S&P Affirms Croatia Ratings At BB/B With Negative Outlook

(RTTNews) - Rating agency Standard & Poor's on Friday affirmed Croatia's long term and short term credit ratings at 'BB' and 'B', respectively, citing weak growth, poor public finances and delay in reforms.

The outlook on the ratings remains 'negative', the agency said, reflecting the view that there is at least a one­-in­-three possibility that ratings could be downgraded in the next 6­-12 months.

"In our view, Croatia's six­-year long recession has ended, but growth in 2016 will be relatively weak and mainly dependent on external factors," S&P said.

"At the same time, public finances remain in poor shape and reform planning has not yet started because the government hasn't been finalized since the election in November 2015."

The ratings are supported by slightly decreasing external debt because of deleveraging in the financial sector, which somewhat offsets that of the public sector, which is mounting, the agency noted.

S&P raised the 2015 growth estimate for Croatia to 0.9 percent from 0.2 percent. However, the agency said growth will remain relatively weak over 2016-2019 at an average 1.4 percent.

"We continue to see downside risks to our GDP forecast, for instance, if the recovery in the Eurozone, Croatia's main trading partner, were to falter," S&P said.

The country's ratings may be lowered if government policies do not robustly counter the entrenched fiscal and economic hurdles after the new government is formed, S&P said. The agency expects a new government formation this month.

Further, S&P said ratings could also be downgraded if the agency perceived that the Croatian National Bank's effectiveness or credibility was being undermined if increased "euroization" weakens its policy transmission mechanism.