Scope Ratings reviews its ratings either yearly, or at least every six months in the case of sovereigns, sub-sovereigns and supranational organisations. Monitoring reviews are unrelated to the calendar that outlines public finance rating actions.

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 on an individual credit. Scope publicly announces the completion of each monitoring review on its website.

Scope completed the monitoring review for the Republic of Croatia (BBB-/Stable; S-2/Stable) on 30 July 2021. 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- credit 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 has since provided 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, gradual pre-crisis public-debt reduction, and pre-crisis overachievement of fiscal objectives. Scope expects the government to pursue the course for joining the euro in the next few years (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 fund allocations to Croatia.

Despite these credit strengths, important medium- to long-term macroeconomic challenges constrain Croatia’s investment-grade ratings. Firstly, Croatia’s already elevated public-debt ratio reached a record 88.7% of GDP in 2020, due to cyclical budget deterioration as well as costs of fiscal support measures in response to the crisis. Moreover, gross financing needs remain among the highest of EU central and eastern European member states. Secondly, Croatia’s growth potential over the medium term is weak compared with that of sovereign peer economies, reflecting insufficient structural reforms and, resultingly, 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. The ratings/Outlooks could be upgraded if, individually or collectively: i) the implementation of structural reform strengthens productivity growth and labour market outcomes over the medium term; ii) public debt declines faster than expected going forward due to robust growth and/or fiscal consolidation; and/or iii) progress is made with respect to joining the euro.

Conversely, the ratings/Outlooks could be downgraded if, individually or collectively: i) the public finance outlook further deteriorates due to inadequate fiscal consolidation and/or higher-than-expected materialisation of contingent liabilities; ii) the medium-run growth outlook significantly weakens due to, as an example, a persistent decline in foreign demand and/or delays in the reform programme; and/or iii) inadequate commitment to convergence criteria unexpectedly places Croatia’s medium-run accession to the euro area in question.

For the updated scorecards accompanying this review, click here.

The methodology applicable for the reviewed ratings and/or rating Outlooks (Rating Methodology: 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, Senior Analyst

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