Fitch affirms Croatia's 'A-' rating amid growth and risks

Fitch Ratings has maintained Croatia's credit rating at 'A-' with a stable outlook, recognizing the country's robust economic growth and fiscal discipline. The agency highlighted that Croatia's rating reflects a credible legal framework underpinned by its EU and Eurozone membership, alongside strong economic expansion and confirmed fiscal discipline that has led to a significant reduction in public debt as a percentage of GDP in recent years.

However, Fitch also pointed out vulnerabilities. These include Croatia's small economy, which is susceptible to external shocks, and a decline in price competitiveness. The 'A' rating signifies Fitch's expectation of a low risk of default on debt obligations, with strong repayment capacities, although these may be more vulnerable to adverse business and economic conditions compared to countries with higher ratings. The stable outlook suggests that Croatia's rating is unlikely to change in the foreseeable future, with Fitch anticipating that public debt as a share of GDP will stabilize in the medium term, despite a projected increase in the budget deficit.

Strong economic growth is expected to continue supporting Croatia's convergence with developed countries, although external price competitiveness has weakened recently. Fitch reiterated its findings from a March report, noting that the country's rating reflects its EU and Eurozone membership, solid economic growth, and fiscal discipline, which have helped reduce public debt. Weaknesses identified include a lower GDP per capita and weaker institutional capacity and governance systems compared to 'A' rated countries, along with the inherent vulnerability of a small economy to external shocks.

Fitch initially upgraded Croatia's rating to 'A-' in September 2024 and has not altered it since. The agency warned that Croatia faces structural challenges that could hinder its progress toward becoming a developed nation. These include sluggish productivity growth and rapid wage increases, which have driven up labor costs. The Croatian economy remains heavily reliant on tourism, making its growth susceptible to shocks in external demand and a weakening price competitiveness. Economic activity is forecast to decelerate to 2.4% this year from 3.4% in 2025, but growth will still surpass the projected median for 'A' rated countries and significantly exceed the Eurozone average of 0.9%. Personal consumption will continue to be a driver of growth in the coming years, albeit to a lesser extent than before, due to slower wage growth and higher inflation. Investments are expected to remain strong, supported by EU funds, despite tighter financing conditions. EU funds are projected to be a significant growth driver until 2030, although Croatia will receive considerably smaller amounts in the EU budget framework for 2028-2034 compared to the current cycle, which benefited from recovery and resilience facility transfers.

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The rating of Croatia reflects a 'credible' legal framework based on EU and Eurozone membership, strong economic growth, and confirmed fiscal discipline that has supported a significant reduction in public debt expressed as a share of GDP in recent years.