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Fitch reaffirms Croatia’s investment rating as the introduction of the Euro looms

Written by  May 07, 2022

On Friday, the ratings agency Fitch reaffirmed Croatia's investment rating of 'BBB' and a positive outlook, estimating that the recovery in tourism will support the economy in a period of declining exports, and joining the Eurozone will mitigate financing risks.

Fitch lowered Croatia's economic growth forecast for this year from 4.4 percent to 3.3 percent, citing a high benchmark base in 2021, the year of recovery from the pandemic crisis, and a sharp slowdown in household spending due to high inflation.

The slowdown in key trading partners, especially in the euro area, will affect exports, but the recovery of key tourism should continue, given Croatia's structural strengths, Fitch estimates.

According to them, growth should accelerate slightly, to 3.7 percent, in 2023, provided that external risks mitigate and investment accelerates, with the key role of the EU program.

Croatia is less exposed to the adverse macroeconomic consequences of the war in Ukraine than other countries in the region, with very limited direct ties to Russia and Ukraine with a share of exports to the two countries of just 1.5 percent and a share of investment and tourism of just one percent.

The share of energy imports is close to the European average of 56 percent, but Croatia has invested in expanding its sources of supply, opening a liquefied gas terminal last year, allowing it to reduce its exposure to Russian gas to zero, Fitch said.

Croatia's budget deficit fell sharply in 2021 to 2.9 percent of GDP, thanks to solid revenue growth and restrained spending, the agency notes.

Croatia has met all the criteria for structural reforms and is in the “waiting room for the euro” and currently meets most of the convergence criteria, with the exception of price stability, given rising inflation, which reached 7.3 per cent in March.

However, inflation has strengthened in all EU countries, and Fitch estimates that the Union will take advantage of the flexibility offered by the criteria and is likely to approve Croatia's entry into the Eurozone in July, meaning that Croatia will officially adopt the Euro from the beginning of 2023.

The positive outlook reflects expectations that Croatia will be in a position to join the Eurozone in January next year, the report said. "We currently estimate that if the country does not meet the inflation criteria this year, accession to the Eurozone will be delayed for a maximum of one year, given that the EU has clearly promised that the process will be accelerated."

They note that they could lower Croatia's rating if its entry into the Eurozone is significantly delayed or if public debt increases again in the medium term. However, the rating will be raised if the EU Council of Ministers confirms that Croatia has met the criteria for joining the Eurozone.