The Fitch credit ratings agency on Wednesday revised its outlook on Croatia's long-term credit rating to Stable from Positive, keeping the country's score at BBB-.

Fitch forecasts that Croatias economy would contract by 5.5 percent in 2020, down from 2.9 percent growth in 2019, mainly due to the impact of the Covid-19 pandemic. However, the economy is expected to rebound in 2021.

In their note, Fitch analysts said that “Croatia is highly dependent on tourism and tourism-related activities, with these sectors accounting for an estimated 25 percent of GDP and a similar share of total employment.”

Fitch projected an aggregate fall in tourism of close to 50 percent for the whole of 2020, reflecting widespread domestic and international travel restrictions, compounded by worse economic performance in Croatia’s key tourist markets such as Germany, Italy, Austria, and Slovenia. These four countries account for 45 percent of total visitors to Croatia.

Fitch expect Croatia’s economy to show signs of recovery in 2021, “expanding by close to 3 percent on the back of service sector growth and a pick-up in exports as global demand resumes.” This is based on the assumption that tourism would recover quickly and that macro-fiscal stability is maintained at current levels.

Unemployment rate is expected to jump to 9 percent in 2020, and continue to rise slowly to 9.5 percent in 2021 before easing in 2022.

GDP per capita is likely to post a sharp drop in 2020 before rising modestly in 2021, to $14,700 at market exchange rates. This would be the same level as in 2019, and it around 30 percent above the BBB median.

The Covid-19 crisis may delay Croatia’s entry into the Exchange Rate Mechanism (ERM II), the preliminary phase of switching currency from kuna to euro, ultimately postponing euro-adoption beyond 2024.

The agency said Croatia’s authorities were making “substantive efforts” to complete all agreed commitments by the original deadline of end-June 2020, while the European Central Bank was preparing to finalise an asset-quality review of five major banks by the end of Q2 2020.

“However, even if the process carries on as planned, it is unclear whether European institutions will agree to move forward given other priorities, or whether Croatia will fulfil the euro-convergence criteria required under ERM II given the outlook and risks to growth and public finances,” Fitch said.

Fitch said that Croatia’s finance sector is in a better position to weather a crisis than it had been in 2008-09, as it is now supported by a liquid, profitable, and highly capitalised banking sector that is less reliant on cross-border lending.

The central bank “has taken a number of steps to support the currency regime, maintain liquidity in the financial system, and provide some relief to the corporate sector,” Fitch said.

“The central bank has abundant foreign reserves ($21 billion in January; 35 percent of 2019 GDP) and a long track record of maintaining exchange rate stability to help the economy withstand shocks. Moreover, inflation is low (1.5 percent in February) and will remain very low this and next year (averaging 0.7 percent),” Fitch added.