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S&P Affirms Croatia's BBB- Rating With Negative Outlook

4/3/2012 8:48 AM ET

Standard & Poor's Rating Services on Tuesday affirmed its long-and short-term foreign and local currency sovereign credit ratings on Croatia at 'BBB-/A-3', citing the possibility of growth getting hampered by lack of improvement in the country's rigid labor market and a large public sector.

The agency maintained the negative outlook, indicating a downgrade next year if the government's implementation of reform efforts are insufficient. The transfer and convertibility assessment was kept unchanged at 'BBB+'.

S&P expects Croatia's real economy to shrink by about 1 percent in 2012, after the economy contracted in 2009 and 2010, before stagnating in 2011. The country's current account deficit is likely to remain at about 1 percent of GDP for the next few years given the weak domestic demand and strong tourism seasons. Net FDI inflows, which contracted to 0.8 percent of GDP last year, are estimated to recover only gradually.

The agency said that the commitment from the new government to accelerate fiscal consolidation and structural reforms are likely to help improve Croatia's growth prospects.

Ratings on Croatia are supported by its political stability, strong per capita GDP and the country's moderate net general government debt burden of just under 50 percent of GDP. However, the ratings are constrained by weak growth prospects in the absence of more substantial structural reforms, the country's sizable net external debt burden, and high euroization, S&P said.

by RTT Staff Writer

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