Croatia Sees Wider Budget Gap in 2014 as Economy Set to Shrink

The Croatian government said it expects the economy to contract 0.7 percent this year, reversing its initial forecast of 0.2 percent growth and predicting a wider-than-planned budget deficit this year.

The budget shortfall will be 5 percent of gross domestic product, compared with an earlier estimate of 4.4 percent, as the economic decline curbed budget revenue, according to a statement on the government’s website ahead of a cabinet session tomorrow. Deputy Premier Branko Grcic said today the economy may contract 0.5 percent this year.

The European Union’s newest member is enduring a sixth year of recession, while its fiscal discipline is being monitored by the European Commission. The latest estimate puts the deficit above the EU requirement of 4.6 percent of economic output that the government pledged to adhere to in April. The cabinet plans to narrow the gap to less than 3 percent of GDP in 2016.

“The upward budget-gap revision is more or less expected due to the fact that there is unwillingness for reforms,” Lutz Roehmeyer, a money manager at Berlin-based LBB Invest, said in response to Bloomberg questions before the government meeting. “It doesn’t give a bright picture to investors from abroad.”

The Adriatic nation’s economy has shrunk 12 percent since 2008, the second-biggest contraction after Greece. The central bank said this month the 2014 contraction will be 0.6 percent. Prime Minister Zoran Milanovic, a Social-Democrat, in September told parliament the government has chosen “a slower, but less traumatic reform path.”

Finance Minister Boris Lalovac said in May Croatia may tap international debt markets in the second half of this year after raising 1.25 billion euros ($1.6 billion) with a record-low 3.875 percent coupon. Lalovac said last week public debt will probably reach 80 percent of GDP by the year’s end.

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