Croatia Raises Budget Gap Outlook as Cost-Cutting Budget Looms

Croatia’s budget deficit will widen past the European Union’s ceiling this year and next as slow growth and rising borrowing costs hamper efforts by the bloc’s newest member to consolidate its public finances.

The government raised its 2013 budget deficit outlook to 5.5 percent of gross domestic product, higher than a September forecast of 3.5 percent, according to a Finance Ministry document posted on the government’s website. It confirmed its 2014 fiscal shortfall at an earlier estimated 5.5 percent in the report, which the cabinet discussed before presenting the 2014 budget to parliament.

Prime Minister Zoran Milanovic’s government is leading the Adriatic state into belt-tightening also pursued by other Balkan states after prolonged recessions across the region undercut exports, eroded budget revenue, raised social spending and pushed borrowing costs higher. With unemployment approaching a fifth of the working-age population, Croatia confirmed a growth estimates of 0.2 percent this year and 1.3 percent for 2014.

“Without economic growth we cannot resolve this fiscal situation, as there is no room for further cuts,” Finance Minister Slavko Linic told the cabinet in Zagreb.

The European Commission said in September the Adriatic state’s economy would contract 0.7 percent this year and grow 0.5 percent in 2014.

Excessive Deficit

The widening fiscal shortfall will probably trigger the EU’s excessive deficit procedure, a monitoring system for budget offenders, which applies to economies where the gap exceeds 3 percent, EU Monetary Affairs Commissioner Ollie Rehn said on Nov. 5.

The European Commission said yesterday it opened an “in-depth review” of Croatia for its economic imbalances, saying there’s a “need to understand the nature and potential risks related to the external position, trade performance and competitiveness, as well as internal development.”

The government plans to cut costs in farm subsidies and will reduce health spending next year. It also wants to raise 22.5 billion kuna ($4 billion) by the end of 2014 with a highway concession, raise the value-added tax on tourism to 13 percent to bring in 600 million kuna a year and increase levies on gas and tobacco, officials said in September.

Debt refinancing and high borrowing costs may push Zagreb toward seeking assistance from the International Monetary Fund, Linic said in a Nov. 6 interview to local news magazine Globus.

‘Risky’ Debt

Croatia needs to borrow 44 billion kuna next year to refinance debt and service the budget gap, Linic told Globus, adding that the country is facing “enormous and very risky” debt levels. Premier Milanovic yesterday told parliament that seeking IMF aid is “not an option for Croatia right now.”

Public debt will reach 62 percent of annual output by 2014, according to the Finance Ministry document.

Croatia, which is rated at below-investment grade by the three major credit rating companies, last tapped international markets in March, selling $1.5 billion of 10-year bonds at 5.625 percent.

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