September 20 (SeeNews) - Standard & Poor's (S&P) said it has affirmed its 'BBB-/A-3' long- and short-term sovereign credit ratings on Croatia, as the country's outlook remains stable.
“The stable outlook indicates that we expect Croatia's strong economic recovery prospects, combined with its government's commitment to reform, to help it gradually rebuild the fiscal space it lost in the aftermath of the pandemic,” the rating agency said in a statement released late on Friday.
“The stable outlook also assumes that vaccine distribution in Croatia will progress and continue to support activity in the country's hospitality industry,” it added.
The agency said Croatia's tourism sector staged a strong comeback this summer, exceeding its previous expectations.
“We now estimate Croatia's GDP will grow by 6.5% in 2021, compared with our previous forecast of 5.0%, and that a solid investment agenda financed by substantial EU financing envelopes will lead to continued growth of 5% in 2022,” it noted.
Croatia's economy contracted 8.4% last year due to the impact of the COVID-19 pandemics.
“Because Croatia entered the pandemic with an improved fiscal balance sheet, the government was able to deploy strong fiscal support measures to mitigate COVID-19 fallout on the labor market. This caused government debt to surge to a record high of 88.7% of GDP in 2020, although the government's debt profile benefits from historically low funding costs and extended debt maturities,” S&P explained.
It projected that the debt-to-GDP ratio will start to fall from this year, based on the government's fiscal consolidation efforts amid a rebounding economy.
Croatia's government aspires to adopt the euro quickly, giving it an incentive to reduce the fiscal deficit to below the Maastricht reference level of 3% of GDP in 2022-2024.
“Our ratings are still supported by Croatia's modest net external leverage and the incumbent administration's record of prudent fiscal policies. The ratings are constrained by Croatia's moderate income levels and its high public debt. Furthermore, Croatia has less flexible monetary settings than its peers, although these anchor its stability. Croatia's entrance into ERM II in 2020 could strengthen its commitment to making institutional improvements,” the statement added.
Croatia's authorities aim to adopt the euro by 2023.