Saturday, 16 July 2022

Moody's Raises Croatia's Credit Rating to Investment Grade

ZAGREB, 16 July 2022 - Moody's on Friday raised Croatia's credit rating by two levels to an investment grade and assessed that Croatian economy's outlook is stable following to the formal completion of the decision-making for Croatia's entry into the euro area.

On 12 July, the Economic and Financial Council of the European Union (Ecofin) gave the final approval for Croatia's admission to the euro zone on 1 January 2023 when the country is switching to the euro.

According to a press release issued by this international credit rating agency, "Moody's Investors Service ("Moody's") has today upgraded the Government of Croatia's foreign- and domestic-currency long-term issuer ratings and foreign-currency senior unsecured debt ratings to Baa2 from Ba1."

"The outlook has been changed to stable from ratings under review. This concludes the review for upgrade that was initiated on 24 June 2022."

"The upgrade of the ratings to Baa2 is driven by the adoption of the legal acts formalizing Croatia's adoption of the euro by the EU Economic and Financial Affairs Council (ECOFIN) on 12 July 2022. Croatia will adopt the euro as its domestic currency on 1 January 2023, thereby eliminating any foreign currency risk for the government's largely euro-denominated debt burden and reducing government liquidity risk.

Moody's also sees euro adoption as credit positive for Croatia's economic strength as it will remove foreign currency risk and transaction costs also for the private sector, spurring further economic integration of Croatia with the euro area.

Ability of Croatia's institutions to complete rigorous process towards euro adoption on time

Furthermore, the ability of the country's institutions to complete the rigorous process towards euro adoption within the planned time frame also supports Moody's assessment of the strength of Croatia's institutions and governance.

Stable outlook balances continued strength of Croatia's economic and fiscal recovery

"The stable outlook balances the continued strength of Croatia's economic and fiscal recovery from the initial shock of the coronavirus pandemic against risks to the macroeconomic and geopolitical environment in Europe stemming from rapidly rising inflation, concerns around the stability of the EU's energy supply and the Russian invasion of Ukraine (Caa3 negative)," reads the press release.

The long-term country ceilings of Croatia for local and foreign currency bonds have been raised to Aa2 from A2. This reflects the fact that for euro area countries, as Croatia will be from 1 January 2023 on, a six-notch gap between the local currency ceiling and the local currency rating, as well as a zero-notch gap between the local currency ceiling and foreign currency ceiling, is typical, reflecting benefits from the euro area's strong common institutional, legal and regulatory framework, as well as liquidity support and other crisis management mechanisms. It also is in line with our view of de minimis exit risk from the euro area.

Rationale for upgrading Croatia's ratings

"Most notably, the adoption of the euro reduces Croatia's share of government debt denominated in foreign currency from over 70% at present to close to zero, as this debt is almost wholly denominated in euros. This, in turn, has a significant positive impact on Moody's assessment of the government's fiscal strength as it eliminates the risk of a sudden and potentially significant increase in the local currency value of government debt relative to GDP in the event of a devaluation of the local currency relative to the euro," reads the press release.

Fiscal strength is one of the four factors of Moody's assessment of a sovereign's creditworthiness.

"Croatia's economy is already highly integrated with that of the euro area, and the country has maintained a managed float of its domestic currency in a narrow band against the euro since 1999. Nevertheless, we expect that euro adoption will have additional positive effects on Croatia's economic strength over the medium to long term by reducing transaction costs and eliminating any remaining foreign currency risks for transactions between Croatia and the euro area, which already accounts for more than half of all of Croatia's imports and exports. This is likely to spur further economic integration and foreign direct investment into Croatia, supporting its longer term growth potential.

"Furthermore, Croatia's adoption of the euro will also reduce foreign currency risks for the banking sector, and will also have a positive impact on our assessment of government liquidity and external vulnerability risks. As a euro area member, Croatia would in a future crisis stand to benefit from potential European Central Bank (ECB) support programmes such as the asset purchase programmes that were first introduced in 2015, while membership of the European Stability Mechanism (ESM, Aaa stable) will also support the government's ability to fund itself in a crisis situation.

Lastly, the ability of the Croatian institutions to steer the country into the euro only two years after joining ERM II - the antechamber of the currency bloc - supports our assessment of the effectiveness and strength of the country's institutions and governance.

Agency expects Croatia's GDP growth to remain robust at 3% in 2022

The stable outlook balances the continued strength of Croatia's economic and fiscal recovery from the initial shock of the coronavirus pandemic against risks to the macroeconomic and geopolitical environment in Europe over the coming 12 to 18 months as well as country-specific challenges that include the effective absorption of EU funds and adverse demographic trends.

The Croatian economy has continued to recover strongly from the sharply negative impact of the coronavirus pandemic on the country's tourism sector and overall economy in 2020.

In its baseline scenario, the agency expects Croatia's GDP growth to remain robust at 3% in 2022 while the debt burden will continue to decline at a more moderate pace, although the continued strength of the tourism sector's rebound from the pandemic could produce outcomes that are stronger than our baseline forecast this year.

However, there are prominent risks to the economic and fiscal outlook for Croatia stemming from a deteriorating macroeconomic environment in Europe. Such risks tied to rapidly rising inflation and concerns about the stability of the energy supply of several EU member states are in large part also linked to geopolitical risks and heightened uncertainty stemming from Russia's invasion of Ukraine and the on-going military conflict. Although the direct risks of a potential energy supply shock are limited for Croatia, in an adverse scenario, the euro area could enter a recession over the next 12 to 18 months, which would also have material negative implications for the economic and fiscal outlook for Croatia.

Moreover, Croatia's relatively weak track record of absorbing EU investment funds raises question marks around whether the country's economy will be able to derive the full benefits of the very substantial funding available for Croatia under NGEU and the EU's regular budget for 2021-2027. Croatia's medium to long term growth potential also continues to face significant challenges from the projected decline of the country's working age population.

Upward pressure could build on the ratings if Croatia manages to maintain a strong economic performance and growth potential as well as a continued reduction of the government debt burden over the coming years. This would notably be supported by evidence of effective implementation of the investments and reforms tied to the EU's post-pandemic recovery fund Next Generation EU, which would support economic growth in the near term but also growth potential over the longer term.

Possible negative pressure tied to resurgence of pandemic-related complications or to fallout of Russia's invasion

Negative pressure could build on the ratings in the event of a sharp deterioration of Croatia's growth potential relative to Moody's expectations, most likely tied either to a resurgence of pandemic-related complications for the tourism industry or to the economic and political spillover effects from the Russian invasion of Ukraine. A failure to effectively implement the investments and reforms of Next Generation EU would also weigh negatively on Moody's assessment of Croatia's growth potential and the strength of its institutions and governance, says the agency.

All three major agencies raise Croatia's credit rating to highest level in history

The Fitch agency raised Croatia's credit rating to BBB+ on Wednesday, and on Thursday, Standard & Poor's upgraded its credit rating by two levels - from BBB- to BBB+, with a stable outlook.

Until the first half of 2019, Croatia had a non-investment rating from both Fitch and S&P, and now the country is at the third level of the investment rating, its highest level in history.

A regular review of the rating by S&P was scheduled for September, but due to the importance of the confirmation of Croatia's entry into the euro area S&P decided to raise the rating earlier.

Saturday, 7 May 2022

Fitch Reaffirms Croatia's Rating at 'BBB' With Positive Outlook

ZAGREB, 7 May 2022 - The Fitch Ratings agency has affirmed Croatia's investment rating at 'BBB' with a positive outlook, estimating that the recovery of the country's tourism industry will support the economy at a time of slowing exports and that eurozone entry will mitigate financing risks.

Fitch revised down its projection of Croatian growth for 2022 from 4.4% to 3.3%, citing base effects and a sharp slowdown in household consumption as high inflation affects consumer spending.

"A slowdown in key trading partners, primarily the eurozone, will affect goods export performance this year but we expect key services sectors such as tourism to continue to recover given the country's structural advantages," the agency said.

"We expect GDP growth to gather pace in 2023 (3.7%) assuming a reduction in external risks and a pick-up in investment momentum, driven by EU programmes. We estimate EU transfers of up to 5pp of GDP per year over the next four years, which will sustain economic momentum," it added.

Limited links to Russia and Ukraine

Croatia is less exposed to the unfavourable macroeconomic consequences of the Russia-Ukraine conflict than other countries in the region. "Direct links to Russia and Ukraine are very limited in terms of exports (less than 1.5% of total), investment and tourism (1%)."

Although energy import dependency is similar to the EU average (56%), Croatia has invested to diversify away from Russian energy sources, last year opening an LNG terminal that allows it to reduce its exposure to Russian gas to zero. Nevertheless, the country is highly exposed to higher energy costs, as well to potential further disruptions to supply-chains.

Lower deficit and debt

Croatia's fiscal deficit narrowed rapidly in 2021, to 2.9% of GDP, thanks to solid revenue growth and expenditure restraint, Fitch said, revising down its deficit forecast from last November by 1.4 percentage points.

"Although we expect revenue growth to remain strong this year, demands for higher expenditure to tackle rising inflation—beyond the 1.1% of GDP that has already been approved—are likely to continue. This will limit the scope for further improvement of the headline deficit in 2022, although over-performance in 2021 means there is a good starting position. We forecast headline deficit of 2.8% in 2022, before narrowing to 1.9% in 2023 with modest downside risks, given strong commitment to fiscal prudence," the agency said.

The public debt/GDP ratio fell to 79.8% in 2021, a reduction of 7.8pp from 2020, thanks to the improved fiscal position and rapid economic expansion. It is expected to fall further to 75.5% in 2022 and 72.6% in 2023.

"Modest primary deficits and high nominal growth (in particular in 2022) support our forecast of an average 3pp reduction in the debt stock per year over the next five years (similar rates to those in 2016-2019). This trend would be consistent with meeting convergence criteria, despite the fact that public/debt GDP will remain above the 60% Maastricht debt ceiling (and compared with the current BBB median of 55%). We expect financing costs to rise gradually, in line with global trends, but the process of euro-adoption plus sound debt management reduce financing risks," Fitch said.

Euro adoption

Croatia has met all structural reform criteria required under ERMII and at present meets most of the convergence criteria, including interest rate, exchange rate and public finances. Questions remain around meeting price stability criteria, especially in the context of rising inflation in recent months. It reached 7.3% in March, the highest level since 2008, and averaged 4.07% in April 2021-March 2022.

Since inflation has risen across the EU, Fitch believes "the EU will use the flexibility provided in the convergence criteria (removing the inflation rates of some member states it considers outliers from the calculation) when assessing Croatia in May, with a likely positive outcome by July."

"At present we do not expect a delay of more than one year in euro accession if the country fails to meet the inflation criteria this year, as we consider that there is a clear commitment at EU level to expedite the process," it added.

The agency said it might downgrade Croatia's rating in the event of a significant delay in the timeline of eurozone accession or a renewed increase in general government debt over the medium term.

On the other hand, the rating would be upgraded if the EU Economic and Affairs Council confirms that Croatia has met its eurozone membership criteria.

Another factor that could lead to an upgrade is "evidence of improvement in medium-term growth prospects, for example via implementation of structural reforms or EU-led investment, that could lead to faster than expected reduction in general government debt/GDP.

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Saturday, 19 March 2022

PM: Affirmation of Croatia's Credit Rating is Message of Confidence

ZAGREB, 19 March 2022 - Prime Minister Andrej Plenković said on Saturday that Standard and Poor's affirmation of Croatia's credit rating at 'BBB-/A-3' was a message of trust in and encouragement to the government to keep preserving the economic stability despite the inflation and the impact of the war in Ukraine.

PM Plenković tweeted that the decision of that credit rating agency to affirm Croatia's ratings with stable outlook "is a message of confidence in and encouragement" to the government to continue taking measures conducive to the economic stability and stable growth, thus weathering the inflationary pressures and the consequences of the war.

He writes on the Twitter account that the priorities are given to the implementation of the National Recovery and Resilience Plan and to the further absorption of European funding for the faster growth and the energy and green transition of Croatia.

Our target to join the euro area in 2023 creates prerequisites to additionally boost the economy's competitiveness and raising our credit ratings, he added.

Standard & Poor's on Friday affirmed Croatia's credit rating at 'BBB-/A-3' with a stable outlook, however, it warns that repercussions of Russia's invasion of Ukraine can affect the Croatian economy.

"The stable outlook reflects our expectation that Croatia's economic growth will remain steady over the coming two years despite inflationary headwinds and the pan-European macroeconomic consequences from the conflict in Ukraine," it says.

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Saturday, 22 May 2021

PM Says Satisfied with Fitch Rating, Gov't Working on Creating Conditions for Growth

ZAGREB, 22 May 2021 - PM Andrej Plenković on Saturday expressed satisfaction with Fitch rating agency's having maintained Croatia's rating at BBB- with a stable outlook, saying his government was working to create conditions for economic growth so that this and next year its growth rate could be among the highest in the EU.

Fitch Ratings on Friday affirmed Croatia's rating at 'BBB-', with a stable outlook, saying that pressure on state finance linked to the pandemic should be neutralised by economic recovery on the back of tourism and EU support.

"We are very happy. The... rating confirms what we have been doing in the past 15 months," Plenković told reporters while visiting Crikvenica and Rijeka in Primorje-Gorski Kotar County, where he met with candidates of the local branches of his HDZ party ahead of the second round of local elections set for 30 May.

Plenković stressed that Fitch had sent a message that Croatia had maintained political stability.

"We had parliamentary elections last year, we quickly formed the government, continued working, fought against the pandemic while at the same time keeping the stability of public finances," he said, adding that owing to public finance stability it was possible to secure funding for healthcare, wages, pensions, and job-keeping support.

"The coronavirus crisis has cost us so far HRK 32 billion, the damage caused by the earthquakes in Banovina and Zagreb amounts to HRK 125 billion. But despite that, we have managed to make sure everyone continues receiving their wages, we have secured job-keeping support in the amount of HRK 10.5 billion, 680,000 workers have received wages owing to the government's political decision to compensate employers for their workers' wages, and we have introduced measures for shorter working hours, various forms of support for liquidity in numerous sectors, and the coverage of fixed costs," he said.

"With a timely entry into the domestic capital market and access to international sources of financing, clever agreements with the Croatian National Bank and the European Central Bank, we have managed to maintain our reputation with credit agencies and all international institutions," he said, adding that apart from functioning normally and heading towards the euro area, Croatia was also in the European Exchange Rate Mechanism II.

"A budget revision will be on the agenda soon, in early June, and we will try to maintain, this year as well, the framework that will make it possible for our growth in 2021 and particularly in 2022 to be among the highest in the EU," said Plenković.

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He put this in the context of vaccination against COVID-19, calling on Croatians to get vaccinated.

Plenković believes that as regards reputation, Croatia has a very stable position and that with vaccination it is also creating conditions for an excellent tourist season, which, he says, together with the green digital certificate and the pandemic subsiding, will enable economic growth.

"Croatia is on the right track and I am encouraged by the assessment of those who have an unbiased and very precise judgment of our performance in the current crisis, it is very encouraging in my opinion," said Plenković.

In its latest rating, Fitch has upgraded the projection for Croatia's economic growth in 2021 from 3.8% to 5.5%.

Fitch forecasts GDP growth to accelerate to 6.1% in 2022 before averaging 4% in 2023-25, driven largely by investment and notes that Croatia will receive around €6.3 billion in grants from the Recovery and Resilience Facility, in addition to €1 billion from the EU Solidarity Fund for earthquake reconstruction and €12.6 billion in the 2021-27 Multi-Annual Funding Facility.

Saturday, 22 May 2021

Fitch Affirms Croatia at 'BBB-', Outlook Stable

ZAGREB, 22 May 2021 - Fitch Ratings on Friday affirmed Croatia's rating at 'BBB-', with a stable outlook, saying that pressure on state finance linked to the pandemic should be neutralised by economic recovery on the back of tourism and EU support.

The 'BBB-' rating balances strong structural features, the agency says, singling out better indicators of human development and governance in comparison with countries with a similar rating and higher GDP per capita.

The rating is restricted by a high public debt and periods of weak economic growth, in part due to the slow adoption of structural reforms.

The stable outlook "weighs large short-term downside risks related to pandemic developments against stronger medium-term growth prospects linked to substantial EU fund support and our fiscal consolidation and debt reduction baseline that is underpinned by the authorities' commitment to fulfilling convergence criteria under the Exchange Rate Mechanism (ERMII)."

"Fitch expects the economy to expand by 5.5% in 2021, from a combination of base effects (growth was stronger than expected in 2H20), the resilience of sectors such as construction and goods exports, and a gradual recovery in consumption," the agency says.

"Our forecasts rest on an improved tourism sector outlook (at around two-thirds of 2019 levels), assuming a pick-up in summer tourism as the health crisis in Europe continues to abate. However, renewed travel restrictions due to the still uncertain evolution of the pandemic, including the spread of new variants, cannot be discounted."

European support

Fitch expects the economy to grow this year, "even if tourism levels remained at 2020 levels (50% of 2019), but the weaker recovery could increase the risk of longer-term scarring and put pressure on public and external finances."

Fitch forecasts GDP growth to accelerate to 6.1% in 2022 before averaging 4% in 2023-25, driven largely by investment and notes that Croatia will receive around €6.3 billion in grants from the Recovery and Resilience Facility (RRF), in addition to €1 billion from the EU Solidarity Fund for earthquake reconstruction and €12.6 billion in the 2021-27 Multi-Annual Funding Facility.

Work force problem

According to those projections, Croatia will likely reach pre-crisis output in early 2022, "limiting the risks of labour market hysteresis and corporate sector bankruptcies."

Rapid labour tightening in sectors such as construction could delay some of the investment momentum, as could the need to pass a large number of reforms, in a short timeframe in order to get RRF fund disbursement.  

"Croatia's absorption capacity lags the EU average and the sheer size of funds accentuates the implementation challenges."

"If the authorities are successful at adopting long-standing reforms, this could mitigate major growth challenges such as adverse demographics. According to the EU Commission, the working age population could contract by 26% by 2050."

Deficit forecast raised

Fitch raised the public deficit forecast from 3.5 to 4% of GDP in 2021 and forecasts a fall to 3% in 2022, up by 0.8 percentage points from the forecast made last December.

"The authorities put in place relatively generous and effective pandemic support measures that are gradually being wound down, with very limited direct budget costs expected beyond 2Q21."

That will help bring public spending/GDP down from a record 55.4% of GDP in 2020, while revenue should benefit from strong nominal growth, but recovery in certain segments could be jeopardised if tourism activity disappoints.

Eurozone entry in 2024

Public debt/GDP should fall to 82.7% of GDP in 2022 from 88.7% in 2020, Fitch said, reducing the forecast from December by 2.8 percentage points.

Croatia benefits from favourable financing conditions and deposits, reducing liquidity pressures.

"Over 75% of public debt is foreign currency-denominated (almost all in euros), but there are few concerns about exchange rate stability and this long-standing vulnerability will dissipate once Croatia joins the eurozone."

The authorities continue to target euro adoption by early 2023, but the biggest challenge remains fulfilling the public finance convergence criteria targets, as the government deficit and debt reduction strategy could face challenges in the near term if macroeconomic conditions do not improve as expected.

Fitch maintains its forecast that Croatia should enter the eurozone in 2024.


The agency says that it could upgrade Croatia's rating if near-term macroeconomic risks dissipate and if criteria are met and eurozone accession goes as planned. A stable reduction of the public debt and budget deficit through budget consolidation would also have a favourable effect.

The rating could be downgraded in case of failure to reduce general government debt over the medium term, "for example due to a more pronounced and longer period of fiscal loosening and economic contraction," as well as in case of deterioration in macroeconomic prospects, for example through a setback to the tourism sector.

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