Croatia’s larger, more competitive economy and stronger institutions stemming from EU accession underpin its higher creditworthiness compared to Serbia.

This is according to a peer comparison report published by the credit rating company Moody’s, which cited Croatia’s rating as “Ba2 stable,” and Serbia’s as “Ba3 stable.”

“Croatia’s economy is approximately a third larger than Serbia’s, and EU membership facilitated a comprehensive overhaul of its institutions,” said Moody’s Vice President and co-author of the report Evan Wohlmann, and added:

“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.”

According to Wohlmann’s remarks published on the agency’s website, both countries “carry large debt burdens, but fiscal consolidation will lead to gradual improvements,” while their debt levels are “markedly higher than the median of similarly rated peers.”

Thus, Croatia’s debt-to-GDP ratio amounted to 84.2 percent of GDP in 2016, while Serbia’s debt burden was 74.0 percent of GDP in the same year – compared to an average of 47.6 percent of GDP for Ba-rated peers.

The report notes that despite progress in improving the fiscal position since the financial crisis, “the state-owned enterprise 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,” the agency said in a summary of the report.

According to this, unemployment rates have fallen in both countries, and legislative reforms carried out in Serbia in 2014 have led to higher labor participation rates and strong employment growth driven by the private sector.

“However, declining unemployment also reflects reductions in the labor 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,” Moody’s concluded.