Standard & Poor's rating agency (S&P) raised Croatia's sovereign credit rating outlook from stable to positive on Friday (March 23), citing declining public debt and economic growth.

The rating was changed from BB to BB+, still remaining at non-investment grade level. According to S&P report, Croatia’s government deficit at the end of 2017 fell below 80 percent of GDP, with a further decline to below 70 percent expected by 2021.

Last year, S&P said, Croatia recorded a budget surplus for the first time in its history, of 0.6 percent of GDP, thanks to stronger budget income on account of cyclical factors but also tax reform. In the next three years until 2021, S&P expects declining budget deficits, averaging at 0.8 percent of GDP.

S&P said the outlook was upgraded because of stronger than expected income from tourism, lower external debt, and the increase in Croatia’s currency reserves. Another contributing factor was improved fiscal position, helped by economic growth but also structural measures such as the 2017 tax reforms.

All these factors combine to lower the public debt, which still constrains the country’s credit rating.

S&P analysts said they expect Croatia’s 2018 GDP to grow 2.7 percent year-on-year, slightly down from 2.8 percent in 2017, with a gradual decrease in GDP growth to around 2.5 percent by 2021.
The agency said more sustainable and stronger reform efforts are needed to maintain gains achieved by 2017 changes in the tax system. S&P expects an orderly restructuring of Agrokor.

The positive outlook reflects improved external and fiscal balance, while Croatia’s still high level of external debt and structural rigidity could present a downward rating pressure in the following 12 months.