The Dun & Bradstreet (D&B) credit rating agency has not changed Croatia's rating for March, DB3d, which ranks it among slight risk countries, the Zagreb-based Bonline company said on Monday.
The report on Croatia says the centre-right government faces a challenging period in the struggle with the global recession which contributed to a drop in GDP in 2009 and which will continue to constrain growth over the next two years.
One of the priorities for Prime Minister Jadranka Kosor is to maintain party unity following a bid by her predecessor Ivo Sanader to return to power within the Croatian Democratic Union, D&B analysts said, not ruling out a party split if disagreement remained between supporters of former PM Sanader and new PM Kosor.
Meanwhile, Croatia's recovery will be constrained by slow economic growth in Euroland. Domestic demand will also be subdued, as household spending is held back by slower wage growth, higher unemployment, increased taxes and tighter credit conditions, according to D&B.
Spending by firms will also be constrained by more limited access to borrowing from banks, while export companies may expect a recovery following a projected upturn in world trade in 2010-11.
D&B estimates that the government's stimulus for spending will be constrained by a desire to return the fiscal deficit to below 3 per cent of GDP.
Persistent deficits have been one of the main risks to Croatia's macroeconomic stability, owing to concerns over how they will be financed, the report said.
Although governments in recent years have brought the deficit down, a sharp fall in revenue and a rise in spending, as a result of automatic stabilisers such as unemployment benefits, have pushed the deficit higher, with austerity measures introduced last July and carried over into the 2010 budget, D&B said, adding that those would dampen domestic demand, underpinning expectations that economic recovery would come slowly.
The March report also mentions data on Croatian companies' payments to foreign companies, still recommending to foreign investors to use letter of credit terms when trading with Croatian companies. As a result of the credit squeeze and lower corporate profitability, meeting foreign payments obligations remains challenging for Croatian companies, according to D&B.
