Standard & Poor's cut Friday Croatia's credit rating to speculative over "insufficient reforms," warning of the deteriorating fiscal position in the EU-bound country.
The international ratings agency lowered Croatia's long-term sovereign credit rating from an investment grade "BBB-" to "BB+" in the so-called junk bond range. The outlook on the rating was put as stable.
"The downgrade reflects our view that structural and fiscal reforms implemented so far have been insufficient to foster economic growth and place public finances on a more-sustainable path," the agency said in a statement.
S&P said it expected Croatia's gross domestic product (GDP) to contract 2.0 percent in 2012, despite a strong tourism season.
"During 2013, we expect the economy to stagnate, and then recover only gradually to trend growth of 2 percent by 2015, well below the pre-crisis average," the agency said.
The Croatian government said last month it expected the economy to shrink by 1.1 percent in 2012, lowering its previous forecast that the country's GDP would stagnate.
Croatia's economy, based mostly on its tourism industry on the Adriatic coast, was in recession in 2009 and 2010 and was flat in 2011.
International financial institutions say the center-left government should undertake structural reforms, notably of the country's huge and inefficient public administration, and improve the overall business climate.
However, "the stable outlook balances our expectation of Croatia's EU accession, which would see the country benefit from EU structural and cohesion funds and higher foreign direct investment, against our view of limited prospects for major growth- and competitiveness-enhancing reforms," Standard & Poor's said.
Croatia is set to become European Union's 28th member in July.
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