Standard & Poor's on Friday affirmed Croatia's credit rating at 'BBB-/A-3' with a stable outlook, however, it warns that repercussions of Russia's invasion of Ukraine can affect the Croatian economy.

“We see various channels through which the conflict in Ukraine may affect Croatia, including weaker global demand and reduced tourism,” this credit agency warned.

S&P expects that “Croatia’s economy will expand by 2.5% in real terms in 2022, supported by recovery in the tourism sector and a pick-up in investments.”

It also highlights that “eurozone accession, targeted for 2023, would reduce foreign exchange risks and improve Croatia’s monetary flexibility, in our view.”

The agency affirmed Croatia’s stable outlook, assessing that Croatia’s economy is supposed to grow at a stable pace in the next two years despite unfavourable inflation trends and the macroeconomic consequences of the war in Ukraine.

“The stable outlook reflects our expectation that Croatia’s economic growth will remain steady over the coming two years despite inflationary headwinds and the pan-European macroeconomic consequences from the conflict in Ukraine.”

We expect the government will remain committed to its reform program, successfully absorb significant EU financing, and gradually rebuild the fiscal space it lost in the aftermath of the pandemic.

Global geopolitical uncertainties

“The Croatian tourism sector staged a strong comeback in 2021 after the COVID-19-related downturn. We estimate Croatia’s economy expanded by 10.4% in 2021, compared with our forecast of 6.5%. We assess Croatia’s economic expansion in 2022-2023 will be backed by rebounding tourism and investments supported by EU financing,” says the agency.

“Global geopolitical uncertainties following Russia’s military intervention in Ukraine and rising energy and commodity prices have led us to moderate our 2022 GDP growth forecast for Croatia to 2.5%, with possible further downside depending upon the evolution of the conflict, particularly with regards to its effect on global demand, the tourism sector, and inflation.”

Croatia is on track for entry into the EMU by 2023

The agency assesses that despite the complex inflationary context “Croatia is on track for entry into the EMU by 2023.”

“In line with euro adoption, we expect the government will reduce its fiscal deficit below the Maastricht reference level of 3% of GDP in 2023-2025.

“Our ratings are supported by Croatia’s modest net external leverage and the incumbent administration’s record of prudent fiscal policies. The ratings are constrained by Croatia’s modest level of economic wealth and its high level of public debt.”

Economic growth to remain strong in 2023-2025

“We expect private consumption to be an important growth driver in 2022, albeit to a lesser degree than 2021 since elevated prices are likely to curb consumer spending. In 2021, household consumption benefitted from tax rate cuts, especially for young taxpayers, as well as a strong labor market supported by government measures to preserve employment,” says the agency.

The agency expects Croatia’s economic growth to “remain strong in 2023-2025, supported by investment spending. Croatia is set to benefit from the disbursement of significant EU funds over the coming years.”

“We project a general government deficit of 3.5% of GDP in 2022, with expenditure benefitting from roll-back of pandemic-support programs, while subsidy schemes to alleviate price pressures on fuel and energy add 1.1% of GDP to the expenditure bill.

“We believe there are risks to our deficit projections as the current energy crisis could require additional government subsidy schemes through 2022.”

In 2023, the economy is likely to expand at the rate of 3.7% and the rise is set at 3.4% in 2024 and 2025 each.