Fitch forecasts that the economy will contract by 5.5% in 2020, from growth of 2.9% in 2019, due to the impact of the COVID-19 pandemic.

Fitch Ratings has revised its outlook on Croatia’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to Stable from Positive and affirmed the IDR at BBB-. Fitch forecasts the economy will contract by 5.5% in 2020, from growth of 2.9% in 2019, due to the impact of the COVID-19 pandemic. This is a downward revision of 8 p.p. since their last review in December 2019.

Croatia is highly dependent on tourism and tourism-related activities, with these sectors accounting for an estimated 25% of GDP and a similar share of total employment. According to Eurostat, the ratio of tourism to total domestic supply stands at 9.8%, by far the highest figure in the EU (average is 3.4%). Fitch assumes an aggregate fall in tourism of close to 50% for the whole of 2020, reflecting widespread domestic and international travel restrictions, and weak economic conditions in the key tourist markets of Germany, Italy, Austria and Slovenia (which account for 45% of total tourist arrivals).

The hit to tourism and other services will, according to Fitch, have a significant effect on employment, consumption, investment and exports. This should be partly mitigated by the authority’s relief measures targeting businesses and individuals, and potentially by higher public investment. Although additional measures are likely, downside risks to Fitch’s growth forecast for 2020 are significant given the uncertainty around the duration of the COVID-19 pandemic (the tourism season is concentrated in 3Q).

Fitch expects the economy to recover in 2021, expanding by close to 3% on the back of service sector growth and a pick-up in exports as global demand resumes. This baseline rests on the assumption that tourism recovers quickly and that macro-fiscal stability is maintained. Fitch expects the unemployment rate to jump to 9% in 2020 but then rise only slowly to 9.5% in 2021 and ease in 2022. This would be significantly below the 17.4% rate reached in 2013, the peak during six years of economic contraction. Fitch maintains the medium-term growth forecast of 2.2%, reflecting adverse demographics and slow progress implementing structural reform (which hinders economic diversification).