Moody’s Says Credit Crunch Slows Croatia's Economic Growth

"On the other hand, financing pressures should be ameliorated somewhat by relationship lending from foreign parent banks," Assistant Vice President Joan Feldbaum-Vidra, Moody's sovereign analyst for Croatia, said in a statement accompanying the rating agency's annual report on the Adriatic country.

Croatia’s government has projected economic growth of 4.4% for 2008 and 2.0% next year. Growth slowed to a real 3.4% in the second quarter this year from 4.3% in the first quarter and 6.6% in the second quarter of 2007.

Moody also said that Croatia's Baa3 government ratings are supported by the progress made in aligning the country's institutions with the EU over the past several years, despite intermittent setbacks. Croatia started accession talks with the union in 2005 and hopes to join the bloc in the next decade.

"Croatia's ratings are also constrained by the high level of euroization of the government debt and the financial system," Feldbaum-Vidra said. "These factors heighten the country's external vulnerability in the event of a fall in the value of the kuna," the analyst added.

Feldbaum-Vidra said that Croatia is working with the World Bank on a variety of structural issues including judicial, public administration, pension and healthcare reform to address structural weaknesses in its economy. She said progress in EU accession will also help in these areas.

The last rating action for Croatia was on November 19, 2008 when Moody's changed the outlook on Croatia's Baa3 foreign currency bond rating, A1 foreign currency country ceiling and Ba1 foreign currency bank deposit ceiling to stable from positive. At the same time, the government's local currency bond rating was lowered to Baa2 from Baa1 and the local currency deposit ceiling was lowered to A1 from Aa1.

(1 euro = 7.2381 Croatian kuna)