DATACRUNCH: Croatia’s post-crisis rebound goes beyond tourism

DATACRUNCH: Croatia’s post-crisis rebound goes beyond tourism
By Clare Nuttall in Zagreb and Glasgow November 30, 2021

Croatia’s economy took one of the deepest hits from the coronacrisis in 2020 across the EU and emerging Europe regions, and the country also had to deal with two deadly earthquakes. In stark contrast to its protracted recovery from the international economic crisis, it’s already bounding back with a broad-based recovery and is on track to achieve some of the fastest growth in the wider region this year. On top of that Fitch Ratings just raised its rating for Croatia to its highest-ever level with Zagreb’s work towards euro adoption a key contributing factor. 

The latest flash estimate for Q3 shows the recovery continued strongly over the summer and early autumn, with 15.8% growth reported for the quarter. The y/y rise in economic activity was seen in all sectors except government spending in Q3. There was a 71.6% y/y hike in exports of services, which includes tourism services, while goods exports rose by 13.1%.


This was the fastest among the EU member states that have reported their Q3 GDP growth so far — almost twice as high as the next ranked country, Romania, at 8%, data compiled by Eurostat shows. 

While Croatia’s performance reflected the depth of the contraction in 2020, and several EU countries have yet to report their growth for the quarter, the comparison was nonetheless by Prime Minister Andrej Plenkovic. “We have the biggest growth ever since Croatia exists. This shows a really fast, strong and explicitly high-quality, comprehensive recovery of the Croatian economy,” the prime minister commented on November 26.

International financial institutions (IFIs) are now projecting strong growth for Croatia for the full year. Earlier in November, the European Bank for Reconstruction and Development (EBRD) raised its forecast to 8%, up from 6% earlier, which would mean a full recovery from last year’s contraction. 

“This year Croatia’s GDP recovered much faster than expected. Growth in the first half of the year was broad-based and reached 7.5%. The onset of this growth was mainly due to the improvement in private consumption and the resilience of the export sector, especially for food and medical products. It was supported by the steady growth of industrial production, particularly in relation to the energy sector. This growth was further exacerbated by the recovery of the tourism sector, which Croatia has repeatedly relied on, starting from late June onwards,” said Victoria Zinchuk, EBRD director for Croatia. 

Other institutions have similarly bullish projections. The International Monetary Fund (IMF) expects growth of 6.3%, having raised its projection from just 4.7% earlier this year. The World Bank raised its forecast to an even higher 7.6% in October. Raiffeisen Bank’s forecast is in line with the EBRD’s at 7%. 

Part of this was down to the recovery of tourism, as numbers of arrivals and overnight stays this summer were close to pre-crisis levels, according to data compiled by both the Croatian Bureau of Statistics and the Croatian National Tourist Board (CNTB). Several factors continued to this, including the low numbers of new coronavirus cases coming into the summer and Croatia’s location close to Germany and other Central European countries, making it accessible overland.

“Croatia continues to draw most of its tourists from its traditional European feeder markets, such as Germany and Austria, as well as neighbouring Slovenia and other CEE countries such as the Czech Republic, Poland, Slovakia, Hungary, as well as other West European markets such as Italy, France, Belgium, the Netherlands, as well as others,” Luci Jerkovic, manager of the CNTB's global PR department, told bne IntelliNews in an interview in October.

The return of tourists to close to pre-pandemic numbers had a knock on effect on sectors such as retail, which achieved double digit y/y growth over the summer months. 

However, as Zinchuk pointed out, it wasn’t just down to tourism, The strong 7.7% y/y growth in H1 came amid a broad-based recovery from the 2020 shock, led by strong recovery of household consumption and exports of goods and services (especially tourism), commented Raiffeisen Bank Zagreb’s chief economist Zrinka Zivkovic Matijevic. She noted the strong performance of exports supported by the recovery of Croatia’s main trading partners. Looking ahead, she expects that following the consumption-led growth of 2021, “next year the baton of the growth will be taken over by investment”. 

“Besides tourism, the main reason behind our recent upward GDP revision (from 5.1% to 7% y/y in 2021) is the fact that some of the sectors like industry, construction, agriculture and IT proved to be more resilient to the pandemic development. In this context, post-earthquake reconstruction will undoubtedly have also a positive impact on the economic recovery this year but also in 2022,” Matijevic told bne IntelliNews.  



Even in 2020, the agriculture, construction and ICT sectors reported growth. 

In the high-tech and IT sectors Croatia has managed to produce some local — now international — champions. Foremost among them is electric hypercar producer Rimac Automobili, founded by youthful Croatian entrepreneur Mate Rimac. The company now counts high profile automakers Porche and Hyundai among its shareholders, as they position themselves for the car industry’s electric future, and recently launched a joint venture with Bugatti. 

In the IT sector, there is Croatia’s first tech unicorn Infobip, which achieved a valuation of over $1bn when it raised $200mn in funding from One Equity Partners in 2020. Smaller companies include AI and robotics company Gideon Brothers, smart bench developer Include and Photomath, the developer of a maths learning app.

A faster recovery 

This is a very different crisis from the previous one; while Croatia is rebounding quickly this time, it was the last economy from the whole emerging Europe region to exit recession after the global financial crisis that started back in 2008. 

“The last financial crisis varied significantly from the current one; in today’s context, there are different preconditions and financial institutions have been significantly reformed to account for today’s global trends,” said the EBRD’s Zinchuk. 

“In Croatia, the central bank (HNB) has repeatedly stepped in as the anchor of stability in the economy. They have been extremely prompt in putting in place monetary measures to ensure the economy does not dip to the levels seen in the last crisis. While the COVID fiscal package was enforced by the government in 2020 and stalled the rising unemployment rates, the central bank was also an essential component in maintaining economic stability within the country. This is demonstrated by the decision not to classify the loans, that performed well prior to COVID but became overdue, as NPLs. It gave companies the possibility to reschedule or postpone their loan payments, removed the pressure on SMEs – that are the backbone of the Croatian economy – and allowed Croatia to keep going without any major bankruptcies.”

The coronacrisis followed five years during which Zagreb made significant efforts to consolidate public finances, resulting in a fall in the public debt to GDP ratio of almost 13 percentage points (pp), according to Raiffisen. Croatia exited the EU’s Excessive Deficit Procedure in June 2017. 

As in other countries, the fall in tax revenues and the hike in spending on healthcare and to support the economy pushed up the budget deficit — it reached 7.4% of GDP in 2020, while public debt shot back up 88.7% of GDP. However, the country’s public finances are expected to recover over the coming years. Following the surge in government debt to a record high of 88.7% of GDP in 2020, S&P expects the debt-to-GDP ratio to start to fall from this year, based on the government's fiscal consolidation efforts amid a rebounding economy.

Euro adoption as an anchor 

Another impetus for recovery is Croatia’s quest for euro adoption. Croatia is preparing to adopt the single European currency and the government hopes it will join the Eurozone at the beginning of 2023. 

An effort by a small right-wing group the Croatian Sovereignists to force a referendum on the government’s plans to adopt the euro failed as they were unable to collect enough signatures. 

“There are good reasons to consider Croatia a suitable euro area candidate. The correlation of the business and inflation cycle with the euro area is high and above regional peers. Croatia is also very much de facto integrated into the euro area, both in financial and real sector,” said Matijevic. 

The prospects of eurozone accession prompted Fitch Ratings to raise its rating on Croatia to the highest-ever level. The rating agency upgraded Croatia's long-term foreign-currency issuer default rating (IDR) to BBB from BBB- with positive outlook on November 12. 

Its note on the rating action focussed on Croatia’s progress towards eurozone accession, forecasting the country will be in a position to join the European single currency in January 2023; it cited the “significant progress in meeting convergence and structural reform criteria, despite the pandemic shock”. 

“Euro adoption is supportive of 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 positive outlook reflects further upward rating potential from the direct positive impact that euro adoption would have on the sovereign rating model output, mainly through reserve currency flexibility,” Fitch commented. 

Risks to this mainly concern exogenous shocks, such as persistent pandemic-related problems or further rises in international commodity prices. This has already to accelerating inflation in Croatia, as elsewhere in the region. 


On the other hand, Fitch noted that Croatia's growth performance has been much stronger than previously expected. It expects growth to average 4% in 2022-2023 . 

In September, fellow rating agency Standard & Poor’s affirmed Croatia’s BBB-/A-3 rating and the stable outlook, expecting an economic recovery backed by the rebound in the tourism sector with GDP seen growing by 6.5% in 2021. Croatia’s tourism posted better than expected results this summer, and, along with the solid investment agenda financed by the EU funds, will lead to 5% economic growth next year, S&P noted.

More reforms needed

“The big question is what Croatia will have learned from the crisis: Will the crisis support the diversification of the economy and spur it to develop and invest in industries other than tourism? Furthermore, will it promote investments into the up and coming IT industry and promote education and social infrastructure?” said Zinchuk. 

The World Bank’s annual doing business reports (recently discontinued) tended to point out the same issues year after year. Among the areas where Croatia scored poorly on the latest report were getting credit, dealing with insolvency and dealing with construction permits. 

Matijevic, meanwhile, commented on the lack of real convergence with eurozone countries as Zagreb aims to join the group. “[I]n terms of real convergence, Croatia has made hardly any income convergence progress in the last 10 year it has been stuck at around 60% of the euro area GDP per capita. In addition to the long lasting recession (2009-2014) in our view the latter reflects stagnant competitiveness that has its roots in a relatively poor business and institutional environment.”

Some of these problems in Croatia are reflected in emigration and the already tightening labour market. “As recovery continues, we do not rule out that structural long lasting issues such as low activity rates and jobs and mismatch between labour supply and demand could weight in shortage of labour force in certain sectors such as construction and tourism (hospitality industry),” Matijevic noted. 

There has been a steady decline in Croatia’s population in recent decades, and large numbers of working age Croatians left for richer European countries. This has led to worker shortages, especially for seasonal jobs in tourism and construction. 

After the shutdown and fall in tourist activity in 2020, as the economy recovers labour demand has already rebounded. The last few issues of the Online Vacancy Index (OVI),  is a monthly index of online job advertisements developed by the Institute of Economics, Zagreb in cooperation with the web portal MojPosao, showed that labour demand is already exceeding pre-pandemic levels. 

“Irrespectively of the labour market stability during the crisis, it is evident that mismatches in the demand and supply of labour will continue to be present in some core industries. The government has already relaxed the rules on entry of foreign workers when related to skilled labour. The tourism industry was struggling even before the pandemic because it was not possible to satisfy demand locally,” commented Zinchuk. 

“If Croatia wants to retain a highly skilled workforce in the long-term, it will need to create opportunities for higher value-added industries and services.

“For me personally, in addition to enabling a better business environment, the priorities are to provide kindergartens, schools, hospitals and care for the elderly. Fundamentally, this basic infrastructure needs to be in place in order to allow young families to settle down, work, invest and promote the growth in the country.” 

Reforms are also needed for Croatia to fully take advantage of the inflows of EU funding over the next few years; compared to the size of its economy, Croatia will be one of the biggest recipients of funding under the Next Generation EU (NGEU). 

“Aware that there is a need to diversify the economy, we hope that a generous source of EU funds from NGEU will bring long-awaited structural changes that together with the implementation of post entry commitments in the euro adoption process could contribute to greater sustainability and growth potential of Croatia,” said Matijevic. 

Also commenting on the EU funds inflow, Fitch’s note said: “Investment will remain a major growth driver, facilitated by EU financing programmes totalling around 40% of GDP over the next six years, making Croatia one the highest net beneficiaries of EU investment funds. We expect implementation challenges to persist, aggravated by supply bottlenecks in sectors such as construction, but anticipate there will be positive spill-overs to the wider economy from the rise in investment.”