S&P projects that Croatia’s economy will contract by 9% in 2020 as a result of the strict measures to contain the spread of COVID-19 implemented at home and abroad.
S&P Global Ratings affirmed its ‘BBB-/A-3’ long and short-term sovereign credit ratings on Croatia, and the stable outlook, which did to some extent come as a surprise given that the revision was not announced by the standard calendar.
Downside scenario
Negative rating pressures could build if travel restrictions and the economic downturn result in more pronounced pressures on Croatia’s balance-of-payments performance, with external liquidity deteriorating significantly beyond their expectations, or if they lead to a more durable weakening of public finances, setting public debt on a firm upward trajectory.
Upside scenario
S&P could raise the ratings over the next two to three years if Croatia’s growth performance significantly outperforms their current expectations, boosting the country’s income levels.
S&P projects that Croatia’s economy will contract by 9% in 2020 as a result of the strict measures to contain the spread of COVID-19 implemented at home and abroad. These are hitting the country’s large tourism and hospitality sectors. However, the rating agency continues to believe that the reduction in macroeconomic imbalances over the last several years has helped put Croatia in a more favorable position to weather a temporary shock to its economy without permanent damage to the country’s credit metrics.
S&P adds that Croatia is one of the most tourism-dependent sovereigns in Europe, given that tourism contributes about 20% of GDP and one-third of current account receipts. The travel restrictions introduced over the past few months will severely hit the sector. Their base-case projection is that tourism revenue will contract by around 70% YoY in 2020. Additionally, uncertainty over the pace of the full removal of travel constraints in both Croatia and other EU states, as well as the potential changes to travel patterns, will likely lead to only gradual recovery of the tourism sector. This is one reason why S&P anticipates only a partial rebound in Croatia’s GDP growth in 2021, with real GDP returning to 2019 levels not earlier than 2023. S&P estimates that the economy is expected to somewhat recover by growing 5.3% in 2021 and 2.5% in 2022.
Severe fallout from the pandemic will continue putting the country’s balance of payments performance under pressure amid Croatia’s current account receipts shrinking by at least one-third in 2020. That said, absent longer cross-border movement restrictions, S&P believes Croatia should be able to avoid a permanent damage to its credit fundamentals.
