November 15 (SeeNews) - Fitch Ratings said it has upgraded Croatia's long-term foreign-currency issuer default rating (IDR) to 'BBB' from 'BBB-, with positive outlook on thanks to the country's prospects to join the eurozone as of 2023.
“Fitch expects Croatia to be in a position to join the euro in January 2023 due to its significant progress in meeting convergence and structural reform criteria, despite the pandemic shock, and political support at the wider eurozone level for Croatia's membership. This is in line with the authorities' official target, and is ahead of our previous expectations of 2024,” the rating agency said in a statement late on Friday.
Euro adoption is supportive of the rating, as it would provide the sovereign with reserve currency status, reduce transaction costs and limit exchange rate risk to corporate and household balance sheets, the statement added.
The positive outlook reflects further upward rating potential from the direct positive impact that euro adoption would have on the sovereign rating model output, mainly through reserve currency flexibility.
In May 2022 the European Commission will assess Croatia's fulfilment of the convergence criteria and the structural reforms pledged prior to entry into the Exchange Rate Mechanism (ERMII), which took place in July 2020.
The European Council's Economic and Financial Affairs Council would then make a final decision in early July 2022, after which the country would have six months to prepare for the currency switch.
“We do not expect obstacles to arise to Croatia's meeting the structural criteria, interest rate convergence or exchange rate stability,” according to the statement. Fitch said it improved its forecast for Croatia's GDP growth to 8.9% in 2021 from 5.5% previously, with output set to exceed 2019 levels at the end of this year, compared with the eight years it took after the global financial crisis.
”We forecast sustained economic momentum in 2022-2023 with GDP growth averaging 4%, broadly in line with 'BBB' peers, despite some persistent short-term risks related to renewed pandemic-related challenges and the potential adverse effects of higher energy costs on the corporate sector,” it added.
Given strong nominal growth and favourable interest rate conditions, Fitch expects Croatia's public debt/GDP to fall to by around 3 percentage points per year in 2021-2023 to 77.9%, compared with 87.3% in 2020 and versus the current peer median of 60.3%.
Fitch forecasts Croatia's fiscal deficit to fall to 4.3% of GDP in 2021 from 7.4% in 2020, before declining further to 3% in 2022 and 2% in 2021.