Croatia's economic recovery from the pandemic recession hinges on the tourism sector's recovery, the Standard & Poor's credit rating agency said in its latest report, adding that recovery and protective mechanisms would offset the risks caused by the pandemic.

“Croatia’s economic recovery from the pandemic-induced recession is within reach as long as tourism picks up,” S&P said in its outlook released on Tuesday, which gave Croatia a credit rating of BBB-/A-3, with a stable outlook.

Impact of COVID-19 pandemic blow to tourism

Croatia’s GDP is expected to increase by 5.1 percent this year, S&P said in its latest outlook contracting Croatia’s estimated GDP growth by half a percentage point.

In 2020, the country’s GDP fell by 8.4 percent according to S&P. In 2022 the economy is expected to grow by 3.5 percent, and by 2.6 percent in 2023 and 2024.

S&P considers that mass vaccination against Covid-19 is a precondition for economic growth as it is likely to relieve the existing travel restrictions across the continent, thus boosting tourism.

“This highlighted vulnerabilities, due to Croatia being one of the most-tourism dependent sovereigns in Europe,” S&P said, adding that “despite prospects of a dynamic summer season, we assume that the tourism sector won’t fully recover to the record pre-pandemic numbers over the coming two years.”

Strong protection mechanism

Even though this has left its mark on the balance of payments, Croatia still has strong protection mechanisms against potential external pressure with its high foreign reserves and its swap line with the European Central Bank.

Also, Croatia entered the pandemic period with an improved budget situation, and the government could reach out to strong fiscal support measures to relieve the consequences of the pandemic on the labor market.

The budget deficit-to-GDP ratio this year is expected to be 2.9 percent, which is 0.1 percentage points better than the autumn outlook. In 2020 the budget deficit amounted to 7.8 percent of GDP, or 1.4 percentage points more from the previous estimate. Next year that deficit could be reduced to 2.0 percent of GDP and to 1.5 percent in 2023.

S&P underlined Croatia’s plan for “quick euro adoption is Croatia’s key policy goal, after last year’s entry into the Exchange Rate Mechanism (ERM II).”

Favourable financing conditions

Due to the pandemic, public debt jumped to a record 88 percent of GDP in 2020, “however, the government’s debt profile benefited from historically low funding costs and extended debt maturities.”

This year it is expected to fall to 84.3 percent of GDP and below 80 percent again in 2024.

“We could lower the ratings on Croatia if, contrary to our expectations, external financing pressure was to build or if public finances failed to recover over the coming two to three years, pushing public debt up,” S&P said.

The report said that Croatia is also entitled to ample EU funds under various envelopes including Next Generation EU and the Recovery and Resilience Facility in the coming years, which will probably contribute to economic recovery.

Additional support should be available for reconstruction efforts following the earthquakes that hit Zagreb in March 2020 and Sisak-Moslavina County in December 2020.

“Net inflows from the EU budget could also support fiscal buffers without unduly constraining investments, which underpins the importance of efficient preparation and the absorption of available funds,” S&P said.