Fitch confirme la note de crédit de la Croatie et les perspectives stables

Fitch Ratings confirmed on Friday Croatia’s rating of 'BBB-', with a stable outlook, emphasizing that the pressure on public finances related to the coronavirus pandemic should neutralize the economic recovery reliant on tourism and EU support. 

Croatia’s 'BBB-' rating reflects strong structural characteristics, the agency states, highlighting better indicators of human capital development and governance compared to countries with similar ratings and a higher GDP per capita.

It is constrained by high public debt and periods of weak economic growth, partly due to the slow adoption of structural reforms.

The stable outlook indicates significant short-term risks associated with the pandemic, but also stronger medium-term growth prospects linked to substantial support from EU funds, as well as the assumption of fiscal consolidation and debt reduction in light of the criteria for entering the eurozone.

The agency has raised its estimate of Croatia’s economic growth this year from 3.8% to 5.5%, noting stronger growth in the second half of 2020 than expected, the resilience of the construction sector and goods exports, and a gradual recovery in consumption.

The forecast is based on improved prospects for tourism, which is expected to recover this year and reach two-thirds of pre-pandemic levels, assuming the health crisis in Europe subsides, Fitch emphasizes.

However, they warn that the possibility of reintroducing travel restrictions due to the still uncertain development of the pandemic, including the spread of new virus strains, cannot be ruled out.

European Support

The economy should still grow this year even if tourism remains at the 2020 level, when it was at half of pre-pandemic levels, Fitch notes, but a weaker recovery could increase the risk of long-term negative consequences and create pressure on public and external finances.

In 2022, the economy is expected to accelerate to 6.1%, then slow to an average of 4% from 2023 to 2025, with investments expected to be the main driver, Fitch estimates, pointing to €6.3 billion in grants from the European Recovery and Resilience Fund.

An additional support should come from €1 billion from the European Solidarity Fund for earthquake recovery and €12.6 billion from the long-term EU budget.

Labor Force Issues 

According to these estimates, the Croatian economy should reach pre-pandemic levels by early 2022, which would limit risks in the labor market and business bankruptcies.

Investment momentum could be delayed by labor shortages in certain sectors, such as construction, as well as the need to adopt a large number of reforms in a short time to secure funds from the European fund.

Croatia is drawing European funds below the European average, and large amounts highlight the challenges in implementation, the agency emphasizes.

If the government is successful in adopting long-term reforms, it could alleviate issues such as unfavorable demographic indicators, Fitch points out, reminding that according to the European Commission, the working-age population could decrease by a quarter by 2050.

Raised Deficit Estimate

The agency has raised its estimate of the budget deficit this year from 3.5% to 4%. In 2022, it is expected to fall to 3%, which is 0.8 percentage points higher than previously forecasted in December last year.

They emphasize that the government has introduced "relatively generous and effective" support measures during the pandemic crisis, which it has since begun to gradually phase out, with expected very limited direct budget costs after the second quarter of this year.

This should reduce public spending expressed as a share of GDP from last year’s record 55.4%, while revenues should benefit from strong nominal growth. However, recovery in certain segments could come into question if tourism disappoints, they add.

Entry into the Eurozone in 2024

Public debt expressed as a share of GDP is expected to decrease from last year’s 88.7% to 82.7% this year, Fitch estimates, lowering its December estimate by 2.8 percentage points. 

They note that favorable financing conditions and deposits are easing liquidity pressure for Croatia.

More than three-quarters of public debt is denominated in foreign currency, almost exclusively in euros, but exchange rate stability is not a major concern, and this long-term sensitive point will be neutralized when Croatia enters the eurozone, Fitch estimates.

The government still aims to adopt the euro in the first half of 2023, with the biggest challenge being meeting the convergence criteria, as the strategy for reducing the deficit and debt could face short-term issues if macroeconomic conditions do not improve as expected, Fitch emphasizes.

The agency continues to estimate that Croatia should enter the eurozone in 2024.

Consolidation

They note that they could upgrade Croatia’s rating if short-term macroeconomic risks subside and if meeting the criteria and entering the eurozone proceeds as planned. A stable reduction of public debt and the budget deficit through fiscal consolidation would also have a favorable impact.

Conversely, failure to reduce public debt in the medium-term perspective would negatively affect the rating, Fitch points out, citing the example of "a more pronounced and prolonged period of fiscal policy easing and economic decline."

The rating could also be downgraded in the event of a deterioration in macroeconomic prospects, they add, for example, due to a slowdown in the recovery of tourism.

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