D&B: We Doubt the Government Will Implement Strict Fiscal Policy

The credit rating agency Dun & Bradstreet (D&B) has maintained Croatia’s credit rating of DB3d in its September report, indicating a slight business risk, along with a continuing upward trend, reports the agency Bonline.

D&B analysts in the latest edition of the publication International Risk & Payment state that the deteriorating state of Croatian public finances raises questions about forecasts for the Croatian economy. The increase in consumption, combined with a decline in revenues, has resulted in a rise in the budget deficit above the targeted level in the first six months of the year. To finance the deficit and refinance maturing obligations, the Croatian government issued 10-year government bonds worth 1.8 billion euros in mid-July with an interest rate of 6.6 percent.

This issuance covered short-term financing needs but increases Croatia’s already high external debt, which D&B analysts estimate could reach 100 percent of GDP by the end of 2010. This, they state, raises concerns about Croatia’s ability to repay debts, both in the short and long term. To address the worsening fiscal situation, the government is considering adopting new measures that could stimulate the recovery of public finances, including the introduction of a special banking tax.

Although it would increase revenues, D&B analysts believe that the banking tax would likely hinder loans to the private sector, thereby increasing the cost of credit and delaying economic recovery. While the government plans to reduce fiscal spending, given the rising public dissatisfaction, we doubt that the weak coalition government will have the strong will to implement strict fiscal policy and reduce social benefits ahead of the upcoming general elections in 2011, according to D&B analysts. They view positively the agreement between Croatia and Hungary on a partnership for the construction of a cross-border gas pipeline that will connect the two countries, which is expected to be operational in early 2011.

This pipeline will provide Croatia with a new source of natural gas supply and enable it to purchase natural gas from several suppliers, significantly reducing its dependence on the Russian state company Gazprom, according to D&B, who add that this will result in lower prices and greater security of supply for the Croatian natural gas market in the long term. Analysts also note that Croatia closed two more chapters of negotiations with the European Union at the end of July. Since the start of negotiations in 2005, Croatia has closed 22 chapters out of a total of 33 required for its accession to the Union.

"The government aims to conclude negotiations by 2011 or early 2012. However, the dynamics of the negotiations will be determined by progress in several difficult chapters – such as market competition, judiciary, and fundamental rights – which will be worked on in the coming months," states the D&B report. Analysts from the credit rating agency also indicate that the possibility of doing business with Croatian companies remains under scrutiny due to reduced credit activities of domestic banks, an increased number of bankruptcies, and a vulnerable economic environment. Corporate payments have remained at the same level, partly due to stricter credit conditions from suppliers but also due to new government measures that have improved payments in the public sector, the report states. (H, G.J.)