Croatia Pledges Cuts, Savings After Fitch Raises Outlook

Croatia’s government pledged to reduce spending, improve tax collection and sell bonds abroad to finance its budget deficit and win further upgrades ahead of its planned European Union entry next year.

Fitch Ratings raised Croatia’s outlook yesterday to stable from negative, citing the government’s progress in meeting spending-cut demands and reducing the shortfall during a recession. It affirmed the long-term foreign and local-currency issuer default ratings at BBB- and BBB, respectively.

Croatia, set to become the EU’s 28th member next July, is struggling with a recession that’s gripping the Balkans because of Europe’s debt crisis. Prime Minister Zoran Milanovic wants to reduce the former Yugoslav republic’s spending by 4 billion kuna ($700 million) by lowering subsidies to state companies and cutting public wages as it integrates with the west.

“The outlook upgrade shows the government enjoys a certain trust, that our fiscal discipline was recognized, but that there are still risks ahead,” Milanovic told reporters in Zagreb late yesterday. “The financial situation in Europe is still difficult. We have no choice but press on with reforms.”

The yield on the bond maturing in April 2017 declined to 4.600 percent at 11:04 a.m. in Zagreb from 4.662 percent on Sept. 5, according to mid-pricing data compiled by Bloomberg.

‘On Track’

Fitch said the government is “on track” to meet its deficit target of 3.8 percent of economic output from this year, compared with a goal of 5 percent in 2011, “despite the recessionary environment.”

“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.

Finance Minister Slavko Linic said yesterday in Zagreb that he will continue austerity measures and sell state assets to build on the Fitch upgrade and persuade other rating companies to follow suit.

An improved outlook will build up investor confidence in the country and allow the government to seek to sell international bonds in March or April next year, Linic said.

The effort by Milanovic’s Cabinet, which took power at the end of last year, has given it a stronger outlook than Serbia and Slovenia, also once republics in the former Yugoslavia, said Vladimir Gligorov, an economist at the Vienna Institute for International Economic Studies.

Upgrade Optimism

“It seems reasonable to feel confident that other credit rating companies will follow suit, particularly as we plan considerable investments in energy along with reducing imports,” Linic said.

National grid Hrvatska Elektroprivreda d.d. may have “immediate benefits” from the outlook upgrade because it’s considering a corporate bond sale “in the near future.” he said.

Moody’s Investors Service, Standard & Poor’s and Fitch downgraded Slovenia last month as the need for additional capital at state-owned lenders such as Nova Ljubljanska Banka d.d. is likely to further burden state finances. All three rating companies kept a negative outlook on the country.

In Serbia, the new government of Prime Minister Ivica Dacic, a former ally of strongman Slobodan Milosevic, the International Monetary Fund will visit Belgrade this month to protest the government’s move to cut the central bank’s independence.

Better Performance

“Croatia seems to be doing better than its neighbors Slovenia and Serbia, as the government in Slovenia didn’t seem to have found the way to face the problems, and they are also burdened with a huge problem in their banking sector,” said Gligorov. “Serbia on the other hand needs yet to start with the program of fiscal consolidation, and has its own set of banking problems.”

Croatia is rated an equivalent Baa3 at Moody’s, the lowest investment grade, level with Latvia and Romania. It is rated BBB- by Standard & Poor’s.

To contact the reporters on this story: Elaine Chan in New York at echan77@bloomberg.net; Jasmina Kuzmanovic in Zagreb at jkuzmanovic@bloomberg.net

To contact the editor responsible for this story: James M. Gomez at jagomez@bloomberg.net

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