Croatia: The Recovery From The Pandemic Was Extremely Fast, Mainly Due To The Impact Of A Good Tourist Season
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Eurozone and Schengen accession
For many generations of Croatians, 1 January 2023 will be a day to remember. After years of painstaking efforts to recover from the 2008-09 deep recession and put public finances back on track, the country will join the eurozone in a relatively solid economic shape. Somewhat overshadowed by the eurozone accession, joining the Schengen area will also be a major milestone, with the potential to further boost Croatia’s exports of goods and especially services. Essentially, on 1 January 2023, Croatia’s EU integration story will be complete, with no other major milestones to be achieved in the coming years. In the short term, we believe that despite already being largely reflected in current ratings, the Eurozone and Schengen accession could bring another one notch upgrade from at least one agency.
What a comeback this was
Unlike the aftermath of the 2008-09 crisis when it took six years for the Croatian economy to resume growth, the post-pandemic recovery has been extremely fast. As usual, a strong tourist season made quite a difference, but tourism revenues in 2022 have dwarfed the record 2019 levels by some 30% to 40% despite a slightly lower number of tourists. This was due partly to inflation but also to the qualitative improvements in the sector which is now able to tap into more premium public. Looking to 2023, the outlook is influenced by an expected slowdown in the eurozone which will affect the demand for goods and services. Nevertheless, public investments should act as a backstop for a flattening private consumption, hence we maintain our 1.6% GDP growth estimate for 2023.
Getting back on track
The revised official targets for the fiscal balance point to a 1.6% of GDP deficit in 2022 and 2.3% in 2023, which given the current macro assumptions seem to be sensible estimates. An important aspect is how well the support measures for households will work in practice. In theory, their cost (estimated at around 5% of GDP) will be largely offset by revenues from EU funds and energy companies. Combined with the lower GDP growth and some remaining public sector arrears, it could mean that risks for exceeding the deficit next year are skewed to the upside. Nevertheless, primary deficits remain under control and with GDP growth still holding on, the overall debt position should continue to improve.
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