Explaining key rating drivers, the agency says that "strengthening tourism revenues have underpinned a sustained improvement in Croatia's external position."
Growth benefits from EU fund disbursements, buoyant tourism and tax reform
Economic growth stayed at 3% in 2017 as Croatia benefited from a strong cyclical position, rising EU fund disbursements, buoyant tourism and tax reforms, the New York-headquartered agency reported.
"Growth should remain around this level over the forecast period due to solid labour market dynamics and higher EU fund disbursements being offset by rising imports.
"Signs of overheating are not expected to emerge and inflation should stay low. Despite the improvement in growth, it remains sluggish relative to peers (a five-year average of 1.5% compares with the 'BB' median of 3.5%) reflecting structural economic weaknesses including high private sector debt, low investment and adverse demographics, according to the explanation of the assessment of Croatia's economic performance."
2017 marks the first year that nominal GDP exceeded its 2008 peak
"Financial problems at Agrokor, the country's largest private sector company by revenues and employment, have not had a significant macroeconomic impact and have been weathered by the banking sector, although risks remain," the agency reported.
"Fitch's base case is that Agrokor restructuring will not cause major disruption to the economy or financial sector, but challenges remain, including legal issues.
"Bank profits have been hit by Agrokor provisioning. However, the 90% foreign-owned sector has remained profitable and sector-wide capital adequacy remains strong, at 22.6% at end-September."
Non-performing loans (NPLs) for corporates remain high, at 28.3%, but are falling due to rising NPL sales, according to the agency's report, which added that total NPLs were 13.2%.
"Consumer lending is rising after a multiyear retrenchment. Lending to corporates should pick up when Agrokor-related uncertainty diminishes.
Croatia's structural features compare very favourably with 'BB' medians. GDP per capita is more than twice the median; governance indicators, human development index and doing business indicators are also stronger than peers, supported by EU membership.
The agency praises the coalition government, installed in June 2017, for having worked smoothly despite its small majority.
Out of the three major credit rating agencies, Fitch keeps Croatia's credit rating a notch below investment grade, whereas S&P and Moody's two notches below investment grade. Also, S&P assesses Croatia's outlook positive which means that one more step is needed for raising the country's rating by one notch, and Moody's assesses the outlook as stable.