May 28 (SeeNews) - Croatia will experience economic and fiscal weakening this year, due to the coronavirus outbreak, but the shock is expected to be temporary, Moody's Investors Service said on Thursday.
"We expect Croatia's economy to contract sharply this year before rebounding strongly in 2021," Moody's Vice President - Senior Analyst, Olivier Chemla, said in a statement.
A sharp contraction in GDP growth and fiscal measures to tackle the coronavirus outbreak are likely to cause the debt-to-GDP ratio to rise by almost 15 percentage points this year, Chemla added.
Croatia is rated at Ba2 positive by Moody's. According to the rating agency, the country's improving fiscal metrics and strengthening economy had supported its credit profile so far.
The rating could be lifted if the positive underlying economic and fiscal trends are sustained after the pandemic, and if Croatia's high debt burden returns to its downward trend over the medium term. Progress towards eurozone membership, as well as higher absorption of EU funds that support long-term growth will also be credit positive, the ratings agency said.
The government in Zagreb said earlier this month it targets joining the European Exchange Rate Mechanism II (ERM II), the mandatory training grounds for Eurozone membership, by the middle of July.
Moody's also noted that Croatia's credit challenges include limited potential growth and weak employment and labour activity rates that constrain the economy's supply side, plus an ageing population and increased emigration since the country joined the EU back in 2012.
Moody's said that the positive outlook means that a rating downgrade is unlikely at this point.
"However, the outlook could return to stable if Croatia's fiscal policy credibility and effectiveness were to deteriorate in a permanent manner following the coronavirus shock. A stalling of the public administration reform agenda and, more broadly, efforts to increase the country's economic growth potential would also be credit negative," Moody's pointed out.