Scope Ratings GmbH (Scope) monitors and reviews its credit ratings on an ongoing basis and at least annually, or every six months in the cases of sovereigns, sub-sovereigns and supranational organisations that may act as a lender of last resort.

Scope performs monitoring reviews to determine whether material changes and/or changes in macro-economic or financial-market conditions could have an impact on the credit ratings. Scope considers all available and relevant information when undertaking the monitoring review.

Monitoring reviews are conducted by performing a peer comparison, benchmarking against the rating-change drivers, and/or reviewing the credit rating’s performance over time, as deemed appropriate by the Lead Analyst or Analytical Team Head, in addition to an assessment of all aspects of the relevant methodology/ies, including key rating assumptions and model(s). Scope announces the result of each monitoring review on its website and/or on its subscription platform ScopeOne.

Scope completed the monitoring review on the Republic of Croatia (long-term local- and foreign-currency issuer and senior unsecured debt-category ratings: A- and Stable Outlook; short-term local- and foreign-currency issuer ratings of S-1 and Stable Outlook) on 9 April 2025.

This monitoring note does not constitute a credit-rating action, nor does it indicate the likelihood that Scope will conduct a credit-rating action in the short term. Information about the latest credit-rating action connected with this monitoring note along with the associated ratings history can be found on scoperatings.com.

Key rating factors

For the updated rating report accompanying this review, please see here.

Croatia’s A- long-term credit ratings are anchored by: i) a declining public-debt trajectory, supported by the expectation of robust nominal growth, moderate funding conditions and modest primary budget deficits; ii) sound structural reforms, which were formerly reinforced by the euro-area accession requirements and are anticipated to continue in line with the ongoing execution of the EU Recovery and Resilience Plan (RRP); and iii) euro-area membership since January of 2023, which has materially curtailed external- and financial-sector risks and supports the sustainability and robustness of medium-run output growth.

Conversely, the credit challenges associate with: i) the low levels of economic diversification, notably linking to an elevated dependence on the tourism sector, alongside moderate wealth levels, which increase economic vulnerabilities to external shocks; and ii) adverse demographics, which add to the pressures on long-run growth and fiscal outlooks.

Output growth reached 3.8% last year (up 0.5pps on the previous year), as buoyant private consumption and strong investment outweighed the headwinds from soft external conditions. Scope anticipates growth slowing to 2.7% this year and 2.6% next year, nevertheless anchored by domestic demand, helped by robust household wage growth and strong EU fund absorption, and offsetting decelerating tourism-sector exports. Growth ought to converge by 2027 on its medium-run trend rate estimated at 2.8% a year, anchored by the productivity-enhancing reforms and investment outlined under the RRP.

The budget deficit increased markedly last year, to an estimated 2.1% of GDP (up 1.2pps on the previous year), resulting from the re-valuation of social transfers and personnel costs, in the context of persistent inflation and after the adoption of a comprehensive public-sector wage reform. The general government balance is anticipated improving gradually medium run, with headline budget deficits forecast at 1.6% and 1.4% of GDP this and next year. This represents the expectation of still-robust revenue growth and the withdrawal of remaining energy-price support measures. The recent reforms of the tax framework – shifting the fiscal burden from personal incomes to property and rental incomes – are anticipated having a broadly neutral effect on the budget balance all the while supporting the medium-run economic outlook. After edging beneath the 60% of GDP Maastricht threshold by year-end 2024 (estimated at 58.8% of GDP, down 4.2pps from the previous year-end), the general government debt ratio is foreseen staying on a declining trend over the forthcoming years, reaching around 53% by the end of 2029.

Downside risks for the fiscal outlook associate with geopolitics, such as the direct and indirect effects of the global trade war alongside the need for authorities to allocate additional funding to defence policies beyond what is currently planned (a target of increasing military expenditure to 2.5% of GDP by 2027 from the estimated 1.8% last year). Importantly, Croatia presently retains adequate budgetary space to further increase defence expenditure all the while remaining onside of the Maastricht rules.

The Stable Outlook represents the view that risks for the ratings remain balanced.

Upside scenarios for the long-term ratings are if (individually or collectively):

1. Fiscal dynamics improved at a faster rate than presently forecast, seeing an accelerated decline in general government debt; and/or
    
2. The growth outlook remained strong, resulting in structural improvements in productivity and the continued convergence of the economy on EU income averages.

Downside scenarios for the ratings are if (individually or collectively):

1. Fiscal dynamics weakened significantly; and/or
    
2. The economic outlook is materially impaired, due as an example to a sizeable external shock.

The methodology applicable for the reviewed ratings and/or rating Outlooks (Sovereign Rating Methodology, 27 January 2025) is available on scoperatings.com/governance-and-policies/rating-governance/methodologies.
This monitoring note is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst: Dennis Shen, Senior Director

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