Croatia’s 2013 Budget Sees Wider Deficit on Debt Payments

Croatia’s budget deficit will widen next year to 3.1 percent of economic output as the government repays debt and begins contributing to the European Union’s coffers upon entry in July.

“Our economic program for the next year is ambitious, relying on boosting the economy by reducing the value-added tax in tourism and some other branches, by continued fiscal discipline and by becoming part of the EU market,” Finance Minister Slavko Linic said as he submitted the 2013 budget draft to Parliament today.

The 10-month-old government of Premier Zoran Milanovic has vowed to reduce public-sector spending and remove obstacles to investment to speed up the sale of state companies and bring the economy out of a recession.

The budget draft forecasts economic growth at 1.8 percent next year, compared with an expected contraction of 1.1 percent in 2012, Linic said. Spending will increase to 124.5 billion kuna ($21.1 billion) from a revised 120 billion this year, with revenue seen at 113.7 billion kuna. The deficit this year is seen at around 3 percent of gross domestic product.

Debt Payments

While the government will cut spending on health care and public wages, expenditures will rise because of 2 billion kuna in interest payments on debt, including guarantees for shipyards, and Croatia’s 1.7 billion kuna in contributions to the EU.

“The overall deficit reduction plan is encouraging, but the key challenge is likely to be on the revenue side, as the growth assumptions look a little optimistic given the weak regional growth perspective,” Timothy Ash, London-based chief emerging-market economist for Standard Bank Group Ltd., said by e-mail.

Though public debt will increase to 55 percent of GDP next year and to 56 percent in 2013, the government “will continue to strengthen capital investments, to stick with fiscal consolidation and to coordinate policies with EU regulations,” Linic said. State borrowing will total 26.7 billion kuna in 2013, including about 16 billion kuna to finance existing obligations, he said.

Debt Sales

Croatia expects to sell about $2.5 billion of debt in January on the U.S. and European markets and targets a 5.75 percent yield in the sale, Linic said. A second round of debt will be sold later in 2013 on Asian markets.

The International Monetary Fund on Nov. 13 said Croatia’s economy will shrink 1.5 percent this year, urging the government to remove barriers to investment and employment in order to return to growth in 2013. The European Commission said on Nov. 7 the economy will contract 1.9 percent in 2012.

Fitch Ratings raised Croatia’s outlook Sept. 5 to stable from negative, citing the government’s progress in meeting spending-cut demands and reducing the budget deficit during a recession. It affirmed the long-term foreign currency rating at BBB-, on par with EU members Latvia and Bulgaria.

Croatia is rated an equivalent Baa3 at Moody’s Investors Service, the lowest investment grade, and BBB- by Standard & Poor’s.