Fitch claims Croatia are ‘BBB-‘, outlook stable
ZAGREB, May 22, 2021 – Fitch Ratings confirmed Croatia’s ‘BBB-‘ rating on Friday, with a stable outlook, saying the pressure on public finances from the pandemic should be offset by an economic recovery supported by tourism and EU support.
The “BBB-” rating balances strong structural characteristics, according to the agency, distinguishing better indicators of human development and governance compared to countries with a similar rating and higher GDP per capita.
The rating is constrained by high public debt and periods of weak economic growth, in part due to the slow adoption of structural reforms.
The stable outlook “balances the large short-term downside risks associated with the development of the pandemic against stronger medium-term growth prospects linked to substantial support from EU funds and our fiscal consolidation and our debt reduction, which is underpinned by the authorities’ commitment to meet the convergence criteria under the Exchange Rate Mechanism (ERMII). “
“Fitch expects the economy to grow 5.5% in 2021, from a combination of base effects (growth was stronger than expected in 2H20), the resilience of sectors such as as construction and exports of goods, and a gradual recovery in consumption, ”the agency said.
“Our forecast is based on an improvement in the outlook for the tourism sector (to around two-thirds of 2019 levels), assuming a recovery in summer tourism as the health crisis in Europe continues to subside. However, further travel restrictions due to a still uncertain course of the pandemic, including the spread of new variants, cannot be ruled out. “
Fitch expects the economy to grow this year, “although tourism levels have remained at 2020 levels (50% of 2019), but the weaker recovery could increase the risk of longer-term scarring and exert pressure on public and external finances “.
Fitch predicts that GDP growth will accelerate to 6.1% in 2022 before settling to an average of 4% in 2023-25, largely thanks to investments and notes that Croatia will receive around 6.3 billion dollars. ‘euros of grants from the Recovery and Resilience Facility (FRR), in addition to euros. € 1 billion from the EU Solidarity Fund for Post-Earthquake Reconstruction and € 12.6 billion from the 2021-2027 Multi-Annual Funding Facility.
According to these projections, Croatia is likely to reach its pre-crisis production in early 2022, “limiting the risks of labor market hysteresis and corporate sector bankruptcies”.
The rapid tightening of the workforce in sectors such as construction could delay some of the investment momentum, as could the need to pass a large number of reforms, in a short period of time in order to achieve the disbursement of FRR funds.
“Croatia’s absorption capacity is lower than the EU average and the sheer size of the funds accentuates the implementation challenges.”
“If the authorities succeed in adopting long-standing reforms, it could alleviate major growth challenges such as unfavorable demographics. According to the European Commission, the working-age population could contract by 26% by 2050. “
Deficit forecasts noted
Fitch raised the government deficit forecast from 3.5 to 4% of GDP in 2021 and forecasts a decline to 3% in 2022, up 0.8 percentage point from the forecast made last December.
“The authorities have put in place relatively generous and effective pandemic support measures that are gradually disappearing, with very limited direct budgetary costs expected beyond 2Q21.”
This will help bring government expenditure / GDP down from a record high of 55.4% of GDP in 2020, while revenue is expected to benefit from strong nominal growth, but the recovery in some segments could be jeopardized if tourism activity disappoints .
Entry into the euro zone in 2024
Public debt / GDP is expected to fall to 82.7% of GDP in 2022 from 88.7% in 2020, Fitch said, reducing the December forecast by 2.8 percentage points.
Croatia benefits from favorable financing and deposit conditions, reducing liquidity pressures.
“Over 75% of public debt is denominated in foreign currencies (almost all in euros), but there are few concerns about the stability of the exchange rate and this long-standing vulnerability will dissipate once Croatia joins the zone euro.”
The authorities continue to target the adoption of the euro by the beginning of 2023, but the biggest challenge remains to meet the objectives of the convergence criteria of public finances, as the strategy to reduce the public deficit and the debt could face short-term challenges if macroeconomic conditions do not improve as expected.
Fitch maintains his forecast that Croatia is expected to enter the Eurozone in 2024.
The agency says it could improve Croatia’s rating if short-term macroeconomic risks dissipate and if the criteria are met and eurozone membership proceeds as planned. A stable reduction in public debt and the budget deficit through fiscal consolidation would also have a positive effect.
The rating could be downgraded in the event of non-reduction in general government debt over the medium term, “for example due to a more pronounced and longer period of fiscal easing and economic contraction”, as well as in the event of deterioration of the macroeconomic outlook, for example by a decline in the tourism sector.
To find out more about doing business in Croatia, follow TCN’s dedicated page.