For the first time in six years, ratings firm Standard & Poor’s has raised Croatia rating to BBB-/A-3.
The upgrade reflects Croatia’s improving fiscal metrics, underpinned by its recent economic recovery thanks to tax-rich domestic demand, but also fiscal consolidation measures implemented by the authorities. Risks to GDP performance, public finance, and financial stability emanating from the bankruptcy of Croatia’s largest food retailer Agrokor have abated. Standard & Poor’s also view the likelihood of fiscal slippages, from the payment of state guarantees against the Uljanik shipyard’s debt liabilities, as having reduced.
“When all the economic indicators we make are positive, then this is a signal that we must continue with structural reforms, tax breaks and pension reform,” said Prime Minister Andrej Plenković.
Croatia has made a great deal of progress on important structural reforms. A third round of taxation reform took effect in January 2019, which among other things reduced the VAT rate for certain items. This in turn is set to stimulate disposable income, while reduced labour costs for employers could support investment activity.
While tourism-related revenues amount to almost 20 per cent of GDP, manufacturing, as well as other services such as transportation, are also important contributors to GDP.
S&P also foresees raising the ratings over the next two-to-three years if Croatia’s economic growth proves resilient to Europe’s cyclical slowdown, allowing continued convergence with EU average income levels, possibly aided by removing structural impediments to growth.
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