The Fitch agency confirmed Croatia's 'A-' credit rating on Friday, maintaining a stable outlook. The agency highlighted Croatia’s fiscal discipline and strong economic growth but noted the country's small economy makes it vulnerable to external shocks.

A rating of 'A' signals to investors that Fitch considers the risk of debt non-repayment to be low, with strong repayment capacity, though potentially more vulnerable to adverse economic conditions than countries with higher ratings.

By assigning a stable outlook, Fitch indicated that Croatia's rating is expected to remain at 'A-' in the foreseeable future.

Economic Strengths and Weaknesses

According to Fitch, Croatia's credit rating reflects a "credible" legal framework supported by EU and Eurozone membership, demonstrated fiscal discipline, and adherence to EU fiscal regulations, as well as strong economic growth.

However, weaknesses include a GDP per capita that is 24% lower than the median of 'A'-rated countries and a small economy, making it more susceptible to external shocks.

In recent years, Croatia has improved its institutional capacity and governance, narrowing the gap with other 'A'-rated nations.

Growth Above Eurozone Average

Croatia’s economy continued to grow faster than regional peers, accelerating to 3.8% in 2024, driven by strong real wage growth, government stimulus, and EU fund inflows.

For 2025, growth is expected to slow to 3.2% due to weaker private consumption, lower investment, and increased external uncertainty. Nevertheless, Croatia’s growth is projected to outpace the Eurozone average (1.2%) and the median for 'A'-rated countries (2.3%).

By 2026, growth is forecasted to slow further to around 2.5%.

External Risks and EU Funding

Fitch identified increased protectionism as a potential risk for Croatia, particularly through secondary effects, as the country has limited direct trade exposure to the U.S.

However, expected fiscal easing in Germany and the EU, aimed at boosting defense spending and infrastructure investment, could increase demand for Croatian goods and services.

Croatia continues to lead in drawing funds from the EU Recovery and Resilience Facility. The agency expects the country to secure its full allocation by mid-2026. EU funds will remain a key growth driver until 2030, supporting structural reforms and boosting economic potential.

Defense Spending and Fiscal Deficit

Croatia’s fiscal deficit rose to 2.1% in 2023 due to higher wage costs. The government estimated that defense spending reached 2% of GDP in 2024, with a commitment to increase it to 2.5% by 2027.

Fitch assumes that, given heightened geopolitical risks, Croatia may increase defense spending beyond current projections.

The budget deficit is expected to remain at 2.1% of GDP in 2025—lower than government targets. New taxes on real estate and rental income are projected to generate additional revenue equivalent to 0.3% of GDP, with growth in subsequent years.

However, Fitch warned that the deficit could exceed current estimates due to heightened "external uncertainty" and potential higher spending ahead of local elections. By 2026, the deficit is expected to decline to 1.7%.

Public Debt on a Downward Trend

Public debt as a share of GDP fell to 57.4% in 2024, aligning with the median of 'A'-rated countries.

Debt is projected to continue declining, albeit at a slower pace, reflecting "normalization of nominal GDP growth, a balanced primary fiscal position, and expected increases in defense spending." By 2029, the debt ratio is forecasted to drop to 53.5% of GDP.

Interest costs on government debt are expected to average 3.6% of budget revenues in 2025 and 2026, slightly below the median for 'A'-rated nations.

Potential Rating Adjustments

Fitch could downgrade Croatia’s rating if economic growth significantly underperforms current forecasts due to "structural shocks in key sectors" or declining competitiveness.

A downgrade could also occur if public debt rises significantly due to prolonged fiscal loosening or weaker economic prospects.

Conversely, Croatia’s rating could be upgraded if public debt declines significantly. Fitch would also view favorably an improvement in GDP per capita and governance quality to align with the median of 'A'-rated countries in the medium term.