Moody’s downgrades Croatia

Moody's Investors Service said it downgraded Croatia's long-term issuer and senior unsecured debt ratings to Ba2 from Ba1 and maintained the negative outlook.

The key drivers for the downgrade are:

• The government's large and increasing debt burden, which stood at around 86% of GDP at year-end 2015 and which Moody's expects will increase to above 90% by 2018. This significantly exceeds the Ba1 peer group median of around 45% of GDP and is unlikely to reverse much before the end of the decade; and

• Croatia's continuing weak medium-term economic growth prospects, which derive from historically low investment and structural rigidities, including a low labor force participation rate, as well as bottlenecks in the absorption of European Union funds. Despite having recently emerged from recession, Moody's believes that Croatia's potential growth is below 1%, which is low for a converging economy and below other catching-up economies.

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