Croatia had its credit rating cut to junk by Fitch Ratings on September 20, on the back of what the ratings agency called a deterioration in the newest EU member's fiscal outlook.
Fitch said that it has lowered the country's long-term foreign-currency debt assessment to 'BB+', one level below investment grade, from 'BBB-', and its local currency rating to 'BBB-' from 'BBB'. The outlook on the ratings is stable.
The move leaves Croatia on a par with Portugal and Hungary at Fitch. It also sees the agency join Standard & Poor's and Moody's Investors Service, which have already cut the country to below investment grade.
"A structurally weak growth outlook has impaired the prospects for fiscal consolidation and the attainment of public debt sustainability," Fitch said. "Measures to clamp down on tax evasion and improve compliance have borne fruit, but revenues have fallen this year, whilst pressures continue to build on the expenditure side."
Croatia, which became the EU's 28th member in July, is struggling to keep public finances in check after the economy shrank more than 10% since 2008, during which time foreign direct investment plunged 80%, according to Bloomberg. GDP will fall 0.9% in 2013, Fitch predicts, lowering its previous forecast of 0.3%.
Tim Ash of Standard Bank notes this is clearly disappointing for Croatia, but not unexpected given the other rating agencies' stances. "Fitch indicated that this move was primarily driven by disappointment in the fiscal side, revising their forecast for the budget deficit from 3.9% of GDP to 4.7% this year, and the ratio of general government debt to 66% of GDP now by 2016 (previous 62% forecast)."
"While the budget deficit is still higher than Hungary, the ratio of public sector debt is still a good 10-15% lower than Hungary," he writes. "Croatia's problem - actually like Hungary, and the region - is still growth, with the economy still mired in recession, and Fitch now forecasting a further 0.9% contraction this year."
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