Moodys Investors Service cut Croatias to a junk rating of "Ba1' from 'Baa3', blaming the move on a stalled recovery, lack of budget discipline and the economy's vulnerability to external shocks. The only good news was that Moodys changed the nations outlook to stable from negative, saying there's only a limited risk that the governments fiscal position and debt will "materially deteriorate any further."
The next country that will join the EU joins two of the bloc's fellow strugglers, Hungary and Ireland, at that level. Normally, EU accession, which should happen this summer for Croatia, is a boost for the economy, but Moody's said "the European environment and the governments reform inertia are likely to limit the benefits normally expected to arise."
In fact, with its finances so stretched, joining could make things worse. The government said December 19 that the budget deficit will widen this year to 3.1% of GDP as the country repays debt and begins contributing to the EU's coffers.
Moody's, which joins Standard & Poors in rating Croatia junk, noted Croatia is in its second recession in two years amid austerity measures and an investment drought sparked by Europes debt crisis. "The second driver underpinning the downgrade are the headwinds to fiscal consolidation, namely the unfavourable economic environment and the governments lack of fiscal flexibility alongside a relatively high debt level," Moodys said.
Prime Minister Zoran Milanovics Cabinet, which has vowed to reduce public spending and remove obstacles to investment, forecasts the economy will grow 1.8% this year as an expected EUR10bn in EU grants through 2020 boost investment. The International Monetary Fund in November said the economy will grow 0.75% this year, after shrinking 1.5% in 2012.
"The third driver informing Moodys decision to downgrade the rating is the weakness of its credit metrics relative to those of its peers, particularly its external vulnerability and fiscal position," Moodys said. "The governments fiscal metrics are also weaker, with general government debt exceeding those of Baa3-rated countries."
Source: bne