April 15, 2023 - Fitch Ratings has confirmed Croatia's 'BBB+' rating and stable outlook, estimating that the Croatian economy should preserve its resilience to external shocks thanks to improved fiscal and external positions and the successful adoption of the euro. In mid-July, Fitch raised the rating of Croatia's debt securities by one level, to 'BBB+', with a stable outlook, after the conclusion of the admission process to the eurozone.

As Index writes, in October, Fitch confirmed the assessment and outlook, warning that economic growth should slow down in 2023 due to inflation and slowing growth in the eurozone.

Reaffirming the 'BBB+' rating and stable outlook on Friday, the agency reiterated that the Croatian economy should remain resilient to external shocks thanks in part to an improved fiscal and external position and adopting the euro.

Approaching the core

Croatia became a member of the eurozone at the beginning of the year, and adopting the euro should improve its integration with the countries in the core zone of the common European currency and strengthen its institutional capacities, according to Fitch. "Access to the ECB's credible monetary policy framework and liquidity capacities for banks will significantly reduce external and financial weaknesses, given the elimination of currency risk," Fitch points out.

European incentive

The Croatian economy will grow by 6.3 percent in 2022, Fitch estimates, raising the forecast from the October report by 0.2 percentage points. This year, growth should slow to 1.7 percent, which is 0.6 percentage points more than they expected last autumn.

Personal consumption is likely to slow down to around one percent this year as disposable income continues to be pressured by inflation and consumer confidence remains muted, Fitch estimates. The key engine of economic growth this year will be investments, which should grow by around 5.5 percent since the withdrawal of money from EU funds should reach its peak, they note, highlighting the fast pace of withdrawal of funds from the European Program for Recovery and Resilience.

In 2024, the growth of the Croatian economy should accelerate to around three percent, driven by the recovery of personal consumption, Fitch estimates.

Less debt

Public debt expressed as a share of GDP should drop to 65.2 percent this year, from 68.3 percent in 2022, to be 20 percentage points lower than at the peak of the pandemic, and will continue to decrease in the coming years, albeit at a slower pace, due to weaker nominal GDP growth.

The budget should be in deficit this year, of 24 percent of GDP, after a surplus in 2022, due to weaker economic growth and higher consumption, Fitch forecasts.

The current account balance should show a slight deficit due to weaker demand from the main trading partners and more significant investments that require imports, they estimate, adding that the adoption of the euro and entry into Schengen could further support tourism.

The fruits of the euro

Fitch notes that it could lower the rating of Croatia's debt papers if the public debt grows over a more extended period, "for example, due to a more pronounced and more extended period of looser fiscal policy.

A trend of weaker economic growth due to structural shocks or weaker demographic indicators would also negatively affect the rating. On the other hand, the agency could raise the rating if it assesses that the government can preserve the trend of reducing public debt through fiscal consolidation.

The rating would also be positively affected by determining the positive consequences of adopting the euro, which would support Croatia's approach to countries with a higher rating and strengthen its institutional capacities, according to Fitch.

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