Fitch Affirms Croatia's A- Rating with Stable Outlook, Warns of Weakening Competitiveness
The agency highlights strong growth and fiscal discipline but also structural challenges such as low productivity and rising labor costs.
The agency highlights strong growth and fiscal discipline but also structural challenges such as low productivity and rising labor costs.
Credit rating agency Fitch confirmed Croatia's rating at 'A-' with a stable outlook on Friday, August 1, 2026. In its latest report, as reported by HRT, the agency highlighted strong economic growth and fiscal discipline as key strengths, but also warned of the vulnerability of the small economy to external shocks and its deteriorating price competitiveness.
The 'A' rating signals to investors in government bonds that Fitch expects a low risk of default and strong capacity for repayment, although these are still more sensitive to adverse economic conditions compared to countries with the highest ratings. With the stable outlook, the agency indicated that it does not plan to change the rating in the foreseeable future, adding that it expects public debt to stabilize relative to GDP in the medium term, despite a projected rise in the budget deficit. Fitch first upgraded Croatia's rating to this level in September 2024.
According to the agency's estimates, Croatia's economic activity is expected to slow to 2.4 percent in 2026, down from 3.4 percent recorded in 2025. Despite the slowdown, this growth remains significantly above the projected eurozone average of 0.9 percent and above the median for 'A'-rated countries. Fitch notes that personal consumption will remain the main growth driver, but to a lesser extent than before due to weaker wage growth and higher inflation.
Investment is expected to remain strong, supported by European Union funds, despite tighter financing conditions. However, the agency warns that Croatia faces structural challenges that could slow its convergence with developed countries. Key issues include sluggish productivity growth and rapid wage growth that has pushed up labor costs. Heavy reliance on tourism makes the economy vulnerable to shocks in external demand and a decline in price competitiveness.
Croatia's budget deficit is expected to remain close to 3.0 percent of GDP in 2026, only slightly falling to 2.9 percent in 2027 and 2028. Fitch believes that the adoption of the euro has "somewhat weakened fiscal anchors," but expects the government to continue adhering to EU fiscal rules. They also note that Croatia has requested from Brussels the activation of a clause that would allow a larger deviation from the original net expenditure trend to increase defense spending.
Regarding public debt, Fitch forecasts its stabilization at around 56 percent of GDP in the medium term, slightly below the median for comparable countries. To upgrade the rating in the future, the agency states that the public debt-to-GDP ratio would need to decline continuously, "likely" below 50 percent, accompanied by "structural improvements in public finances."
The agency specifically warns of a sharp increase in the current account deficit, which reached 3.5 percent of GDP in 2025, up from 2.1 percent a year earlier. For the period 2026-2028, Fitch expects "moderate" deficits, averaging 3.3 percent of GDP. The reasons cited include a smaller surplus in the services sector due to worsened price competitiveness in tourism and increased travel by Croatian citizens abroad. Despite this, they estimate that these deficits will be easily financed by "stable" foreign direct investment and EU fund inflows.
European money will, according to Fitch, be an "important" driver of growth until 2030, but they warn that Croatia will receive "significantly" smaller amounts in the next EU budget framework for 2028-2034 compared to the current cycle. The current cycle has been strongly supported by transfers from the European recovery fund and financial assistance for post-earthquake reconstruction.
Fitch outlines scenarios that could lead to a downgrade. This could happen if the economy grows significantly weaker than current estimates in the medium term, for example due to "structural shocks in key sectors" or impaired competitiveness. The rating would also be lowered if public debt increased significantly due to a prolonged period of looser fiscal policy or worse economic forecasts.
On the other hand, a positive assessment would be given if "structural" indicators, such as the quality of governance and income levels, approached the median of 'A'-rated countries. This could be achieved through a prolonged period of strong economic growth that does not lead to an "accumulation" of macroeconomic, fiscal, or external imbalances.
