S&P raises Croatia’s credit rating after announcing its entry into the euro zone
ZAGREB, July 15, 2022 – Standard & Poor’s (S&P) Global Ratings on Thursday raised its long-term and short-term sovereign credit ratings in foreign and local currencies on Croatia from “BBB+/A-2” to “BBB-/A -3”. , saying that the country will benefit from joining the euro zone and that its economic growth will remain stable. The outlook is stable.
S&P is the second credit rating agency to raise Croatia’s rating in an unscheduled release after Fitch Ratings did the same on Wednesday. These two announcements come after the Council of the European Union officially confirmed on Tuesday Croatia’s membership of the euro zone on January 1, 2023.
S&P says the stable outlook reflects its expectation that Croatia’s economic growth will remain stable over the next two years despite rising inflation and the economic fallout from the conflict in Ukraine.
“We expect the government to remain committed to its reform agenda, receive significant EU funding and gradually rebuild the fiscal space it has lost as a result of the pandemic,” the agency said. .
Ratings could be upgraded if Croatia’s economic growth accelerates beyond S&P’s current expectations, leading to an increase in economic wealth. In this scenario, the agency would expect fiscal consolidation and a decline in net public debt beyond its current projections.
“The ratings upgrade could also come from Croatia’s deepening European integration, should this facilitate institutional improvements, for example in the judiciary, education and the broader business environment.”
On the other hand, a downward revision could be considered in the event of significantly weaker budgetary positions and structurally weaker than expected economic growth.
“Such a weakening could occur if a protracted conflict in Ukraine produces increasingly severe pan-European economic consequences or if a sudden stop in European energy supplies accentuates recessionary tendencies across the continent. net emigration and an aging population also pose a long-term risk to Croatia’s growth and public finances,” the agency said.
Benefits of ECB monetary policy
According to S&P analysts, as a member of the Eurozone, Croatia will benefit from the flexible monetary policy of the European Central Bank (ECB), while residual currency risks will decrease in the strongly euroized economy.
The upgrade also follows the agency’s forecast of a stable near-term economic outlook thanks to expected strong tourist flows and strong near-term execution of EU-funded investments.
“In addition, we consider that Croatia has a limited direct dependence on Russian hydrocarbons, in particular following the recent expansion of the Krk liquefied natural gas (LNG) terminal and the advanced substitution of oil supply by shipping,” the agency said.
S&P believes that membership will eliminate any residual currency risk in the heavily euroized economy, where approximately 75% of banking sector assets and 67% of liabilities are denominated in euros, and will similarly eliminate changes in the government’s balance sheet.
“This should reduce Croatia’s share of public debt denominated in foreign currencies from over 70% currently to almost zero, as this debt is almost exclusively denominated in euros.”
Growth projection revised to 3.5%
S&P has revised its growth projection for the Croatian economy for this year from 2.5% to 3.5% on the basis of resilient momentum in the first half and prospects for a strong tourist season comparable to the levels of before the pandemic.
“Rising energy and commodity costs are expected to dampen disposable income and contain consumer spending in the second half of 2022 and carry over into 2023. We expect growth to ease to 2.5% in 2023.”
In the medium term, the agency predicts that the Croatian economy will settle on a solid growth trajectory, supported by investments supported by EU funding and the rebound in tourism.
The pan-European economic repercussions of the Russian military intervention in Ukraine and inflationary pressures pose near-term risks to the outlook.
“Some lingering pandemic risks for the resumption of tourism in Croatia persist, however, due to the relatively low vaccination rates in the country. As of July 7, 2022, less than 60% of the Croatian population was fully vaccinated against COVID-19, compared to the EU average of 76%.
Average inflation forecast at 8.0% in 2022
“The Russian-Ukrainian conflict has increased pressure on energy prices, which will have a significant impact on Croatia’s inflation outlook for 2022. We expect a significant recovery in inflation, the index of consumer prices averaging 8.0% this year (vs. 2.6% in 2021) due to rising energy prices, rising wages and rising costs in the hospitality sector. »
S&P forecasts a general government deficit of 3.0% of GDP in 2022.
“The government has already introduced subsidy programs to ease pressures on fuel and energy prices, adding 1.1% of GDP to the spending bill. We believe our deficit projections carry risks. , as the current energy crisis may require additional government subsidy programs second half of 2022.”
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