HR: S&P raises Croatia’s rating

S&P kicked off the autumn rating round by delivering a one-notch upgrade from 'BBB+' to 'A-', while the outlook has been left unchanged at positive. The former has been part of our baseline scenario, while the latter came as a nice bonus, signaling that there might be room for an additional step down the road. Yet progress already thus far has been remarkable, with a three-notch upgrade in slightly more than two years and five notches in the last seven years.

The rating rationale has been benevolent and brought little surprise, with comparatively strong economic performance, a favorable mid-term outlook (GDP growth to average 3% until 2027 aligning closely with our GDP growth trajectory), and prospects of further convergence being strong tailwinds. Fading external risks and fiscal diligence were expectedly cited as positive factors, while efforts to improve the institutional framework under the NRRP umbrella were also rating supportive. The fiscal outlook envisages a budget gap in the 2.0-2.5% of GDP region in the coming years, implying no risk of EDP activation. Inflation is expected to keep pace somewhat above the EU average, while sensitivity to the tourism sector remains.

As for market reaction, markets have been pricing in the rating upgrade for quite some time, hence a strong market reaction to the news seems unlikely. Still, the outlook left unchanged at positive implies an increasing likelihood of another bump in 2025-26, acting as a motivation for policymakers to maintain a diligent policy course, but also adding support to the spread levels in the high-double-digit region going forward. This Friday Fitch is likely to deliver similar message, while later in November we would see decent chance of Moody's also adding another notch.