March 21 (SeeNews) - S&P Global Ratings said it has affirmed its 'BBB-/A-3' long- and short-term foreign and local currency sovereign credit ratings on Croatia, maintaining its outlook at stable but warned that the conflict in Ukraine may affect the Adriatic country through weaker global demand and reduced tourism.
“Global geopolitical uncertainties following Russia's military intervention in Ukraine and rising energy and commodity prices have led us to moderate our 2022 GDP growth forecast for Croatia to 2.5%, with possible further downside depending upon the evolution of the conflict, particularly with regards to its effect on global demand, the tourism sector, and inflation,” the rating agency said in a statement late on Friday.
This follows a very strong GDP rebound of 10.4% in 2021, which enabled Croatia's GDP to exceed its pre-pandemic level following the 8% decline in 2020.
The rebound in 2021 was supported by the country's flagship tourism sector, which benefitted from a reduction of COVID-19 cases during the key summer months.
Tourism is a key industry in the Adriatic country, and the credit rating agency estimates that the tourism and hospitality sectors account for almost 20% of value-added in Croatia and about one-third of its current account receipts, exposing the country to swings in tourism flows.
“We understand that bookings for the upcoming summer season are strong, but we do not rule out that the tourism sector could face some headwinds emanating from the worsening geopolitical situation. Secondary effects, as the Ukraine conflict could dampen overall demand across the European continent, also present risks to our forecast,” it added.
The stable outlook reflects its expectation that Croatia's economic growth will remain steady over the coming two years despite inflationary headwinds and the pan-European macroeconomic consequences from the conflict in Ukraine.
Eurozone accession, which Croatia aspires as of January 2023, would reduce foreign exchange risks and improve Croatia's monetary flexibility, in its view.
“Despite the complex inflationary context, we assess that Croatia is on track for entry into the EMU by 2023,” the credit rating agency said.
In line with euro adoption, it expects the government will reduce its fiscal deficit below the Maastricht reference level of 3% of GDP in 2023-2025.
"We project a general government deficit of 3.5% of GDP in 2022, with expenditure benefitting from roll-back of pandemic-support programs, while subsidy schemes to alleviate price pressures on fuel and energy add 1.1% of GDP to the expenditure bill," the agency said.
It anticipates that Croatia's economic growth will remain strong in 2023-2025, supported by investment spending.
Croatia is set to benefit from the disbursement of significant EU funds over the coming years including 10 billion euro ($11 billion) under the Next Generation EU program 2022-2024, of which about 6 billion euro or almost 12% of GDP is in the form of grants; and over 12 billion euro under the EU's new Multiannual Financial Framework 2022-2029.
Additional funds are available from various other programs, among them the solidarity fund for the post-earthquake reconstruction efforts.
($= 0.9038 euro)