April 8 (SeeNews) - Fitch Ratings said it has affirmed Croatia's long-term foreign-currency issuer default rating (IDR) at 'BBB+' with a positive outlook reflecting Croatia's resilience to recent external shocks.
"Croatia's ratings are supported by governance and GDP per capita indicators higher than 'BBB' category peers, in addition to EU and eurozone membership," Fitch Ratings said in a press release on Friday. Set against these factors is a high, albeit falling level of public sector debt, a relatively small size economy with a high reliance on tourism, and an adverse demographic profile, it added.
At end-2023, Croatian real GDP was almost 16% higher than the pre-pandemic level of the fourth quarter of 2019 and the country is expected to grow on average by 3.2% in 2024-2025 compared with 1.1% forecast for the eurozone. High nominal GDP growth and prudent fiscal policy have led to a substantial reduction of public debt, Fitch said.
Fitch believes that private consumption will remain supported by strong nominal wage growth and social transfers. Investment activity will also remain solid as Croatia continues to absorb EU funds. "We expect economic growth to moderate to 3% in 2025. Weaker than expected external demand and slower rebound of private sector investment are key downside risks," it explained.
Croatia remains a front-runner in the absorption of EU Recovery and Resilience Facility (RRF) grants, it noted. Swift progress on RRF-linked reforms has led Croatia to receive 2.9 billion euro (3.5% of GDP), half of its total RRF grant allocation. Croatia also intends to request loans up to a maximum of 4.2 billion euro (5.1% of GDP) and is eligible for 14 billion euro (17% of GDP) EU cohesion funds. Between now and 2030, Croatia could receive up to 21 billion euro (around 5% of GDP annually) of funds under various EU programmes. Investments financed with the funds and structural reforms under the RRF could boost potential growth and further strengthen convergence with average EU income levels.
According to Fitch, the decline in inflation in the Adriatic country has been more gradual than in other euro area member states mostly due to higher services inflation, ongoing price convergence, higher wage growth and slower monetary policy transmission. HICP inflation stood at 4.8% in February 2024, above the euro area rate of 2.6% but down from the peak of 13% in November 2022. "We expect HICP inflation to continue to moderate, supported by easing of services prices. We see average HICP at 3.3% in 2024 and 3.1% in 2025, down from 8.4% in 2023, broadly in line with the current 'BBB' median," it added.