The Fitch credit rating agency on Friday affirmed Croatia's credit rating at 'BBB+' with a stable outlook, saying that the Croatian economy will remain resilient to external shocks, due in part to improved fiscal and external positions and successful euro adoption.

The confirmation of this rating ensued after this July, it upgraded Croatia’s rating to ‘BBB+ from ‘BBB’, with a stable outlook, after the European Council’s Economic and Financial Affairs Council approved on 12 July Croatia’s application to join the euro on 1 January 2023.

Public debt to keep declining

Fitch expects public debt to decrease to 65.2% of GDP in 2023 (versus the BBB median at 55.4%), from an estimated 68.3% in 2022 and almost 20pp below the pandemic peak in 2020.

“We see general government interest payments increasing to 3.9% of revenue in 2024, below the current ‘BBB’ median of 8.1%,” the agency said.

Debt reduction will continue over the forecast horizon, albeit at slower pace of 2pp-3pp per year, reflecting a slowdown in nominal GDP growth. Fitch sees general government interest payments increasing to 3.9% of revenue in 2024, below the current ‘BBB’ median of 8.1%.

Croatia became the 20th member of the eurozone as of 1 January 2023. “We expect the euro adoption to further enhance Croatia’s integration with core eurozone countries and boost its institutional capacity. Access to the ECB’s credible monetary policy framework and liquidity facilities for banks will significantly reduce external and financial vulnerabilities, as the currency risk is eliminated. We expect the Croatian economy to also benefit from lower transaction costs and greater price transparency,” the agency said.

Fitch expects GDP growth to decelerate to 1.7% in 2023, from 6.3% in 2022. Private consumption will likely ease to around 1% as inflation continues to weigh on disposable incomes, and consumer confidence remains dampened.

Fitch expects investment growth to be the key growth driver in 2023 as EU funds absorption should peak. “We see investments growing around 5.5% in 2023 as Croatia draws down on various EU funding programmes. In 2024, GDP growth should recover to about 3% on private consumption rebound.”Fitch expects Croatia to post small current account deficits (CAD) in 2023-2024 due to weaker demand from main trading partners, and increase in import-intensive investments.

The euro adoption and Schengen area entry could provide further support to the tourism sector.

The credit rating agency also said that prospects of sustained increase in general government debt over the medium term, for example, due to a more pronounced and longer period of fiscal loosening.

Lower trend growth due, for example, to structural shocks to key sectors or weaker demographics, could negatively affect the rating.

A factors that could, individually or collectively, lead to positive rating action/upgrade is confidence in the government’s ability to keep public debt on downward trajectory, through fiscal consolidation, Fitch said.