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."

For more, check out our business section.

ZAGREB, 12 July 2022 - The ceremony of signing the three final legal acts necessary for Croatia to adopt the euro on 1 January was held in Brussels on Tuesday, whereby the decision-making process for Croatia's entry into the euro area was completed.

One of those legal acts adopted by the European Union's Economic and Financial Council (Ecofin) sets the conversion rate between the euro and the Croatian kuna at 7.53450 kuna for 1 euro. The rate corresponds to the current central rate of the kuna in the exchange rate mechanism (ERM II).

Another of the three acts concerns the decision on the adoption of the euro by Croatia, while the third is an amendment to a regulation welcoming Croatia as the 20th member of the euro area as of next year.

The legal acts also make it possible for the Croatian National Bank (HNB) governor to become an observer in the European Central Bank's governing council in September, and on 1 January 2023, the HNB Governor becomes ta full member of that council.

The relevant documents were today signed by  Zbyněk Stanjura, the minister of finance of Czechia, which currently holds the rotating EU presidency..

In attendance at the ceremony were the ECB Executive Board President Christine Lagarde, European Commission Vice President Valdis Dombrovskis, the European Commissioner for Economy, Paolo Gntiloni, and Croatia's Finance Minister Zdravko Marić.

The chairman of the Eurogroup, Irish minister Paschal Donohoe, addressed the ceremony via a video link from Dublin.

All the participants in the ceremony described this as Croatia's historic achievement and that both the European Union and the common currency continued to be attractive.

The EC Executive Vice President Dombovskis said that the entry into the euro area "will complete Croatia’s full integration into the European Union less than a decade after its accession."

"Croatia has shown great commitment and perseverance in meeting the necessary conditions for joining the euro and achieving a high degree of sustainable economic convergence" he stated as carried on his web site.

"This was achieved when Croatia also had to cope with the setbacks of earthquakes and impact of the COVID pandemic.

"Croatia’s hard work and ownership throughout the euro accession process confirms that the euro is an attractive, resilient and successful global currency.

"Our trusted currency union is a great asset for Europe," he underscored

"As Croatian goods and services become more competitive, this should lead to more jobs and higher living standards: good news at a time when Europe is grappling with high inflation," the EC Executive Vice President said.

The Commissioner for Economy, Paolo Gentiloni, said that Croatia had passed an amazing journey from having fought a war some 30 years ago, which was the first war on Europe's soil since the Second World War, to the EU membership which it joined in 2013 to enter the euro area now.

This is an amazing result, we are celebrating the strengthening of our Union today, said Gentiloni.

Donohoe also praised Croatia's achievements and performance of the outgoing minister Marić, who attended the Ecofin in his capacity as Croatia's minister for the last time.

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