Boston, MA -- (SBWIRE) -- 03/26/2013 -- Core Views

Though the coalition government has reiterated its commitment to a common goal, we believe the domestic political environment will remain heavily divided along ethnic lines, posing a significant impediment to structural reform and threatening the country's EU membership ambitions.

In 2013, the economy will begin to rebound from the double-dip recession, though this recovery will be slow in the short term and vulnerable to external headwinds, particularly from the eurozone. The passing of the 2013 budget was an important milestone for fiscal policy, though ongoing political uncertainty and limited administrative capacity pose a threat to successful execution.

Major Forecast Changes

We have lowered our short-term real GDP growth projections based on disappointing final data for 2011 and high-frequency available indicators for 2012. We now estimate a contraction of -0.5 in 2012, and forecast a modest 0.8% expansion in 2013.

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We believe the government's deficit-reduction targets are within reach and forecast a general government deficit equal to 2.6% of GDP in 2013.

Risks To Outlook

Failure to agree on key reform issues this year, such as the delayed census, could trigger an irreparable split in the governing coalition, even before the 2014 election. This would lead to another political impasse that would further delay progress towards EU accession.

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