Out of a difficult macro-financial decade (the 2010s) Croatia emerged stronger, as proven in recent crises. Croatia stayed the minimum time inside ERM II and adopted the EUR 1 Jan 2023. Euroization has been traditionally high, and HRK abandonment is easy to bear. Pros of the common currency, including cheaper (re-)financing costs (public & private sector), outweigh cons. Now the door to European capital markets opens up. We expect local banks and non-financials to make greater use of Eurobond markets. Slovakia can serve as a blueprint here. On top, "country risk" appetite re-emerges, also regarding Croatian exposures at Western banks. The latter is crucial as a lot of investments will be needed for real convergence. Finally, we see no evidence that the euro introduction excessively fueled inflation.
After a strong performance of the Croatian economy in 2022, we expect the 2023e GDP growth to slow down. Investments, predominantly supported by EU funds, should become the main growth driver, which, together with exports of services (i.e., tourism), are expected to mitigate the slowdown of other GDP components. We maintain our positive view on CROBEX, as the macroeconomic outlook remains supportive and the profit margins should bottom out in mid-2023, followed by some stronger recovery in 2024.
Above-average GDP growth and the availability of EU funds together with accession to the euro and Schengen areas add attractiveness to Croatian equities, despite the (traditionally) low liquidity of the ZSE. In 2023, we expect the tourist season to provide some tailwind again, as we believe that summer vacation is one of the last things people are willing to give up in the current environment. Just like in Western markets, we reckon with some more stable growth for the CROBEX in H2 23.