Croatia Preparing 1 Billion-Euro Bond Sale, Lalovac Says

Croatia plans to sell its second euro-denominated bond in less than a year, expecting investors will reward government efforts to curb the budget gap amid expectations the European Central Bank plans further easing.

The European Union’s newest member is preparing a roadshow on the European market next month and plans to raise about 1 billion euros ($1.2 billion), Finance Minister Boris Lalovac said in an interview in Zagreb yesterday. The exact amount and maturity will depend on investors’ interest, he said, adding he expects the bond to yield “below 4 percent, similar to the country’s previous Eurobond issued in May.”

“We’d like this to be the only international borrowing we undertake this year,” Lalovac, 38, said. “That would be a good message to investors that Croatia can keep its borrowing under control.”

The Adriatic nation has lost 12 percent of its gross domestic product since 2008, the second-biggest contraction after Greece, according to a World Bank report last month. The government forecast the economy to grow 0.2 percent this year as the energy industry and tourism show signs of recovery.

The recession has also pushed the country’s budget gap above the EU’s 3 percent of economic output limit, prompting the European Commission, the 28-nation bloc’s executive arm in Brussels, to monitor its fiscal consolidation progress since January last year.

Additional Easing

Slovakia raised 1.5 billion euros for 12 years this week at a record-low yield of 1.44 percent in the region’s first euro-denominated sale of the year. Others are set to follow as global sovereign yields are at record lows and European policy makers look for measures to spur inflation and economic growth. Poland may sell Eurobonds in the first quarter, the Finance Ministry said on Dec. 30, while Romania plans as much as 3 billion euros of issuance this year.

“Croatia’s issue may be well timed as additional easing measures by the ECB are expected this month,” Zdeslav Santic, chief analyst at Splitska Banka, a unit of Societe Generale SA, said by phone.

Croatia, whose debt is rated two levels below investment grade by Standard & Poor’s and Fitch Ratings, raised 1.25 billion euros in a bond sale in May.

The yield on the government bond, maturing in 2022, fell nine basis points to 3.19 percent at 16:17 p.m. in Zagreb today, the lowest on record, according to data compiled by Bloomberg.

Spending Cuts

“Though global borrowing conditions are favorable at the moment, we’d like to avoid sudden massive refinancing and offer investors a sustainable model of public financing,” Lalovac said. “As a result, we’d like to keep international borrowing to one tranche a year in the future.”

Through spending cuts in the last months of 2014, the government narrowed last year’s budget deficit to “about 4.6 percent” of gross domestic product, from a November estimate of 5 percent, Lalovac said. This year’s budget gap should be “even lower,” he said. It was forecast at 3.8 percent of GDP by the government in November.

“We’re cutting expenditures, we are clearing the arrears, particularly in the health sector,” Lalovac said. “For instance, our goal is to have the central government material expenditures permanently fixed at 2 percent to 2.2 percent of GDP in the long run, for any future government.”

The European Commission is expected to review the government’s efforts next week in Zagreb, according to Lalovac.

The International Monetary Fund commended the efforts of Prime Minister Zoran Milanovic’s Cabinet two months ago to streamline costs, saying the measures could contain the deficit at 4 percent to 4.5 percent of GDP this year.

EU Funds

Croatia elected Kolinda Grabar Kitarovic as new president on Jan. 11. An opposition candidate and a NATO executive, she defeated incumbent Ivo Josipovic. The result put pressure on the Social-Democrat-led ruling coalition, ahead of general elections that should be held no later than in December.

The change is “unlikely to affect investors, as they are mostly interested in whether expenditures and deficit are kept under control,” Lalovac said.

In the election year, the government plans to use EU funds allocated to Croatia to revamp infrastructure and boost energy, pharmaceuticals and IT industries to diversify an economy dominated by tourism and services. The EU has earmarked as much as 10 billion euros for the country in its budget through 2020.

“I’d also like to see tax reform continue so that the maximum income tax rate be lowered to 25 percent from the current 40 percent,” Lalovac said.

“That would make Croatia more flexible and competitive.”

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