Scope Ratings GmbH (Scope) monitors and reviews its credit ratings on an ongoing basis and at least annually, or every six months in the case of sovereigns, sub-sovereigns and supranational organisations.

Scope performs monitoring reviews to determine whether material changes and/or changes in macroeconomic or financial market conditions could have an impact on the credit ratings. Scope considers all available and relevant information when undertaking the monitoring review.

Monitoring reviews are conducted by performing a peer comparison, benchmarking against the rating-change drivers, and/or reviewing the credit ratings’ performance over time, as deemed appropriate by the Lead Analyst or Analytical Team Head, in addition to an assessment of all aspects of the relevant methodology/ies, including key rating assumptions and model(s). Scope publicly announces the completion of each monitoring review on its website.

Scope completed the monitoring review for the Republic of Croatia (long-term local- and foreign-currency issuer and senior unsecured debt ratings: BBB+/Stable; short-term local- and foreign-currency issuer rating: S-2/Stable) on 6 December 2022.

This monitoring note does not constitute a credit rating action, nor does it indicate the likelihood that Scope will conduct a credit rating action in the short term. Information about the latest credit rating action connected with this monitoring note along with the associated rating history can be found on www.scoperatings.com.

Key rating factors

Croatia’s BBB+ rating is underpinned by the following credit strengths: i) Croatia’s upcoming euro area membership, to be effective on 1 January 2023, which should underpin a robust framework for fiscal and economic policy; ii) good track record of fiscal prudence and implementation of structural reforms in recent years; iii) lowered external and financial sector risks, resulting from significant improvements to the supervisory framework made ahead of euro accession and expected to be further significantly reduced from 1 January 2023.

Croatia’s economy and external sector are expected to perform relatively robustly despite the energy shock and trade disruptions in the Central and Eastern European region. This is due to a low direct energy and trade exposure to Russia and Ukraine, sizeable inflows on EU funding and robust tourism receipts. At the same time, due to a marked slowdown in key trading partners in the EU, such as Germany and Italy, we expect economic growth to slow to around 1.8% in 2023, from an expected 6.3% this year.

Croatia’s rating remains constrained by credit challenges relating to: i) still-elevated public debt levels; ii) modest growth potential, reflecting low investment and productivity growth and unfavourable demographics constraining the labour supply; and iii) the economy’s relatively high reliance on tourism revenues, making it more vulnerable to potential recurrent Covid-19 restrictions and external developments.

The Stable Outlook reflects Scope’s view that risks to the ratings are balanced over the next 12 to 18 months.

The ratings/Outlooks could be upgraded if, individually or collectively: i) the growth potential rose with the help of structural reforms; and/or ii) fiscal performance improved, resulting in a significant decline in the general government debt-to-GDP ratio over the medium term.
Conversely, the ratings/Outlooks could be downgraded if, individually or collectively: i) the economic outlook weakened materially, due to, for example, a more protracted war in Ukraine with negative repurcussions on key trading partners; and/or ii) fiscal dynamics deteriorated significantly.

For the updated rating report accompanying this review, click here

The methodology applicable for the reviewed rating(s) and/or rating Outlook(s) (Sovereign Rating Methodology, 27 September 2022) is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
This monitoring note is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst: Julian Zimmermann, Senior Specialist

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