Fitch updates Croatia's credit rating due to euro area entry

Fitch Ratings on Wednesday upgraded Croatia's Long-Term Foreign-Currency Issuer Default Rating to 'BBB+ from 'BBB', with a stable outlook, after the European Council's Economic and Financial Affairs Council on 12 July approved Croatia's application to join the euro on 1 January 2023.

The next scheduled review date for Fitch's sovereign rating on Croatia will be 28 October "but Fitch believes that developments in the country warrant such a deviation from the calendar."

"Fitch believes that euro adoption is positive for the rating, as it would provide the sovereign with reserve-currency status, reduce transaction costs and limit exchange-rate risk to corporate and household balance sheets," the agency said.

Croatia joined the Exchange Rate Mechanism (ERMII) in July 2020 and "has fulfilled all convergence and reform criteria within the shortest possible timeframe."

According to Fitch, seven EU member states have a lower rating than Croatia - Italy, Portugal, Greece, Cyprus, Hungary, Bulgaria and Romania.

Fitch said early in May already that while in the waiting room for the euro, Croatia had fulfilled all structural reform criteria as well as most convergence criteria, except price stability, given the accelerating inflation.

Explaining the latest rating upgrade, Fitch said reflected Croatia's "track record of stable and peaceful political transitions, well-established rights for participation in the political process, moderate institutional capacity, effective rule of law and a moderate level of corruption."

Fitch said the rating could be downgraded in the event of a "sustained increase in general government debt over the medium term, for example, due to a more pronounced and longer period of fiscal loosening" as well as due to a "deterioration in international competitiveness or structural shocks to key sectors resulting in lower trend growth."

The rating could be upgraded in case of a "sustained decline in general government debt/GDP to levels closer to the peer medians, for example, via continued fiscal consolidation" and of "improvement in medium-term growth prospects, for example, via implementation of structural reforms or EU-led investment, that that supports convergence on GDP per capita with higher-rated peers."

Fitch upgraded Croatia's rating in an extraordinary report, citing "a material change in the creditworthiness of the issuer that we believe makes it inappropriate for us to wait until the next scheduled review date."

PM: New upgrade direct consequence of euro area membership

Prime Minister Andrej Plenković said on Twitter the credit rating upgrade "is a direct consequence of membership of the euro area, which brings Croatia greater security in the crisis."

Text: Hina