Moody's Investors Service said it has upgraded the government of Croatia's foreign- and domestic-currency long-term issuer ratings and foreign-currency senior unsecured debt ratings to Baa2 from Ba1 and has changed the outlook to stable from ratings under review to reflect the forthcoming euro adoption by the country in January 2023.
“The upgrade of the ratings to Baa2 is driven by the adoption of the legal acts formalizing Croatia's adoption of the euro by the EU Economic and Financial Affairs Council (ECOFIN) on July 12, 2022. Croatia will adopt the euro as its domestic currency on January 1, 2023, thereby eliminating any foreign currency risk for the government's largely euro-denominated debt burden and reducing government liquidity risk,” Moody's said in a statement late on Friday.
Moody's also sees euro adoption as credit positive for Croatia's economic strength as it will remove foreign currency risk and transaction costs also for the private sector, spurring further economic integration of Croatia with the euro area. Furthermore, the ability of the country's institutions to complete the rigorous process towards euro adoption within the planned time frame also supports Moody's assessment of the strength of Croatia's institutions and governance, it added.
The stable outlook balances the continued strength of Croatia's economic and fiscal recovery from the initial shock of the coronavirus pandemic against risks to the macroeconomic and geopolitical environment in Europe stemming from rapidly rising inflation, concerns around the stability of the EU's energy supply and the Russian invasion of Ukraine.
By the upgrade of rating and the change of the outlook, Moody's concluded the review for upgrade that it initiated on June 24.
Croatia, together with Bulgaria, joined the exchange rate mechanism (ERM II), seen as the training grounds for the euro adoption, and the EU's banking union, on July 10, 2020.
The Adriatic country of 3.85 million people will be the 20th member of the Eurozone.