Scope Ratings reviews its ratings either yearly, or at least every six months in the case of sovereigns, sub-sovereigns and supranational organisations. Scope performs monitoring reviews to determine whether outstanding ratings remain proportionate. Monitoring reviews are conducted either by performing a portfolio review in terms of the applicable methodology/ies, latest developments, and the rated entity’s financial and operational aspects relative to similarly-rated peers; or through targeted reviews of an individual credit. Scope publicly announces the completion of each monitoring review on its website.

Scope completed the monitoring review for Croatia (BBB-/Stable; S-2/Stable) on 25 February 2021, incorporating the update from the sovereign methodology. The review resulted in no action on the assigned ratings. This monitoring note does not constitute a rating action nor does it indicate the likelihood of a credit rating action in the short term. The latest information on the credit ratings in this monitoring note along with the associated ratings history can be found on www.scoperatings.com.

Key rating factors

Croatia’s BBB- ratings are underpinned by i) the country’s strengthened external buffers and financial stability, underpinned by successful entry to the EU’s Exchange Rate Mechanism II (ERM II) and Banking Union in July 2020, which provides a roadmap to the adoption of the euro over the medium run; ii) a pre-crisis track record of improved fiscal discipline, which resulted in fiscal surpluses before this crisis, gradual pre-crisis public-debt reduction, and overachievement of fiscal targets. Scope expects the government to pursue the course for joining the euro (at the earliest by 2023). The period in ERM II will, meanwhile, continue to enforce a degree of credit-positive prudence in macroeconomic and fiscal policies, underpinned by significant EU funds allocations to Croatia.

Despite these credit strengths, important medium- to long-term macroeconomic challenges constrain Croatia’s ratings. Firstly, Scope expects Croatia’s already elevated public-debt ratio to have reached a projected 87% of GDP in 2020, due to cyclical budgetary deterioration as well as the costs of fiscal support measures in response to the crisis. Moreover, gross financing needs remain among the highest of the EU’s central and eastern European member states. Secondly, Croatia’s growth potential over the medium term is weak compared with that of sovereign peers, reflecting insufficient structural reform and, subsequently, low productivity growth and labour-market shortages.

The Stable Outlook reflects Scope’s assessment that the challenges Croatia faces remain manageable in view of the country’s outstanding credit strengths.

For the updated scorecards accompanying this review, click here.

The methodology applicable for the reviewed rating(s) and/or rating Outlook(s) (Sovereign Ratings, 9 October 2020) is available on https://www.scoperatings.com/#!methodology/list.
This monitoring note is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst: Levon Kameryan, Analyst.

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