Moody’s upgraded Croatia’s foreign and domestic currency long-term issuer rating and foreign-currency senior unsecured debt rating to Baa2 from Ba1 with a stable outlook.
On Friday, Moody’s upgraded Croatia’s rating, following Fitch’s and S&P Global Ratings upgrades. Moody’s upgraded domestic currency long-term issuer rating and foreign-currency senior unsecured debt rating to Baa2 from Ba1 and upgraded Croatia’s outlook to – “stable”.
The agency said the upgrade of the rating to Baa2 is driven by the adoption of the legal acts formalizing Croatia’s adoption of the euro. As a reminder, Croatia will adopt the euro as its domestic currency on 1 January 2023. As a result, foreign currency risk for the government’s euro-denominated debt will be eliminated and government liquidity risk will be reduced. This is notable as Croatia’s share of government debt is currently over 70% denominated in euros. This has a significant positive impact on Moody’s assessment of the government’s fiscal strength as it eliminated the risk of a sudden and potentially significant increase in the local currency value of government debt relative to GDP, as a result of the potential devaluation of the local currency relative to the euro.
The agency also commented it sees Croatia’s euro adoption as credit positive for Croatia’s economic strength as it will remove both foreign currency risk and transaction costs from the private sector, encouraging further economic integration of Croatia with the euro area. Also, the ability of the country’s institutions to complete the rigorous process toward euro adoption within the planned time frame is seen as supportive of the strength of Croatia’s institutions and governance. Furthermore, Croatia’s adoption of the euro will also reduce foreign currency risks for the banking sectors and will have a positive impact on external vulnerability risks. As a euro area member, Croatia would in a future crisis stand to benefit from potential ECB support programs such as the asset purchase programs.
Stable outlook, as the agency said, was achieved by balancing the continued strength of Croatia’s economic and fiscal recovery from the initial shock of the coronavirus pandemic against risks of the macroeconomic and geopolitical environment in Europe, arising from boiling inflation and energy supply shock as a result of the Russian invasion of Ukraine.
The rationale for the stable outlook upgrade was Croatia’s strong recovery from the sharply negative impact of the coronavirus pandemic on the country’s tourism sector and overall economy in 2020. In the agency’s baseline scenario, Moody expects GDP growth to remain robust at 3% in 2022 with the debt burden continuing to decline at a more moderate pact.
The long-term country ceilings of Croatia for local and foreign currency bonds have been raised to Aa2 from A2. This increase reflects all benefits from the euro area’s strong common institutional, legal and regulatory framework, liquidity support, and other crisis management mechanisms.