S&P Confirms Croatia’s Rating and Improves Growth Outlook

Standard & Poor’s agency confirmed on Friday Croatia’s rating of ‘BBB+/A-2’ and improved the outlook from stable to positive, estimating that the economy will grow stronger this year than in most eurozone members, supported by tourism and consumption.

S&P upgraded the rating to ‘BBB+/A-2’ in July last year after the EU Council officially confirmed Croatia’s entry into the eurozone. They also predicted at that time that the Croatian economy should grow steadily in the coming years.

On Friday, they confirmed the current rating and improved the outlook, emphasizing that thanks to stable growth in tourism, which is increasingly complemented by investments in production capacities, Croatia’s GDP this year lags behind the EU average by 27 percent. Ten years ago, it lagged by 40 percent, they note.

The Croatian economy is expected to grow by 2.5 percent this year, they estimate, adding that they had previously forecasted a 1.7 percent growth in activity in March. Gross real wages have increased this year due to a tight supply-demand relationship in the labor market, so personal consumption was stronger than expected.

Workers Needed

Croatia is expected to record solid growth in the medium-term perspective, averaging 2.6 percent annually until the end of 2026, they estimate, adding that investments supported by EU financing should cushion any fluctuations arising from variations in the number of tourists.

The successful implementation of the recovery and resilience program could open opportunities to strengthen the resilience of the economy and production capacities, while institutional progress could enable better productivity and business environment, as well as a more efficient public sector and judiciary. This would also accelerate the convergence of income to the EU average, they emphasize at S&P.

Short-term risks to the economy arise from deteriorating consumer sentiment in continental Europe, they warn.

– Croatia exports nearly 25 percent of its goods to Germany and Italy, making it vulnerable to economic trends in these key trading partners – they say, also highlighting the structural problem of a declining population, which means a shortage of labor, especially in the construction sector and tourism.

– We estimate that Croatia will need to attract 200,000 foreign workers to meet labor market needs, which corresponds to five percent of the population – they added.

Among the advantages, they highlight the diversified procurement of energy and fuels over the past 18 months, particularly thanks to the liquefied gas terminal in Krk and the ‘advanced’ phase of transitioning to maritime oil procurement.

Lower Debt

They expect the government to continue with the reform program, secure significant EU financing, and persist in budgetary austerity to gradually ‘restore the budgetary space lost during the pandemic’.

The general government debt is expected to amount to 64.6 percent of GDP this year and slide to 62.3 percent in 2024. By the end of the observed period, in 2026, it will drop below 60 percent of GDP.

The budget deficit is expected to be a ‘modest’ 0.7 percent of GDP this year, primarily due to an increase in VAT revenues and the gradual phasing out of support programs from 2021, which will overshadow expenditure items such as pension indexing and social benefits. In 2024, the deficit will rise to 1.8 percent, but will remain below two percent of GDP in the next two years, S&P notes.

Emigration Long-term Risk

They emphasize that they could improve the rating outlook in the next 12 months ‘if Croatia’s economic resilience is preserved, supported by deepening integration into Europe and if it enables institutional improvements, for example in the judiciary, education, and business environment’.

They also add that they could revise the outlook from positive to stable if the results of the Croatian economy do not improve as currently expected, citing possible even harsher economic consequences of the Russia-Ukraine war in Europe and a significant worsening of inflation.

They warn that net emigration trends and an aging population represent a long-term risk for the growth of the Croatian economy and public finances.