Standard & Poor’s (S&P) Global Ratings has upgraded Croatia's long-term foreign and local currency sovereign credit ratings to 'A-' from ‘BBB+’, the agency said on September 13. 

The rating is the highest in the country’s history. "In our view, Croatia's reform progress has further deepened its integration with its European and global partners, resulting in broader institutional improvements," S&P said in a statement. 

The outlook is positive, signaling potential for further upgrades in the next two years. S&P affirmed Croatia's 'A-2' short-term foreign and local currency sovereign credit ratings.

Croatia's economy, heavily driven by tourism, is expected to expand by an average of 3% annually from 2024 to 2027. This growth will contribute to steady income convergence with the eurozone average.

Croatia's reform agenda, supported by investments from the Next Generation EU funds, is seen as a key driver for enhancing the country's economic growth potential by diversifying the economy and boosting productivity. The positive outlook reflects the possibility of an upgrade if Croatia's economic and external resilience continue to strengthen.

S&P indicated an upside scenario where Croatia's ratings could be raised if the country's external position improves significantly, possibly due to strong current account surpluses. Furthermore, reforms that boost economic competitiveness and productivity could lead to a more diversified economy, reducing reliance on tourism.

However, a downside scenario could see the outlook revised to stable if Croatia's economic, budgetary, or external performance deteriorates. Long-term risks include net emigration and an aging population, which could constrain economic growth and public finances.

The upgrade reflects S&P's view that Croatia's enhanced integration with European and global policy partners has incentivized reform implementation, leading to broader institutional improvements and contributing to a structural increase in the country's wealth.

The Croatian government continues to implement a comprehensive reform agenda aimed at reversing structural weaknesses, enhancing economic competitiveness, and improving key institutions' efficiency, S&P said. These reforms are considered vital for addressing structural challenges, such as a declining population and sluggish productivity growth.

Croatia's economy is projected to grow by 3.4% in 2024, outperforming the eurozone average of 0.7%. This growth is driven by high private consumption, solid investments, and a strong tourism season. Wage growth, fueled by recent public-sector wage hikes and a tight labour market, is expected to benefit private consumption.

S&P forecasts that Croatia's real economic growth will continue to outperform its eurozone peers from 2025 to 2027, averaging about 3% annually. Despite challenges posed by a declining population and sluggish productivity growth, the country has shown significant economic expansion over recent years.

Croatia's dependence on tourism makes it vulnerable to changes in global economic sentiment and geopolitical risks. Nevertheless, investments backed by EU financing are expected to anchor growth and mitigate potential volatility from variations in tourism flows.

S&P also said the government's ongoing reform program, particularly the implementation of the National Recovery and Resilience Program, is expected to sustain reform momentum.

S&P projects that the general government deficit will decline to 2.0% of GDP in 2026 from 2.6% in

2024. Croatia's external position is expected to remain strong, supported by solid tourism receipts and EU fund inflows.

Inflation is anticipated to moderate over 2024-2025 but remain above the eurozone average due to the economy's convergence with more mature European markets. 

Meanwhile, Croatia’s banking sector is characterised by strong capitalisation, adequate profitability, and steadily improving asset quality, the rating agency said. The ratio of nonperforming customer loans has decreased to 4.3% in June 2024, and the systemwide common equity Tier 1 ratio of 22.2% is among the highest in the EU.

Profitability has surged due to rising net interest income, with the return on equity increasing to 15.5% in 2023. However, this increase is largely attributed to interest income from overnight deposits with the central bank. Consequently, profitability is expected to return to historical levels as policy rates continue to fall.

Prime Minister Andrej Plenkovic announced the news at a press conference, where he stressed the benefits of the upgrade for Croatia’s economy. 

 

Plenkovic attributed the upgrade his government’s “responsible policy” of managing public finances, reducing public debt, tax relief, balancing the state budget, structural reforms, as well as the gradual realisation of strategic goals. 

The prime minister also pointed out that Croatia’s growth is faster than most other EU countries, with this year’s forecast of 3.5% well above the average of 1% for the 27-country bloc. 

The rating action by S&P puts Croatia, the newest EU entrant, level with Portugal, and ahead of several EU members — Bulgaria, Cyprus, Greece, Hungary, Italy and Romania.