In the opinion of the credit rating provider's analysts, "competitiveness challenges constrain Croatia's economic growth potential. These stem in part from a rigid labor market and a large public sector, which both contribute to persistent current account deficits."

"However, the new government formed after the December 2011 elections appears committed to accelerating fiscal consolidation and structural reforms, and we expect these to help improve Croatia's growth prospects," S&P said in a statement on Tuesday.

"The negative outlook reflects our view that there is a one-in-three chance of a downgrade during the next year if the scope and pace of implementation of the reform efforts, particularly in the labor market and public sector, are insufficient to facilitate sustainable economic growth."

The transfer and convertibility (T&C) assessment is unchanged at 'BBB+'.

This rating, which S&P affirmed for Croatia, is the lowest category of ratings at which the agency recommends investments.

In early March the Fitch agency also retained the existing credit rating for Croatia at 'BBB-'.