On Friday, Standard & Poor's reaffirmed Croatia's credit rating of BBB- / A-3, with a stable outlook, highlighting fiscal and monetary measures that should mitigate the effects of the corona crisis and thus prevent permanent damage to credit indicators.
The Croatian economy will shrink by eight percent this year, S&P estimates, easing an estimate from May when it predicted a 9 percent drop.
In 2021, it is expected to rise 5.6 percent and reach pre-pandemic levels in 2022, a year earlier than the agency estimated in May.
The coronavirus pandemic is affecting Croatia primarily through the tourism and hospitality sector, and preliminary information shows that the decline in tourism revenues could be milder than the 70 percent estimated in May, S&P points out.
"Despite the continuously increased pressure on the most prominent economic sectors in the coming months, several factors will prevent permanent damage to Croatia's core credit indicators," the agency said.
"Croatia entered 2020 with a significantly improved situation in the foreign trade balance and budget, after years of reducing macroeconomic imbalances," they note.
This has provided the government with a strong fiscal response, which will mitigate the pandemic impact on the labour market, S&P notes.
At the same time, monetary policy tools, the Croatian National Bank's response, abundant foreign exchange reserves of almost 40 percent of GDP and tourism revenues in recent months should alleviate potential external pressures on financing, they added.
In 2021, the general government budget deficit should fall to around three percent of GDP and the downward trend should continue in 2022 and 2023, as the government will strive to respect the Maastricht criteria in the process of adopting the euro.
Public debt expressed in GDP is expected to be 85.8 percent this year, compared to 87 percent estimated in May. It should fall to 83.4 percent next year. In May, the agency expected it to slide to 83.9 percent.
The outlook for the rating is stable as enhanced safeguards and economic recovery prospects will amortize the risks to the balance of payments and budget of the impact of the coronavirus pandemic on an important tourism sector, the agency said.
In the long run, the adoption of the euro should also have a favourable effect on the rating, they added.