Overall, Fitch now forecasts GDP growth of 8.9% in 2021 (from 5.5% previously).
On Friday, Fitch Ratings upgraded Croatia to BBB, with outlook positive.
Fitch expects Croatia to be in a position to join the euro in January 2023 due to its significant progress in meeting convergence and structural reform criteria, despite the pandemic shock, and political support at the wider eurozone level for Croatia’s membership. This is in line with the authorities’ official target, and is ahead of their previous expectations of 2024. Euro adoption is supportive of the rating, as it would provide the sovereign with reserve currency status, reduce transaction costs and limit exchange rate risk to corporate and household balance sheets.
The Positive Outlook reflects further upward rating potential from the direct positive impact that euro adoption would have on the Sovereign Rating Model output, mainly through reserve currency flexibility.
In May 2022 the European Commission will assess Croatia’s fulfilment of the convergence criteria and the structural reforms pledged prior to entry into the ERMII, which took place in July 2020. The European Council’s Economic and Financial Affairs Council (Ecofin) would then make a final decision in early July 2022, after which the country would have six months to prepare for the currency switch. Fitch does not expect obstacles to arise to Croatia’s meeting the structural criteria, interest rate convergence or exchange rate stability.
Fulfilling public finance criteria will largely depend on Croatia avoiding the Excessive Deficit Procedure (EDP), which seems likely, given the expected narrowing of the public deficit and fall in public debt/GDP in 2021. However, meeting price stability criteria has become more challenging, given the acceleration in Croatia’s headline inflation (to 3.3% YoY in September 2021), but this is mitigated by the rising trend across the EU (3.6% in September).
Fitch believes that risks around the timeline of euro adoption are mainly tied to exogenous shocks, such as persistent pandemic-related problems or further rises in international commodity prices, which could cause Croatia to miss its convergence targets and delay Ecofin’s assessment by at least a year. They add that they do not foresee major risks on the domestic political front, despite a euro referendum called by small parties.
Overall, Fitch now forecasts GDP growth of 8.9% in 2021 (from 5.5% previously), with output set to exceed 2019 levels at the end of this year (compared with the eight years it took after the global financial crisis). They also forecast sustained economic momentum in 2022-2023 with GDP growth averaging 4%
