative Outlook

Croatia had its credit rating affirmed at BBB- by Standard & Poor’s with a negative outlook over concern that an overhaul of its labor market and public sector will fall short and hamper economic growth.

The rating, the lowest investment grade, is supported by Croatia’s “political stability, its relative prosperity reflected in its per capita gross domestic product of more than $13,000 and its moderate though rising, net general government debt burden of just under 50 percent,” S&P analyst Ana Jelenkovic said today in a statement. The rating in on par with Iceland and Tunisia.

Croatia, the second former Yugoslav republic set to join the European Union next year after Slovenia’s entry in 2004, is struggling to recover from a recession as domestic consumption slows and Europe’s debt crisis damps demand for its exports.

The Adriatic Sea nation’s economy, which shrank 0.4 percent in the final quarter of 2011 from a year earlier, is forecast to contract about 1 percent in 2012, S&P said. A lack of competitiveness and its relatively small non-tourism export base are preventing the economy from recovering, it said.

The rating assessment is constrained by “weak growth prospects,” sizable net external debt and high “euroization” that hampers monetary flexibility and renders Croatia more vulnerable than its peers to external shocks, S&P said.

Fiscal Consolidation

Prime Minister Zoran Milanovic’s Cabinet, which took power after the ouster of the previous administration of Jadranka Kosor in December vote, “appears committed to accelerate the fiscal consolidation and structural reforms,” which will help improve the country’s growth prospects, according to the statement.

The government’s growth strategy to increase investment by state-owned enterprises backed by external funding may boost domestic demand temporarily, the ratings service said.

“We remain concerned, however, that the government may not address underlying structural weaknesses sufficiently such that investment in the tradable sector is increased in the medium term and the economy’s growth potential is restored and fully realized,” it said. “We believe failure to front-load structural reforms could soon lead to reform fatigue as recession bites into public support for the government.”

The government in January pledged to cut the budget deficit to 3.8 percent of total output from the 5.5 percent level at the end of last year.

Croatia is rated an equivalent BBB- at Fitch ratings and Baa3 at Moody’s.

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