Croatia ‘Minuscule’ 2013 Growth to Cut Revenue, Widen Gap

Croatia’s economic growth of almost zero this year will pinch revenue and raise spending as the former Yugoslav republic fails to benefit from its first year in the European Union.

The 21-month-old government of Prime Minister Zoran Milanovic will preside over a budget gap expansion to 5.5 percent of total economic output in 2014 from 3.5 percent this year, according to a document posted on the government’s website before today’s cabinet meeting in Zagreb.

The Balkan nation, which has been hobbled by four years of contraction or stagnation, is weighed down by rising interest payments, state company debts and higher salaries and pension payouts, the document said. This year’s growth was cut to 0.2 percent from 0.7 percent predicted in February, though that may be too optimistic, according to Royal Bank of Scotland Plc.

“The budget was based on an overambitious growth forecast from the start, and it is only natural that a revision lower to growth estimates will imply lower revenue and hence a higher budget deficit target,” said Abbas Ameli-Renani, an RBS emerging-market analyst in London, in an e-mailed response to Bloomberg questions. “The Croatian economy will likely contract for a fifth consecutive year this year.”

Budget Review

The economy, after “minuscule” growth this year, will gain pace and end 2014 with a 1.3 percent expansion, according to the ministry document. The government needs to review the budget plan because of “reduced expectation of economic growth” this year, the ministry said.

Finance Minister Slavko Linic, who acknowledged that the country that joined the EU on July 1, will “definitely” enter the bloc’s excessive deficit procedure, the EU’s monitoring system of budget offenders.

He said the cabinet will try to reduce the forecast of the 5.5 percent gap by the time the budget plan for next year is presented and endeavor to bring it down to 3 percent of gross domestic product by 2016.

Among measures, the country will earn 22.5 billion kuna by the end of 2014 through a highway concession, raise the value-added tax on tourism to 13 percent to bring in 600 million kuna ($106.34 million) a year and raise tariffs on gas and tobacco, officials said.

Today’s Reforms

At the same time, it will cut the real-estate transaction tax rate to 4 percent from 5 percent, while the general VAT rate will remain at 25 percent.

“We’ll start with these reforms from tomorrow, and they will be implemented no matter how much yelling, how much resistance we encounter,” Deputy Prime Minister Branko Grcic told reporters.

Meantime, public debt will grow to 190 billion kuna by the end of this year, Linic said. The Adriatic nation has struggled to keep public finances in check during the economic crisis, which has knocked more than 10 percent off economic output and squeezed foreign direct investment by 80 percent since 2008. Gross domestic product in fell 0.7 percent from April to June on an annual basis.

The report said growth should accelerate to 2.2 percent in 2015 and 2.5 percent the following year. It said inflation should stay at “the level of 2 percent,” without giving a timeframe.

Ratings Decisions

Fitch Ratings followed similar moves by Standard & Poor’s and Moody’s Investors Service on Sept. 20 by cutting Croatia’s long-term foreign-currency debt rating to BB+, one level below investment grade, from BBB- with a stable outlook. It shaved its local currency rating to BBB- from BBB, citing worsening fiscal prospects.

Milanovic has sought to revive the economy by luring investors with infrastructure and energy projects funded from EU funds. The cabinet also plans to continue with public sector cost cuts and consolidating state finances, Milanovic told lawmakers in an annual address on Sept. 24.

The European Commission said in May the economy will contract 1 percent this year, before a “modest recovery” in 2014.

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