Bloomberg News

Croatia Has One-In-Three Chance of Downgrade Within Year at S&P

April 16, 2012

Croatia has a 33 percent chance of having its credit rating lowered to a non-investment grade depending on government efforts to spur economic growth, Standard & Poor’s said.

S&P today affirmed the rating of BBB- with a negative outlook for state-owned development bank HBOR, “mirroring” its assessment of the country’s sovereign debt, which was affirmed on April 3. The rating is on par with Iceland, Latvia, Bulgaria and Romania. Croatia is rated an equivalent BBB-, the lowest investment grade, at Fitch Ratings, and Baa3 at Moody’s.

“The negative outlook on the long-term sovereign rating reflects our expectation of a one-in-three chance that we could lower the rating over the next year if the scope and implementation of reform efforts, particularly in the public sector and labor market, are insufficient to facilitate sustainable economic growth,” S&P said in a statement today.

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, will 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, S&P said.

Growth Estimates

The economy will grow 0.8 percent in 2012, Prime Minister Zoran Milanovic said in February, while central bank Governor Zeljko Rohatinski said in December the country may slide into a recession again this year after a modest recovery in 2011.

The government, which took power in January, proposed 4 billion kuna ($696 million) in spending cuts through lower subsidies to state companies and public wages.

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

To contact the reporter on this story: Jasmina Kuzmanovic in Zagreb at jkuzmanovic@bloomberg.net

To contact the editor responsible for this story: James M. Gomez at jagomez@bloomberg.net


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