As Novac/Gojko Drljaca writes on the 16th of November, 2020, any raise in a credit rating in a situation where much of Europe is sliding towards a new recession carries with it some extreme weight. This is Moody’s message that comes with the fact that Croatia has managed to improve its unenviable previous position. What does this raise say, or not, about Croatian economic success?
Since Moody’s kept Croatia at Ba1, which is the highest so-called non-investment rating, one should remain realistic and say that this rating improvement is not a message that the country has suddenly become an investment paradise in which it is wise to invest huge money. Croatia remains a country with a rating level that indicates very high risks for investors, but improving that outlook at the hands of a very conservative agency is a sign that Prime Minister Andrej Plenkovic’s government has weighed up key public policies quite well. That’s excellent, but in fact ,nothing significant has happened yet where it should have, and that is with the economy.
Persistence in joining the Eurozone, joining the European Exchange Rate Mechanism, announcements of reforms, preparations for the banking union, followed by a few more announcements about reforms… doesn’t sound particularly exciting, but it is important proof that the Croatian authorities haven’t lost their orientation in this unexplored territory of increasingly difficult economic challenges. Croatia has been a part of Europe struggling with low growth potential since the 2008-2009 crisis. The crisis caused by the 2020 pandemic has only exposed the structural problems of a number of European economies that have been accumulating over the last 20-30 years. If, from these perspectives, you get a thumbs up for current economic and financial policy, it means that, fortunately, we live in a country that will remain manageable even after the pandemic enters the history books.
It seems, and let’s emphasise it again, that the improvement in Croatia’s rating shouldn’t be attibuted so much due to some sort of concrete Croatian economic success but to the fact that two Croatian institutions, the Ministry of Finance and the Croatian National Bank, have garnered a critical level of expertise over the years which has allowed us, if nothing else, to sell a sustainable story about Croatia’s plans for the future to the European Commission, all relevant bodies of the Union, as well as credit agencies. However, the persuasiveness and professionalism of the Ministry and the CNB is not in itself a guarantee of success.
The second wave of the pandemic has already stopped any economic recovery in a situation when the country’s GDP in the first nine months is a huge 8.3 percent lower than it was last year with general government debt of 82.5 percent of GDP, which, for a country like Croatia, is simply too much.
Although the Croatian Government expects huge sums of money from the EU’s recovery fund, as well as from the medium-term financial framework, the consequences of the crisis caused by the pandemic will be a challenge we have not yet faced. Many forget that our European environment has changed dramatically and that in 2021 we could see a fierce struggle for economic survival. In such a situation, a high level of professionalism in the Ministry and the CNB will not be enough for agencies and investors to look favourably upon a small country with some kind of perspective.
For example, if Greece is currently preparing amendments to its tax laws that will make it a more attractive destination for living and investing, Croatia can no longer afford to maintain the misconception that we can count on high growth rates with this level of tax pressure.