Fitch on Friday upgraded Croatia's credit rating from 'BBB+' to 'A-', describing the country's outlook as stable, and highlighting the national economy's resilience to external shocks, the reduction of the public debt and further integration with the core eurozone countries.

Croatia’s ratings reflect its credible policy framework supported by its EU and eurozone membership, says this agency, which was the second one to raise Croatia’s credit rating to the A level, after on 14 September Standard & Poor’s raised Croatia’s ‘BBB+’ to ‘A-‘, with its outlook positive.

In its explanation for its decision to upgraded Croatia’s Long-Term Foreign-Currency Issuer Default Rating (LTFC IDR) to ‘A-‘ from ‘BBB+’, Fitch on Friday underscores that Croatia’s robust economic growth underpinned by fast absorption of EU funds, rising real wages and further integration with the core eurozone countries since EMU accession in January 2023, has lifted GDP per capita to 76% of the EU average in 2023 from 67% in 2019.

“Despite significant external shocks, Croatia achieved one of the strongest post-pandemic recovery in the EU, with real GDP at end-1H24 19% above its 4Q19 level.”

Fitch expects Croatia’s real GDP to average 3.1% in 2024-2026 compared with our 1.3% forecast for the eurozone and 2.6% for the ‘A’ median.

Growth will be driven by domestic demand, underpinned by strong household spending and continued high absorption of EU funds. Croatia is a front-runner in the absorption of EU Recovery and Resilience Facility (RRF) funds and on track to absorb all available funds by mid-2026 (12.1% of 2024 GDP).

Significant Debt Reduction

Prudent fiscal policy and strong nominal GDP growth have underpinned Croatia’s fast public debt decline towards the ‘A’ category median of 53.3% of GDP. Fitch forecasts gross general government debt to decline to 59.3% of GDP in 2024 from 63.1% in 2023, more than 25pp below the pandemic peak.

Debt reduction will continue beyond 2024, albeit at a slower pace, reflecting normalisation of nominal GDP growth and a gradual narrowing of primary budget deficits. We forecast public debt/GDP to decline to 55.3% by 2028, in line with the peer median.

Broader tax reform, centred around property taxation, to improve revenue predictability

Fitch expects Croatia to comply with all Maastricht criteria in 2024, with public debt projected to drop below 60% of GDP and the fiscal deficit below 3%. The government plans to maintain fiscal prudence, aiming for a structural primary budget deficit of 0.4% by 2028. The medium-term fiscal strategy includes a broader tax reform, centred around property taxation. While potentially challenging to implement, it should improve revenue predictability.

Gradual Fiscal Consolidation

Fitch forecasts the budget deficit to widen to 2.6% of GDP in 2024, versus the current ‘A’ median of 2.9%, reflecting the higher cost of the wage bill reform, high capex, costs of pension indexation and support for vulnerable groups, including the cost of energy-related subsidies. Fitch expects budget deficit to narrow to 2.2% in 2025 and further to 1.8% in 2026, driven by a gradual withdrawal of energy-related subsidies and a supportive macroeconomic environment.

Small Current Account Deficit

The agency expects “the current account to turn to a small deficit of 0.7% in 2024-2026, compared with a surplus of 1.2% in 2023, amid strong domestic demand and a gradual recovery of the external environment. ”

“The anticipated current account deficits will be comfortably financed by capital account inflows, reflecting the EU funds cycle, and steady foreign direct investment inflows. We forecast the net external creditor position to further improve toward 8% of GDP by 2026, from 3.9% in 2023 versus the ‘A’ median of 5.8%.”

Stable Banking Sector

The banking sector remains stable, with solid capitalisation (total ratio at 22.9% at end-1H24) and improving asset quality. The non-performing loan ratio improved to 3.7% at end-1H24 versus 4.2% at end-1H23, under Fitch’s estimates. Credit growth to non-financial corporates has slowed from high levels in 2023, while housing loan growth remained solid at about 10%. Since the Financial Action Task Force (FATF) has placed Croatia on the ‘Grey List’ in July 2023, the Croatian authorities continued to implement the needed reforms. In June 2024, the FATF recognised the authorities’ commitment and progress on reform implementation.