Fitch reaffirms Croatia’s investment grade as euro introduction looms

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On Friday, the rating agency Fitch reaffirmed Croatia investment rating of ‘BBB’ and a positive outlook, believing that the recovery of tourism will support the economy in a period of declining exports, and eurozone membership will mitigate funding risks.

Fitch lowered Croatia’s economic growth forecast for this year from 4.4% to 3.3%, citing a strong baseline in 2021, the year of recovery from the pandemic crisis, and a sharp slowdown in household spending due to high inflation.

The slowdown in major trading partners, particularly in the euro zone, will affect exports, but the recovery in key tourism should continue, given Croatia’s structural strengths, Fitch believes.

Growth is expected to pick up slightly, to 3.7%, in 2023, they say, provided external risks ease and investment picks up, with the EU program playing a key role.

Croatia is less exposed to the negative macroeconomic consequences of the war in Ukraine than other countries in the region, with very limited direct links with Russia and Ukraine with a share of exports to the two countries of only 1.5% and a share of investment and tourism of only one percent.

The share of energy imports is close to the European average of 56%, but Croatia has invested in expanding its sources of supply, opening a liquefied gas terminal last year, allowing it to reduce to zero its exposure to Russian gas, Fitch said.

Croatia’s budget deficit fell sharply in 2021 to 2.9% of GDP, thanks to solid revenue growth and limited spending, the agency notes.

Croatia has met all the criteria for structural reforms and is in the “euro waiting room” and currently meets most of the convergence criteria, with the exception of price stability, given the rise in inflation, which reached 7.3% in March.

However, inflation has strengthened in all EU countries, and Fitch believes that the Union will take advantage of the flexibility offered by the criteria and should approve Croatia’s entry into the euro zone in July, which means that Croatia will officially adopt the euro from the beginning of 2023.

The positive outlook reflects expectations that Croatia will be able to join the euro zone in January next year, according to the report. “We currently estimate that if the country fails to meet the inflation criteria this year, eurozone membership will be delayed for up to a year, given that the EU has clearly promised that the process will be accelerated.”

They note that they could downgrade Croatia’s rating if its entry into the euro zone is significantly delayed or if public debt rises again in the medium term. However, the rating will be raised if the EU Council of Ministers confirms that Croatia has fulfilled the criteria for joining the euro zone.

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