Moody’s Lowers Croatia Rating to Ba1

Moody’s on Friday downgraded Croatia’s credit rating from Baa3 to Ba1, citing poor economic growth prospects and the government’s lack of fiscal flexibility.The agency also changed the outlook on Croatia’s rating from negative to stable, citing only a limited risk of a significant deterioration in the government’s fiscal position and debt.

Moody’s said that “the government’s capacity to re-balance the economy toward exports is intrinsically limited” and “that the country’s expected forthcoming EU accession in July 2013 is a positive development; however, the European economic environment and the government’s reform inertia are likely to limit the benefits normally expected to arise from EU accession.

“The second driver underpinning the downgrade are the headwinds to fiscal consolidation, namely the unfavourable economic environment and the government’s lack of fiscal flexibility alongside a relatively high debt level,” the statement said.

“The third driver informing Moody’s 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,” the agency said, adding that the “government’s fiscal metrics are also weaker, with general government debt exceeding those of Baa3-rated countries.”