Croatia’s financing risks remain contained. Strong nominal GDP growth has helped reduce public debt to below 60% of GDP, supporting recent sovereign rating upgrades. External balances remain broadly manageable, although buffers have weakened somewhat. The services surplus, historically a key stabiliser, narrowed from above 20% of GDP to below 18% of GDP, reflecting softer tourism price competitiveness and rising outbound travel. Combined with lower EU fund inflows, this pushed the current and capital account balance close to zero in 2024. We expect the current account to keep fluctuating around zero for 2026 and 2027. 

Despite strong economic growth, the fiscal position has loosened. The general government deficit widened from 0.8% of GDP in 2023 to around 2% of GDP in 2024, with a further widening close to 3% of GDP implied by the 2025 budget. While debt dynamics remain broadly manageable, higher and more rigid current spending has reduced fiscal space and increased sensitivity to adverse shocks. 

Private-sector financing risks remain limited. Access to finance is not a major constraint for most firms as small and medium-sized enterprises rely primarily on retained earnings, leasing and deferred payments rather than bank loans. Financing conditions have tightened somewhat due to higher interest rates and fees, but credit availability remains broadly adequate. 

Structural factors remain a key medium-term vulnerability. Croatia’s business environment continues to be constrained by complex and frequently changing regulations, although their importance has gradually declined. At the same time, rising labor and production costs and persistent shortages of skilled workers and experienced managers have become increasingly binding, reflecting demographic pressures and a tight labor market. 

Cost competitiveness has deteriorated since mid-2022, driven by rapid wage growth—particularly in the public sector—outpacing productivity gains. While price competitiveness pressures have eased somewhat as inflation moderated, structural cost pressures remain elevated. These dynamics weigh on productivity growth and export competitiveness over the medium term. 

Late payments, particularly from private counterparties, remain a recurring challenge and disproportionately affect smaller firms, weighing on investment and hiring decisions. Looking ahead, companies identify labor costs, input prices and demand conditions as the main drivers of their pricing decisions, underlining the close link between labor market tightness, cost pressures and inflation persistence. Improving the regulatory framework, easing labor constraints and enhancing the business climate remain key priorities to support competitiveness and potential growth.

Political risks are moderate and primarily linked to policy choices rather than institutional instability. Fiscal policy has become increasingly procyclical, adding to domestic demand pressures and inflation. The rapid expansion of public wages, social benefits and investment during a period of strong growth has increased budget rigidity and reduced flexibility. 

Looking ahead, a gradual fiscal consolidation would help rebuild buffers, support competitiveness and contain inflationary pressures. Key challenges include restraining current expenditure growth, improving tax efficiency and enhancing spending effectiveness—particularly in healthcare, education and pensions—while preserving public investment. Delays in implementing these adjustments could amplify cyclical and financing risks over time. Overall, political risks are tilted to the upside in the absence of stronger consolidation, but remain contained within a stable institutional framework.