However, structural reforms in Serbia and its strong shift towards the export sector will bolster its economic performance in the coming years.
The report, "Governments of Croatia and Serbia - Croatia's more developed economy and institutions justify stronger credit profile," gives an update to the markets and does not constitute a rating action.
"Croatia's economy is approximately a third larger than Serbia's, and EU membership facilitated a comprehensive overhaul of its institutions," said Evan Wohlmann, a Moody's Vice President and co-author of the report.
"On the other hand, the greater reform momentum in Serbia in recent years will support income convergence, and investment is likely to benefit from recent improvements in the country's business environment," he added.
Both sovereigns carry large debt burdens, but fiscal consolidation will lead to gradual improvements, Wohlmann said.
Debt levels for both countries are markedly higher than the median of similarly rated peers. Croatia's debt-to-GDP ratio amounted to 84.2% of GDP in 2016, while Serbia's debt burden was 74.0% of GDP in the same year - compared to an average of 47.6% of GDP for Ba-rated peers, the report said.
"Despite progress in improving the fiscal position since the financial crisis, the state-owned enterprise (SOE) sector continues to represent a larger fiscal risk in Serbia. Reforms to reduce the risk of future demands from SOEs on the budget are underway, including the restructuring of loss-making public enterprises. Yet unlike Croatia, Serbia is not subject to EU state aid rules which limit the chances of direct government support and provide a degree of external oversight," Moody's said.
Unemployment rates have fallen in both countries, and legislative reforms carried out in Serbia in 2014 have led to higher labour participation rates and strong employment growth driven by the private sector.
However, declining unemployment also reflects reductions in the labour force tied to ageing populations and high emigration, adding uncertainty to longer-term growth outlooks. Continued integration with the EU and sustained efforts to improve the investment climate are crucial to an acceleration in both countries' growth potential.
"Continued integration with the EU and sustained efforts to improve the investment climate are crucial to an acceleration in both countries' growth potential", the report concluded.