Moody's has today upgraded the Government of Croatia's long-term issuer and senior unsecured ratings to A3 from Baa2, and it concurrently has changed the country's outlook to stable from positive, this international credit agency reported on Friday.
"The decision to upgrade the ratings to A3 primarily reflects our expectation that Croatia's fiscal strength will remain materially higher in the near to medium term, due most notably to a sharp reduction of the government debt burden that is unlikely to reverse," it reports.
The upgrade "also reflects a continued improvement of Croatia's economic strength, driven not least by significant structural reform and investments under the country's National Recovery and Resilience Plan (NRRP) as well as a significant increase in labour immigration, both of which contribute to supporting the country's long-term growth potential."
Debt to stand at 57% of GDP, decline n debt burden faster than expected
"At the end of 2024 we expect debt to stand at 57% of GDP, close to 14 percentage points (pps) below the pre-pandemic level of Croatia's debt burden in 2019 and almost 30 pps below the pandemic peak in 2020. The decline in the debt burden has also been significantly faster than we expected at the time of the upgrade of Croatia's ratings to Baa2 in July 2022," reads the report.
"The significant improvement of Croatia's debt-to-GDP ratio has on the one hand been driven by very rapid real economic growth in the wake of the pandemic, further fueled by even higher nominal GDP growth in the high-inflation environment of recent years."
While the agency expects the headline deficit to widen to 2.2% of GDP in 2024 from a deficit of 0.7% in 2023, the deficit is projected to moderate in coming years as cost-of-living support measures are phased out and loan-funded RRP investments come to an end in 2026.
"We expect Croatia's real GDP growth to reach 3.5% this year, above our estimate of the economy's current potential growth rate, and slow somewhat to around 3% in 2025-2026, broadly in line with the A3-rated median growth rate."
Croatia's total National Recovery and Resilience Plan (NRRP) funding envelope of just over 13% of 2023 GDP is the second largest relative to GDP of any EU member state after Greece (Ba1 positive).
Stable outlook
The stable outlook reflects the balanced risks at the A3 level.
"On the one hand, Croatia's medium-term growth and fiscal performance could continue to outperform our expectations, especially if the NRRP-related measures boost growth potential to a greater extent than we currently assume," says the agency.
"On the other hand, capacity constraints in the economy coupled with potential challenges in bringing down the moderate fiscal deficit as expected could produce growth and fiscal outcomes that are weaker than we currently expect."
Croatia is now rated A by all three major international agencies -- S&P, Fitch and Moody's.