On Friday, Moody’s Investors Service (Moody’s) completed a periodic review of the ratings of Croatia. Croatia’s previous Baa2 Rating & Positive Outlook both remain unchanged.
On Friday, Moody’s Investors Service (Moody’s) completed a periodic review of the ratings of Croatia. Croatia’s Baa2 Rating & Positive Outlook, from the previous revision, both remain unchanged. However, Moody’s provided us with a rating consideration and rationale, which you can find below.
As the rating agency emphasized, Croatia’s Baa2 ratings are supported by a level of institutions and governance strength and fiscal strength that are higher than that of rating peers. Further, it was noted that high institutional effectiveness underpinned Croatia’s adoption of the euro in 2023, while the government debt burden remains on a declining trend.
Anyhow, despite our relatively high per capita income level, Croatia’s demographics remain its biggest challenge. The banking sector and geopolitical risks also remain constraints on the rating.
Moody’s expects Croatia to grow at one of the highest growth rates in the euro area, amounting to 3.3% in 2024. Headline government deficit is expected to expand to 2.5% of GDP in 2024 due to rising costs for public sector wages and pensions as well as loan-funded EU investment. However, Moody’s still expects the debt burden to decline to 59.2% of GDP at the end of 2024 from 63.5% at the end of 2023, while debt affordability metrics will also remain stronger than most rating peers. Moody’s also expects the new government formed following parliamentary elections on 17 April 2024 will provide broad policy continuity as the governing coalition will continue to be led by the Croatian Democratic Union (HDZ) which has governed Croatia since 2016.
Regarding Croatia’s outlook, the positive outlook reflects the increasing likelihood that Croatia’s debt burden will fall more significantly than previously expected, leading to further improvements in fiscal strength combined with improvement in institutional effectiveness through the effective implementation of the very significant package of investments and reforms under Croatia’s Recovery and Resilience Plan (RRP).
Finally, Moody’s noted that it would upgrade Croatia’s ratings if the government debt burden continues to fall more significantly than expected, while debt affordability is maintained. Effective implementation of Croatia’s RRP would also support Moody’s assessment of Croatia’s economic as well as institutions and governance strength, thus also supporting the case for an upgrade.
On the flip side, Moody’s would consider changing the outlook back to stable, and in an adverse scenario, to negative if there was to be a reversal in the trend of debt reduction, accompanied by a significant loosening of government fiscal policy. A significant weakening of the growth outlook relative to Moody’s expectations, as well as a weakening of Croatia’s ability to effectively implement our national RRP, would also support the case for a stabilization of the outlook. An increase in geopolitical risks negatively impacting the Croatian economy and public finances would also be credit-negative.
