"The outlook revision reflects the government's progress in developing a medium-term plan to address the country's fiscal challenges," the rating agency said in a statement.

It said that implementation risks were nevertheless high and the GDP growth outlook weak.

On Fitch's latest forecasts, Croatia faces the prospect of a real GDP contraction of 1.7% in 2012, followed by anaemic growth of 1.5% in the medium-term.

The public finances remain a key rating driver and Fitch considers Croatia's public debt dynamics to be unsustainable without a credible medium-term fiscal consolidation plan.

"The revision to a Stable Outlook is therefore based on the government maintaining a tight medium-term fiscal stance in line with the requirements set by the fiscal responsibility law," the agency said.

Fitch views positively the government's efforts to improve tax compliance and to fight tax avoidance. "Such efforts have been well-targeted and have borne fruit in a short-time frame," the rating agency said.

Fitch also believes that the changes to the labour laws and collective agreements would make the public sector wage bill more flexible and responsive to the economic cycle.

"The key challenge facing the government will be to further reduce its deficit and implement structural reforms against a backdrop of prolonged low economic growth," Fitch said.

In terms of potential rating triggers, significant slippage against fiscal targets would lead to a negative rating action. Balance of payment pressures that led to a sustained fall in foreign exchange reserves, for example triggered by an intensification of the eurozone crisis, would also put downward pressure on the rating.

Conversely, the government meeting its budget deficit targets, stabilisation of the public debt ratios and return to sustainable GDP growth would stabilise the rating. Progress on structural reforms would also be rating positive, Fitch said in the statement.