Croatia’s Junk-Rating Outlook Cut by S&P to Negative on Debt

The outlook on Croatia’s junk credit grade was lowered by Standard & Poor’s, which said the Adriatic nation’s debt burden will swell while economic and fiscal overhauls are “lackluster.”

S&P cut its outlook to negative from stable, leaving the the sovereign-debt assessment at BB, two steps short of investment grade and on par with Paraguay and Guatemala. Fitch Ratings has Croatia at BB, also two notches off investment status, while Moody’s Investors Service rates it one level higher, at Ba1.

“Croatia’s general government indebtedness, as a share of gross domestic product, will continue to increase to over 90 percent in 2016, after doubling since 2008,” S&P analyst Felix Winnekens said Friday in a statement from Frankfurt. “We foresee a marked risk that the policy response to increasing debt and momentum for reform could be insufficient.”

The European Union’s newest member has shed more than 12 percent of its gross domestic product since 2008, the second-biggest contraction after Greece and Cyprus, according to the World Bank. The economy will grow 0.5 percent in 2015 as tourism picks up, the central bank predicts. Spending cuts will help trim the budget gap to 5 percent of GDP from 5.7 percent last year, Deputy Prime Minister Branko Grcic said in April.

Investors often disregard ratings companies’ credit grade and outlook changes. Yields on the Croatian government’s euro-denominated debt due 2025 were four basis points lower at 4.09 percent at 5:47 p.m. in Zagreb, the capital, data compiled by Bloomberg showed.

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