The agency said in a statement on Wednesday that the new Croatian government's proposed fiscal and structural reforms presented a mixed picture so far.

"The Croatian government's proposed HRK3.4bn ($589m) of expenditure cuts, announced in this week's 2012 budget, is encouraging given the need for fiscal consolidation. Cutting expenditure marks a difference from previous governments and it sends a message that the current pace of public debt growth is not sustainable," the statement said.

"However, the planned cuts are less than the HRK4.6bn outlined by the government in late January, and risk being seen as diluted as a result. The Croatian government's GDP growth forecast of 0.8% in 2012 is also optimistic, in our view (we assume a contraction of 1% in 2012)," it added.

Fitch sees some signs of early progress on structural reform, for example in raising the VAT rate (to 25% from 23%) from March 1 and cutting social security contributions to ease the tax burden on businesses and foreign investors. This could encourage foreign direct investments and diversify Croatia's export base.

The agency warns that the Croatian economy suffers from "significant supply-side bottlenecks," adding that without addressing them "potential GDP growth will remain weak and this will pose a threat to the country's fiscal adjustment and its debt dynamics."

"The government needs to address significant structural issues, including its rigid labour market, where its plans remain unclear," the statement said.

The current rating for Croatia is BBB- with a negative outlook.

"We will assess the proposed fiscal and structural measures, and any additional steps or more detailed implementation information. We expect to conclude our review of the rating by the end of the first quarter," the agency said.