Fitch Affirms Croatia at ‘BBB-‘; Outlook Stable

(Photo credit: Shashank457/CC license)

ZAGREB, June 6 (Hina) – The Fitch agency has confirmed Croatia’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘BBB-‘, with the country’s outlook being stable.

The agency says that the stable outlook “reflects confidence that the authorities will maintain medium-term fiscal stability while providing short-term support to combat COVID-19, as well as continued gradual progress towards euro accession.”

Croatia’s economy is forecast to contract by 8.4% in 2020  while in March the agency projected a contraction of 5.5%. On the other hand, the Croatian government’s forecast is -9.4%.

The agency also now assumes “an aggregate fall in tourism of 70% in 2020 (from 50% previously), reflecting widespread lockdown measures in 2020 and the likely negative effects of the crisis on the global travel industry and consumer spending in the rest of the year.”

“However, the nature of Croatia´s tourism industry (largely based on private accommodation and accessible by land) could provide some resilience at a time when European governments are easing travel restrictions.”

Success so far in controlling coronavirus

The agency’s “baseline assumption is for the economy to start recovering over the following quarters, with growth reaching close to 5% in 2021. “

“This is supported by the success so far in controlling the coronavirus and by the authorities’ large relief measures targeting businesses and individuals – which we estimate at over 10% of GDP -that will help prevent larger job losses and widespread firm closures.”

“Recent economic data highlight the dramatic deterioration in economic activity (GDP fell by 1.4% qoq in 1Q, while retail sales fell by a record 22% in April and unemployment jumped to 9.4%).”

The agency warns that “downside risks will remain in the short and medium-term, including the scope and length of the pandemic, recovery of external demand, the potential impact of winding down of support measures, and adverse demographics.”

Fitch forecasts a budget deficit of 7% of GDP in 2020 (from a surplus of 0.4% in 2019) and for the public debt/GDP ratio to reach an all-time high of 86.2% given a sharper-projected recession. 

It expects the public deficit to fall markedly to 2.7% of GDP in 2021, based on solid nominal growth, supportive financing conditions, and sustained confidence in the policy framework.

Fitch praises government for improved fiscal management

In the four years preceding the COVID-19 pandemic, the Croatian authorities over-performed their fiscal targets every year and improved fiscal management says the agency.

“Although a potential change of government following parliamentary elections in July creates some uncertainty, downside fiscal risks are moderated by broad consensus around maintaining macro stability. Moreover, potential entry into ERM II is likely to serve as an additional policy anchor,” it says.

Assuming a gradual return to moderate primary fiscal surpluses of around 1% of GDP, Fitch forecasts the ratio of public debt/GDP to fall to around 80% in 2022 and 67% by 2029.

In 2016-19 Croatia averaged a primary fiscal surplus of 2.7%, highlighting the scope for faster consolidation. Much higher grant funding from the EU could also lead to lower financing needs and potentially lower debt. Conversely, the materialisation of contingent liabilities (5.6% of GDP at end-2020) represents a modest downside risk. Medium-term funding needs are modest, reflecting long maturities (close to six years) and sound public debt management, it added.