Fitch revised upward Croatia's rating to 'BBB+' in July last year, after the country received a final greenlight to join the euro area n 1 January 2923.
In October 2022, the agency affirmed Croatia's Stable Outlook and its IDR rating at 'BBB+', warning that the economic growth could be at a slower rate due to rising inflation and a decelerating growth in the euo area.
Strong economic recovery
In its latest report, Fitch upgraded Croatia's Outlook to Positive underscoring the country's strong economic recovery.
"Croatia has recorded the second-highest cumulative growth in the EU since the pandemic shock," reads the report.
"Real GDP is 13% higher compared with 4Q19, while income levels reached 73% of the EU average at end-2022. "
The agency expects "growth to average 2.7% in 2023-2025 compared with 1.1% expected for the eurozone."
The economic outlook will be largely driven by domestic demand.
Steady rise in disposable income levels to boost private consumption
"A steady increase in real disposable income levels will support private consumption, while investments will be supported by increased absorption of NGEU funds."
The inflation trajectory and slowdown in external demand are downside risks to the growth outlook.
Declining Public Debt
The agency expects "public debt/GDP to fall to 62.1% in 2023 (versus the current 'BBB' median of 55.5%), from 68.8% in 2022 and 25pp below the pandemic peak in 2020."
"Debt reduction will continue beyond 2023, albeit at slower pace of 2pp-3pp per year, reflecting slower nominal GDP growth and expected primary balance surpluses.
"We forecast public debt/GDP will decline below 55% by 2027. General government interest payments should remain stable at about 3% of revenue in 2023-2025."
Solid Budget Performance
The agency expects "the general government budget to post a small deficit of 0.5% of GDP, compared with 2.4% expected previously and down from a surplus of 0.4% in 2022."
"Budget performance was strong in 1H23 as indirect tax revenues were boosted by high inflation."
"Costs of pension indexation and the recent support package, as well as public sector wage increases will push expenditure up in the remainder of the year. The latest aid package, worth EUR460 million, prolongs the cap on electricity prices for households and SMEs until end-March 2024, and introduces various one-off transfers for the most vulnerable groups," it notes.
The agency sees "a moderate risk of a further increase in spending due to the electoral cycle, with parliamentary, European parliament and presidential elections due next year." and forecasts the budget deficit will widen to 1.6% of GDP in 2024, before narrowing toward 0.8% in 2025."
Factors that could be detrimental to national economy
Concerning the public finances there is risk of sustained increase in general government debt over the medium term, for example, due to a pronounced and long period of fiscal loosening.
"Lower growth, for example, due to structural shocks affecting key sectors, weaker demographics or inflation remaining entrenched at high levels, which could lead to erosion of external competitiveness."
Factors that could lead to upgrade of rating
Concerning macro/public finances "long-lasting inflation decline, sustained GDP growth and confidence in the government's ability to keep public debt on downward trajectory through fiscal consolidation," are cited as positive factors.
On the structural front "implementation of structural reforms or positive spillovers from euro adoption, which supports convergence of GDP per capita, supports diversification of the economy and enhances productivity," are cited as positive factors.