ZAGREB, 15 July 2022 - Standard & Poor's (S&P) Global Ratings raised its long- and short-term foreign and local currency sovereign credit ratings on Croatia to 'BBB+/A-2' from 'BBB-/A-3' on Thursday, saying that the country will benefit from accession to the euro area and its economic growth will remain steady. The outlook is stable.

S&P is the second credit rating agency to upgrade Croatia's rating in an unscheduled publication after Fitch Ratings did the same on Wednesday. Both announcements came after the Council of the European Union on Tuesday officially confirmed Croatia's accession to the euro area on 1 January 2023.

Stable outlook

S&P says that the stable outlook reflects its expectation that Croatia's economic growth will remain steady over the coming two years despite rising inflation and the economic consequences of the conflict in Ukraine.

"We expect the government will remain committed to its reform program, receive significant EU financing, and gradually rebuild the fiscal space it lost in the aftermath of the pandemic," the agency said.

The ratings could be raised if Croatia's economic growth were to accelerate beyond S&P's current expectations, leading to a step-up in economic wealth. In this scenario, the agency would expect fiscal consolidation and declining net general government debt beyond its current projections.

"Rating upside could also come from Croatia's deepening European integration, if it were to facilitate institutional improvements, for example within the judiciary, education, and the broader business environment."

On the other hand, a downgrade could be considered in the event of significantly weaker fiscal positions and structurally weaker economic growth than projected.

"Such weakening could result if a prolonged conflict in Ukraine produced increasingly severe pan-European economic consequences or if an abrupt halt to European energy supply accentuated recessionary tendencies throughout the continent. Net emigration trends and an aging population also represent a long-term risk to Croatia's growth and public finances," the agency said.

Benefits from ECB's monetary policy

In the view of S&P analysts, as a member of the euro area Croatia will benefit from the monetary policy flexibility of the European Central Bank (ECB), while residual foreign exchange risks will decline in the heavily euroised economy.

The upgrade also follows the agency's forecast of steady near-term economic prospects from expected solid tourism flows and strong near-term execution of EU-funded investments.

"In addition, we consider Croatia to have limited direct dependence on Russian hydrocarbons, in particular following the recent expansion of the Krk liquefied natural gas (LNG) terminal and advanced sea-borne oil supply substitution," the agency said.

S&P believes accession will eliminate any residual exchange-rate risks in the heavily euroised economy, where about 75% of banking sector assets and 67% of liabilities are denominated in euros, and that it will similarly eradicate the foreign currency risks of the government's balance sheet.

"This should reduce Croatia's share of government debt denominated in foreign currency from over 70% at present to close to zero, as this debt is almost exclusively denominated in euros."

Growth projection revised up to 3.5%

S&P revised its growth projection for the Croatian economy for this year from 2.5% to 3.5% on the back of resilient dynamics in the first half and prospects for a strong tourist season on par with pre-pandemic levels.

"Rising energy and commodity costs are likely to dampen disposable income and contain consumer spending during second-half 2022 and spilling over into 2023. We forecast growth will calm to 2.5% in 2023."

Over the medium term, the agency forecasts Croatia's economy will settle on a solid growth path, backed by investments supported by EU financing and rebounding tourism.

Pan-European economic repercussions from Russia's military intervention in Ukraine and inflationary pressures represent near-term risks to the forecasts.

"Some lingering pandemic risks to Croatia's tourism recovery persist, however, due to comparatively low vaccination rates in the country. As of July 7, 2022, less than 60% of Croatia's population was fully vaccinated against COVID-19, compared with an EU average of 76%."

Average inflation forecast at 8.0% in 2022

"The Russia-Ukraine conflict has added pressure on energy prices, which will have an important bearing on Croatia's inflation outlook for 2022. We project a significant pickup in inflation, with the consumer price index averaging 8.0% this year (from 2.6% in 2021) due to rising energy prices, increasing wages, and rising hospitality sector costs."

S&P projects a general government deficit of 3.0% of GDP in 2022.

"The government has already introduced subsidy schemes to alleviate price pressures on fuel and energy, which add 1.1% of GDP to the expenditure bill. We believe there are risks to our deficit projections as the current energy crisis could require additional government subsidy schemes in the second half of 2022."

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ZAGREB, 1 Jan 2021 - The rebound from the corona crisis, the country's improved credit rating as well as a rise in inflation marked the economic trends in Croatia in 2021.

After 2020, which will be remembered for efforts to curb the COVID-19 pandemic and for the devastating quakes that hit the capital city of Zagreb on 22 March and Sisak-Moslavina County on 28 and 29 December, the outgoing year has been marked by a high growth rate.

In 2020, the economy contracted by 8% and it is set to have rebounded at a rate of 8.1% in 2021, according to the European Commission's forecasts, while the Fitch rating agency forecasts Croatia's recovery at a rate of 8.9% in 2021.

In mid-December, analysts of four major commercial banks presented projections of Croatia's growth at a rate of 9.5%, and the Croatian National Bank projects a 10.8% recovery.

Croatia's credit rating reaches a record high

On 13 November, Fitch upgraded Croatia's rating from BBB- to BBB, the best in Croatia's history, with a positive outlook.

Fitch expects "Croatia to be in a position to join the euro in January 2023 due to its significant progress in meeting convergence and structural reform criteria, despite the pandemic shock, and political support at the wider eurozone level for Croatia's membership."

The euro adoption will support Croatia's rating, "as it would provide the sovereign with reserve currency status, reduce transaction costs and limit exchange rate risk to corporate and household balance sheets."

Commenting on this improvement, Finance Minister Zdravko Marić recalled that the credit rating is important for the price of borrowing for the state, businesses, and citizens as its upgrade lowers the risk premium, which has a favorable effect on the price of capital.

Increasing inflation

Last year was marked by an acceleration in inflation rates.

At the beginning of 2021, inflation was moderate, however, it stepped up in the autumn and November saw 4.8%, a record high rate since February 2013, with analysts projecting that the inflation rate in December is set to have exceeded 5%.

In the EU, record-high inflation rates of 9.3%, 8.6%, and 7.5% were registered in Lithuania, Estonia, and Hungary, respectively, in November.

In Croatia, November's inflation rate was fueled by a 12.9% rise in transport prices, which was spurred by a 26.6% annual increase in fuel prices.

In mid-November, Marić said that that effect was not surprising given all the circumstances, primarily on the global level. However, the overall inflation rate in Croatia is not deviating from the EU average, which is good, he added.

According to Eurostat, the European Union's statistical office, the EU inflation in November reached 5.2% and the euro area registered a 4.9% inflation.

The Maastricht criteria concerning price stability envisage that a euro-area aspirant's inflation rate cannot be higher than 1.5 percentage points above the rate of the three best-performing member states.

The Andrej Plenković cabinet forecast an inflation rate of 2.5% both in 2021 and 2022.

Tourist trade again pulls the economy from the lows

In 2021, the pandemic-hit economy bounced back thanks to trends in the tourism sector.

Both the financial and physical indicators hint at a successful season.

From 1 January to 20 December 2021, tourist turnover was equivalent to 77% of the tourist trade in the pre-pandemic 2019.

Fiscalised receipts in this sector reached 85% of the value registered in the corresponding period in 2019.

Rimac takes over Bugatti

In July, Rimac Automobili, the Croatian carmaker based in Sveta Nedelja west of Zagreb, acquired Bugatti.

The Rimac Automobili company has decided to combine forces with the automotive brand Bugatti Automobiles "to create a new automotive and technological powerhouse" called Bugatti Rimac d.o.o. (in English – LLC), the Croatian company reported on 5 July.

As part of the deal, the newly-formed Rimac Group has become the majority shareholder with a 55% stake.

Croatia's National Recovery and Resilience Plan

The government drafted Croatia's National Recovery and Resilience Plan (NRRP) which consists of 77 reforms and 152 investment plans. Croatia's 2021-2026 NRRP was formally adopted by the EU in July.

Under the EU Recovery and Resilience Facility (RRF), Croatia has €6.3 billion in grants and 3.6 billion in favorable loans at its disposal.

Croatia plans to set aside 40.3% of that money for climate targets and 20.4% for digital transformation. A large part will go for post-earthquake reconstruction.

On 28 September, the European Commission disbursed €818 million to Croatia in a pre-financing payment under the RRF, and that was equivalent to 13% of the country's total financial allocation under the RRF.

The pre-financing payment will help to kick-start the implementation of crucial investment and reform measures outlined in Croatia's NRRP.

The implementation of the NRRP is expected to contribute 1.4 percentage points to Croatia's GDP growth in 2022 and as much in 2023.

Pelješac Bridge built

In late July, Pelješac Bridge was fully joined together, with the installation of the last, 165th segment of its steel span, and it now stretches from Komarna on the coast to Brijesta on the peninsula of Pelješac.

The 2,440-metre bridge has 13 spans, of which the five central spans are each 285 meters long, six 33-meter-high centrally installed pylons made of reinforced concrete, and two lanes, plus a hard shoulder for bridge maintenance.

The navigation profile under the bridge is 200 by 55 meters.

The bridge was designed by Marjan Pipenbaher and built by the China Road and Bridge Corporation. The Chinese company was awarded the job in 2018, offering a price of HRK 2.081 billion, not including VAT, and a completion deadline of 36 months.

Work on the bridge officially started on 31 July 2018.

The bridge and its access roads are expected to be opened to traffic in June 2022, before the start of the peak tourist season.

The decision on financing the project was made by the government in 2017.

LNG terminal off Krk starts operating

The floating terminal for liquefied natural gas (LNG) on the island of Krk began commercial operations on 1 January when the first LNG tanker, the Tristar Ruby, carrying 143,000 cubic meters of liquefied natural gas arrived at Omišalj, marking the launch of the terminal's commercial operations

The terminal's annual capacity is 2.6 billion cubic meters of gas. All of the terminal's capacity has been leased for the next three years, 80% of its capacity until 2027 and around 50% until 2035.

The floating LNG terminal in Omišalj and the Zlobin-Omišalj pipeline which will deliver LNG to Croatia's gas transport system and consumers was formally inaugurated at a ceremony in late January.

The LNG Croatia project is worth €234 million. In 2017, Croatia signed with the European Commission a grant agreement totaling €101.4 million for the construction of the terminal.

Gas transport operator Plinacro said the terminal and the Zlobin-Omišalj pipeline gave Croatia a new supply route that guaranteed energy stability and gas supply.

A compressor station was built in January 2020 to allow for a two-way flow of gas between Croatia and Hungary. With the reconstruction of the Rogatec-Zabok gas pipeline between Slovenia and Croatia, all requirements were met for delivering gas from the LNG terminal to Central and Eastern Europe and Croatia's gas transport system was integrated into European supply routes.

The LNG Croatia company invested HRK 1.7 billion in the project, while Plinacro invested HRK 430 million.

The 16.7-kilometre-long Zlobin-Omišalj pipeline, completed in mid-November 2020, is worth HRK 430 million, with €16.4 million coming from EU funds.

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ZAGREB, 13 Nov, 2021 - The credit rating is important for the price of borrowing for the state, businesses and citizens as its upgrade lowers the risk premium, which has a favourable effect on the price of capital, Finance Minister Zdravko Marić told Hina on Saturday.

The Fitch Ratings agency yesterday upgraded Croatia's rating to BBB, the best in Croatia's history, with a positive outlook.

Marić said the rating was first of all closely related to debt price and the capital price for the state and, directly or indirectly, for the interest paid by businesses and citizens.

The Fitch rating has a positive effect on those processes, he said, but added that the upgrade should be viewed in continuity, recalling that until not so long ago the state paid a considerable amount for interest.

In 2015, the budgetary expenditure for interest was HRK 12 billion, which at that time was almost the entire budget of the education ministry, whereas now that expenditure is HRK 4.5 billion lower.

"Interest used to be 5-6% and now it is about 1% on the ten-year bond," said Marić, adding that the credit rating assessment was important both in times of low and in times of higher interest rates on capital markets.

"We are talking about reference interest rates," he said, adding that the increased money offer in recent years led to a considerable drop in reference rates, but that the total interest paid by citizens, businesses and the state was a sum of the reference rate and the rate related to a specific country and to the risk premium.

"That's where the rating strikes because Croatia can't influence the trend of reference interest rates, but it can the risk premium it pays."

Marić said Croatia had a stable growth, public finances in order, a clear prospect of entering the euro area, and political stability.

"Those are all elements which have an effect on rating improvement, which is then reflected in a better perception and reputation of a country like Croatia in the financial world, and in the end comes the effect on the risk premium," he said. That is important both when reference interests are low and when they are high, he added.

The investment rating is very important, not just for debt and capital prices but also for capital availability, Marić said.

"The moment you are in the investment zone, you are interesting to many more good investors who can invest in securities," he said, adding that international investors had restrictions and were often not allowed to invest in a country below the investment credit rating.

"That's why it's very good that that has changed for Croatia in terms of Fitch and Standard & Poor's," Marić said, adding that it was also important that Fitch had a positive outlook on Croatia. "That sort of indicates the direction the rating could take."

He praised the media focus on the credit rating, saying that it was good that people became aware of how important it was to know how to manage public money well.

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ZAGREB, December 5, 2020 - Croatia's having kept its investment grade credit rating proves that the government's response to the crisis has been good, Prime Minister Andrej Plenkovic said on Saturday in reference to a report by Fitch Ratings, which affirmed the country's investment grade rating for the third time this year.

Fitch Ratings has for the third time this year affirmed the country's investment grade rating, which is owing to an expected gradual recovery from the coronavirus pandemic and the government's strong aid measures, accession to the Exchange Rate Mechanism II (ERM II), and fiscal consolidation having been maintained, Plenkovic stressed in a statement.

The latest decision by Fitch Ratings also confirms the stable outlook for future trends. The agency underlines the importance of political stability and fast government formation following the HDZ party's victory in the July 2020 parliamentary election, as well as the adoption of the budget for 2021 and the fifth round of the tax reform.

"The fact that our credit rating has been kept in the investment category confirms that during the coronavirus pandemic we have managed to maintain economic stability without major imbalances, made progress on the journey to the euro area and joined the ERM II and that we have provided high amounts of aid to the private sector to preserve jobs. We are continuing to pursue a prudent fiscal policy, focusing on further reforms and reduction of the tax and administrative burden so as to improve the business climate and boost investment," Plenkovic said in the statement.

He noted that quality crisis management had shown that Croatia was able not only to have its rating kept in the investment category with Fitch and Standard&Poor's but also to make progress with Moody's as the most conservative credit rating agency.

Fitch expects Croatia's GDP to drop by 9% in 2020 as a consequence of the coronavirus pandemic. In 2021 it expects a moderate growth at a rate of 3.8% and in 2022 it forecasts that growth will pick up to 6%, which will also be owing to EU funds, whose contribution is estimated to account for two percentage points of economic growth in 2022.

Fitch believes that Croatia's entry to ERM II in July this year has contributed to the rating having stayed in the investment category and says that it could upgrade it by two notches between admission to the ERM II and joining the euro area.

In 2020 Fitch expects an 8% budget deficit. The budget deficit is expected to go down to 3.5% of GDP in 2021 and further to 2.2% in 2022. This confirms that the government has continued to implement a stable fiscal policy for which Fitch says that it has been yielding results above fiscal targets since 2016.

Fitch's decision to affirm the country's credit rating is also owing to more than €24 billion having been made available to Croatia from the EU's Multiannual Financial Framework and Recovery Plan in the coming decade.

The government recalls in its statement that Fitch had kept Croatia's credit rating outside the investment category from August 2014 to June 2019, when it was returned to the investment category where it has stayed since.

November the 16th, 2020 - The words ''Croatian credit rating'' are rarely followed by good news of late, especially as the ongoing coronavirus pandemic continues to cause havoc with not only the domestic economy but that of the entire world. Surprisingly, however, it seems that things might just be looking up for the Croatian credit rating in the eyes of all major rating agencies.

As Novac writes, the respected credit agency Moody’s improved its outlook of the Croatian credit rating a few days ago. However, even after this improvement, Croatia still remains in the ''investment'' credit rating level in the eyes of Standard & Poor's and Fitch, and in the non-investment rating with Moody's, the Croatian Chamber of Commerce (HGK) said.

After deteriorating ratings in the years dominated by various types of economic crisis, positive trends in ratings or at least outlook finally began for Croatia back at the end of 2016, when all three of the largest agencies improved their respective negative outlooks for Croatia to a very welcome stable.

The last improvement in the Croatian credit rating or at the very least its appearance was back on June the 10th, 2019, when Fitch improved its rating and thus assigned Croatia an investment rank. Previously, this was done by Standard & Poors.

The current situation in the rating or appearance movement is primarily determined by the global situation and the present pandemic, and less by internal factors. Therefore, in April, Fitch changed the outlook for Croatia from positive to stable, which was not unexpected given the estimated decline in GDP for this year of about 9 percent, as well as the accompanying growth of the budget deficit and public debt. Such a decline in GDP, of course, cannot be viewed in isolation from the global environment, because the European Union's economy, according to European Commission estimates, should fall by 7.4 percent, and the global economy by -4.4 percent.

When looking at Croatia, in the long period since way back in 1997, Moody's changed its view of the Croatian credit rating only twice until yesterday, while Fitch and S&P changed their ratings six times each within the same time period.

This is certainly good news for Croatia, and a step towards an investment rating with all three of the most important and well respected credit rating agencies, despite the current situation caused by the pandemic, the Croatian Chamber of Commerce reports.

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ZAGREB, September 20, 2020 - Economy and Sustainable Development Minister Tomislav Coric said on Saturday that Standard&Poor's agency having affirmed Croatia's credit rating of BBB- was a result of the government's consistent macroeconomic policy in recent years and the political stability it had created.

"It is a fact that we introduced clear measures also during the election period, on the one hand to preserve jobs and on the other to maintain the economy's liquidity. The GDP drop, despite a very large share of tourism in GDP, is smaller than was projected and our recovery from the crisis and return to the level of 2019 will happen somewhat sooner," Coric said in an interview with the RTL broadcaster.

"In the coming period we will be continuously monitoring economic trends and we are confident that we will respond appropriately if necessary," he said.

Commenting on President Zoran Milanovic's statement that estimates by credit rating agencies were obsolete, Coric said that "(Milanovic's) economic advisors evidently did not brief him appropriately."

"Rating agencies' forecasts do not refer only to interest rates and cheap money, which is what he was talking about, but also to a country's adequacy for doing business and finally, for the overall economic relations in the country. That is why those estimates are very much relevant for all potential investors in Croatia," he said.

Commenting on corruption scandals involving members of his HDZ party, Coric said that "corruption affects most systems."

One should fight corruption continually, the minister said, adding that he believed the legislative changes and the action plan and strategy for the fight against corruption, announced by Justice and Public Administration Minister Ivan Malenica, would help make progress in that regard.

He also underlined the importance of making the spending of budget money more transparent.

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As Novac writes on the 6th of June, 2020, Fitch has reaffirmed the long-term Croatian credit rating of 'BBB-' with a stable outlook.

"The stable outlook reflects confidence in the government that medium-term fiscal stability will be maintained while short-term measures are taken for economic recovery in regard to the effects of the coronavirus epidemic, as well as the continuation of the gradual euro changeover process," Fitch said.

Fitch forecasts a decline in Croatia's GDP of 8.4 percent in 2020, which is more optimistic than the government's own estimate (which stood at a concerning 9.4 percent), primarily due to the major consequences of the ongoing coronavirus pandemic on tourism, Croatia's strongest economic branch. The new forecast is that Croatian tourism will fall by 70 percent (compared to 50 percent, as was previously assumed).

"Recent economic data points to a dramatic deterioration in economic activity (GDP fell 1.4 percent in the first quarter, while retail sales fell a record 22 percent in April and unemployment jumped to 9.4 percent). Sentiment indicators point to recovery in May, in line with mitigation of the previously stringent anti-epidemic measures put in place to try to slow down the coronavirus infection rate. Other risks will remain as they are in the short and medium term, including the extent and length of the pandemic, recovery in external demand, the potential impact of suspension measures and adverse demographics, Fitch explains.

As for Croatia's desire to join the Eurozone, Fitch writes that Croatia is close to completing the requirements for simultaneous entry into ERMII, a sort of proverbial waiting room countries enter into before adopting the euro as its official currently, as well as the Banking Union.

"In May, the government approved a law reducing non-tax and parafiscal costs, meeting all structural commitments agreed with their European partners. The ECB also conducted its comprehensive assessment and the results will be published in June. If the ECB's results are positive, Croatia is likely to seek entry into the ERMII/Banking Union in the third quarter of 2020,'' they state.

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