The latest report by the Moody's credit rating agency is in line with expectations, Governor of the Central Bank (HNB) Boris Vujcic said on Friday (March 16).
“Without implementing structural reforms, it’s difficult to expect the potential growth of Croatia’s economy to be satisfactory, which in return affects the country’s outlook in terms of joining the euro zone,” Vujcic told reporters on the sidelines of a debate on the pros and cons of adopting the euro organised by HNB in Zagreb.
Moody’s said that Croatia’s Ba2 stable credit profile reflects the balance of its fiscal consolidation and strengthening of institutions on the one hand, and the economy’s weak potential growth and the government’s slow pace of structural reform in a report released on Thursday (March 15).
The report said Croatia’s growth is likely to remain robust in 2018, decelerating slightly to 2.7 percent, in line with the second half of 2017, moving closer to Moody’s medium-term forecasts of 2-2.5 percent GDP growth. However, it warned that if the country’s rating might worsen unless a comprehensive set of structural reforms is completed in the coming years, as it would likely lead to weaker growth and increase Croatia’s public debt in the long term.
Vujčić said that the findings of Moody’s report were expected, and added that structural reforms in a series of sectors are essential. He said Croatia’s accession to the euro zone is an obligation which is a mandatory part of its EU membership, and that at some point a target date for adopting the euro would be set. Adopting the euro involves at least 4-5 years of preparation, he added.
In October 2017 Prime Minister Andrej Plenković said Croatia’s goal is to join the euro “within 7-8 years”. He also said Croatia wants to join the Exchange Rate Mechanism (ERM II) within three years, before the country takes its turn holding the 6-month presidency of the EU. The ERM is a mechanism to ensure stabillity of the local currency before switching to the euro, and countries are expected to spend at least two years in the programme.
Vujčić said that there is not much monetary sovereignty for Croatia to lose by joining the euro zone, as a great deal of debt held by businesses, amounting to 150 percent of GDP, or some 500 billion kuna (66.7 billion euros), is already euro-denominated. He added that a 10 percent depreciation of kuna against the euro would increase the debt by 50 billion kuna, while appreciation of the local currency would reduce the competitiveness of Croatian companies, he added. HNB keeps the kuna’s exchange rate stable at around 7.5 kuna to the euro.
