After 2020 which was marked by lockdowns, travel restrictions, social distancing, and other pandemic-related measures, 2021 followed with the easing of measures, recovery, and growth. Can 2022 be the year when the tourism industry can finally say: „We are back to normal!“? In this blog, we’ll discuss the current trends in the industry, and where they might take us.
After the aforementioned period of lockdowns and travel restrictions, 2021 started the recovery of the tourism industry, but still well below 2019’s levels. It should be noted that 2019 was a record year for Croatian tourism, so after the abysmal 2020, 2021 did manage to do a lot to set the tourism industry on the right track. As things are currently shaping out to be, the number of arrivals and overnight stays is increasing significantly compared to 2021, and it does have the potential to surpass 2019.
However, there are some factors that we should take a look at before we give too positive of an outlook. Two things come to mind immediately, the current Russia-Ukraine crisis and the inflationary pressures that are present across the world, but especially in Europe. The Russia-Ukraine crisis by itself should not have a strong „direct“ influence on the performance of Croatian tourism. This is because of several reasons: first of all, Russian and Ukrainian tourists make up only a tiny minority of both arrivals as well as overnight stays in Croatia. If we look at data since 2019 (before the pandemic), on average, Ukrainian arrivals accounted for 1% of all tourist arrivals, while Russian arrivals accounted for 1.53%. At the same time, they accounted for 1.4% and 1.5% of tourist nights on average, respectively. This means that even if most of the tourists from this region stopped coming to Croatia, the impact would not be significant.
Russia and Ukraine tourist arrivals and overnight stays as a percentage of the foreign total (2019 – April 2022, %)
Secondly, the largest market from where most of the tourists traditionally visiting Croatia come is the EU itself. The main way of transportation of these tourists is by road, usually in cars or campers. As the war in Ukraine does not have any direct impact on this type of tourism, it should experience growth in 2022. Moreover, the current inflationary pressures should not have a significant impact on these customers either, as these countries do have higher standards of living, higher saving rates, and traditionally spend their summers in Croatia. It should also be noted that the only country not from the EU, the UK (from where the tourists come mostly by air) does have some additional encouraging news. According to the UK’s Post Office, there has been a 137% increase in the exchange between GBP and HRK in 2022 as compared to 2021, showing that Croatia could benefit a lot from the British travelers this year.
Tourist arrivals as a percentage of total foreign tourist arrivals for select countries (2019 – April 2022, %)
Tourist nights as a percentage of total foreign tourist nights for select countries (2019 – April 2022, %)
Looking on the other side of the coin, inflation could also have a negative impact on tourist companies. This is because it puts a strong pressure on them to increase the prices of their services, potentially losing some customers. Furthermore, there has been a 20% decrease in bookings in March 2022, due to the uncertainty posed by the Russia-Ukraine crisis. Still, according to the biggest Croatian hospitality companies, in recent weeks a substantial increase in bookings was recorded, pointing towards 2019’s levels.
Meanwhile, the main problem that has been plaguing Croatian tourism for years, the lack of workforce, also presents a challenge. However, the tourist companies have started offering better working conditions (higher wages, stronger benefits, etc.), and have also increasingly imported foreign workers, so much of the demand for workers has been fulfilled this season. Because of this, the workforce shortage should not be so prevalent.
Taking all of this into account, why are the expectations for a good 2022 summer season still so high? Let’s look at some data from the European Travel Commission (ETC) in order to answer this question. Firstly, we’ll take a look at the survey they did on the people’s intention to travel. According to the survey, 76.8% of the participants answered they are likely or very likely to travel in the next six months. Considering the latest version of this survey was made in March 2022, when most of the negative influences on travel were already known, one wouldn’t expect this number to be so high. What’s more, this represents a 15.7 p.p. increase from the last survey that was made in December 2021. Finally, the participants from countries that were most likely to travel, i.e. Germany with 80.8%, the UK with 81.8%, Poland with 82.4%, and Italy, with 84.6%, are also some of the largest inbound markets for Croatia.
European Travel Commission „Intention to travel in the next 6 months“ survey, (July 2021 – March 2022, %)
At the same time, there are other indicators to consider. For instance, travelers’ planned spending amounts. The share of travelers who are planning to spend EUR 500 – 1,500 rose by 8%, while the share of those ready to spend over EUR 2,000 dropped by 8%. This is currently one of the best potential indicators of inflation’s influence. What can be surmised from this is the fact that people aren’t willing to cancel their summer plans, but rather choose more budget-friendly options. The last research to consider is the preferred countries of travel survey. On it, the South European destinations dominate, with Croatia tied in the 5th/6th place tied with Portugal, at 5.1% as a country of preference.
So, what can all of this data tell us? Firstly, the huge influence that COVID-19 travel restrictions had on the tourism industry. It’s not that most people weren’t willing to travel, especially when the vaccination rates started ramping up, it’s that most countries had a form of travel restriction in place. Secondly, after the removal of these restrictions, even when the current geopolitical uncertainty and inflation are taken into account, people have a strong willingness to travel. This is also supported if we look at the data from some of the largest inbound markets for Croatia (Germany, Austria, Italy, etc.), in which, Croatia still remains the country of preference.
Because of all of these reasons, we expect Croatian tourism to either match or surpass the 2019 levels in terms of arrivals, tourist nights, and overall revenue. At the same time, considering the uncertainty and changes that are happening on a daily, weekly, and monthly basis, profitability is next to impossible to estimate right now, so we’ll exclude it here.
To end this blog by answering the question in the title, yes, it can. And all things are pointing towards it being one of the largest eggs on record.
Fitch Ratings has affirmed Croatia’s long-term foreign currency issuer default rating at ‘BBB’ with a positive outlook. Below we provide the breakdown of the key drivers of this assessment.
First of all, we start with the credit fundamentals. According to Fitch, Croatia’s ratings are supported by strong structural features, including higher human development and governance indicators than peers, supported by the membership in the EU, and a GDP per capita that is around 40% higher than the ‘BBB’ median. On the other hand, Croatia is facing high (although decreasing) public sector debt and a weak record of structural reform implementation, which when combined with failing demographics, stunts potential growth.
Next up, we have the positive outlook. The agency expects that Croatia will be in a position to join the euro in January 2023, with strong progress being made towards meeting convergence and reform criteria under Exchange Rate Mechanism II (ERM II), as well as the political support at the wider EU level for Croatia’s membership. Breaking this down further, Croatia has met all structural reform criteria under ERM II and currently meets most of the convergence criteria, i.e. interest rate, exchange rate, and public finances. The only thing that could pose a problem for the euro adoption is the price stability criteria, which is affected by the rising inflation in recent months. The inflation peaked at 7.3% in March (the highest since 2008), and on average hovered around 4%-4.1% from April 2021 to March 2022.
Nevertheless, the agency does not expect this to pose that big of a risk, as inflation has increased across the EU. This is important because the way that the price stability criteria are looked at is by taking the three best performers in terms of inflation and adding/removing 1.5 p.p., then comparing it to a country to see if it passes the criteria. As some countries started with a very low base in terms of inflation, this could become an issue for Croatia’s ascension. However, the agency believes that the EU will use the flexibility provided in the convergence criteria (for example removing the inflation rates of some of the members it considers outliers from the calculation) when assessing Croatia in May, with a likely positive outcome in July. Because of this, they do not expect a delay of more than one year if Croatia fails to meet the inflation criteria.
Going further, the agency also talked about inflation itself. They forecast that HCPI (harmonized consumer price indices) will average at 7% in 2022, with the possibility of it reaching double digits in Q2 2022, as energy and commodity prices continue to have an impact. The government’s decision to reduce VAT on food and energy, as well as put caps on electricity and gas means that a part of these costs won’t be passed to final consumers. In 2023, they forecast a 3.5% inflation rate, with a possibility of even higher inflation because of a demand for higher wages.
Because of these reasons, they expect growth to slow to 3.3% in 2022 due to the base effect and slowdown in household consumption as inflation affects consumer spending. They also expect a slowdown in trade with key trading partners (particularly in the EU), but at the same time, this will be somewhat mitigated as service sectors such as tourism continue to recover due to Croatia’s structural advantages. They expect GDP growth to amount to 3.7% in 2023, assuming a reduction in external risk and higher investments, driven by EU programs. Finally, Fitch estimates EU transfers of up to 5% of GDP per year in the next four years will sustain the economic momentum.
Fitch also touched on the downside risks, primarily the Russia Ukraine crisis. The effect on Croatia is very limited in this regard, as Russia and Ukraine make up 1.5% of exports, and 1% of investments and tourists. Even though Croatia stands at the EU avg. in terms of energy dependency (56%), the opening of last year’s LNG terminal means that Croatia can reduce its dependence on Russian gas to zero. Still, higher energy costs will affect the country, combined with further supply chain disruptions.
Moving on to the financial position of the country, Fitch estimates that Croatia is in a stable fiscal position. As Croatia’s fiscal deficit decreased to 2.9% of GDP in 2021, owing to the revenue growth combined with expenditures decrease, Fitch estimates that the revenue growth will continue, but that expenditures will increase in order to combat the inflation. Because of this, they forecast a headline deficit of 2.8% in 2022, before decreasing to 1.9% in 2023.
Next up, they also talked about the falling debt. In 2021, public debt/GDP fell to 79.8% (-7.8 p.p. YoY), thanks to the improved fiscal position and economic expansion. Fitch expects it to fall to 75.5% in 2022 and 72.6% in 2023. Modest primary deficit and high nominal growth support the forecast of an average 3 p.p. decrease in debt stock per year over the next 5 years. This would also be consistent with meeting the convergence criteria, even though the public debt/GDP will remain above the 60% Maastricht debt ceiling. They expect the financing costs to rise gradually, following global trends, but also that the euro adoption and good debt management to reduce financing risks.
Croatia’s solid external position was also analyzed. Croatia’s external sector continues to benefit from the current positive account trends, rising foreign investment and strong EU support, with net external debt broadly in line with ‘BBB’ peer median of 5% of GDP. They expect the current account surplus to narrow to an avg. of 1% of GDP in 2022-2023 as the trade deficit widens in line with higher energy imports. This, however, should be offset by rising EU inflows as absorption increases. Furthermore, a large FX reserve (over 40% of GDP) will allow the Croatian National Bank to maintain exchange rate stability ahead of euro adoption.
Finally, the rating agency also commented on factors that could lead to a downgrade/upgrade. Starting with the negative, we have two. Firstly, if a significant delay in the timeline of the eurozone ascension happens. Secondly, if the general government debt increases over the medium term. Ending with the positive factors, Croatia will get an upgrade if the Economic and Affairs Council of the EU confirms that Croatia met its eurozone membership criteria, or if there is evidence of an improvement in medium-term growth prospects (for example, from the implementation of structural reforms of EU-led investments, that could lead to a faster than expected reduction on govt. debt/GDP.
To read the entire report, click here.
In March 2022, total loans of Croatian financial institutions amounted to HRK 284.9bn, an increase of 3.2% YoY, and 1.1% MoM.
The Croatian National Bank (HNB) has published its monthly report on the development of the Croatian financial institutions. According to the report, as of the end of March 2022, the total loans of all financial institutions equaled HRK 284.9bn, an increase of 3.2% YoY, and 1.14% MoM.
Household loans which represent the largest segment, grew by 4.1% (or HRK 5.63bn) YoY, 0.8% (or HRK 1.12bn) MoM. Meanwhile, corporate loans grew by 5.7% YoY, 4.41% MoM, and amounted to HRK 91.8bn.
Corporate and Household Loans Growth Rate (YoY, %)
In total, loans issued to households amounted to 143.2bn. The increase was primarily driven by the increase in housing loans, which grew by HRK 5.15bn (or 8.1%) YoY, and HRK 535.6m (or 0.8%) MoM. Housing loans also constitute the largest segment of the household loans, at 48.1%, roughly the same as the month before, but an increase of 1.78 p.p. YoY. At the same time, the 2nd largest category of household loans, the consumer loans (accounting for 37.5% of total household loans), grew by 2.5% (or HRK 1.3bn) YoY, and 0.5% (or HRK 257.7m) MoM.
Meanwhile, the household loan growth was offset by the lower result of credit card loans, which decreased by HRK 769.2m (or -22.1%) YoY but experienced a slight increase of HRK 8.4m (or 0.31%) MoM. The 3rd largest category of household loans, other loans, experienced a decrease of HRK 77m (or -0.85%) YoY while increasing by HRK 161m (or 1.83%) MoM. Lastly, the 4th largest category of household loans, overdrafts on transaction accounts, decreased by HRK 42.2m (or -0.66% YoY) but grew by HRK 150.3m (or 2.43%) MoM.
What can be deduced from data? On the one side, current geopolitical situation, that is evidenced in strong inflationary pressures, is showing increasingly negative influence from month to month on the “real” value of deposited money. On the other hand, the lending risks for banks is increasing but it has still not resulted in real impact on the loan lending rate while expected growth rate of Croatian economy is expected at lower rate than at the end of 2021.
Composition of Croatian loans to households (HRKm)