Public debt threatens to downgrade credit rating, while servicing obligations halts economic growth

At the end of August, Croatia’s public debt amounted to 287.3 billion kuna, or 86.5 percent of the estimated GDP for 2015, according to the latest data from the Croatian National Bank (HNB). Although it recorded a monthly decrease of 0.6 percent, it increased by 6 percent year-on-year.

At the end of August, the general government debt, which includes the central government debt, social security funds, and local government debt, was 1.8 billion kuna or 0.6 percent lower than at the end of July. However, on an annual basis, it continued to grow at relatively strong rates, increasing by as much as 16.3 billion kuna, or 6 percent, analysts from Raiffeisenbank Austria (RBA) noted in their commentary on HNB data. They explain that the decrease in public debt on a monthly basis was largely contributed by the foreign component of the central government debt, which fell to 115.7 billion kuna at the end of August, a decrease of 2.3 billion kuna or 1.9 percent compared to July.

On an annual basis, however, it continued to grow at solid rates, which, along with the increasing domestic component, resulted in a central government debt of 282.3 billion kuna in August, accounting for about 98 percent of total public debt, RBA emphasized. Due to the reduction in the foreign component, public debt at the central government level recorded a monthly decline of 0.7 percent, or 1.9 billion kuna, but compared to last year’s August, it increased significantly by 16.6 billion kuna or 6.3 percent.

– In addition to low economic growth rates, negative risks to the level of public debt remain weak fiscal consolidation and relatively high costs of servicing public debt. According to the latest data from the Ministry of Finance, in the first nine months of this year, total expenditures of the consolidated central government for interest payments exceeded 9 billion kuna, which is almost 8 percent higher than in the same period last year. Therefore, we expect that public debt could reach nearly 90 percent of the estimated GDP by the end of this year, RBA concluded.

From the Croatian Chamber of Economy (HGK), it is noted that during the first eight months of this year, public debt increased by a total of 7.7 billion kuna, with the general government borrowing slightly more domestically, where debt increased by 5.4 billion kuna, than on the foreign market, where the debt level increased by 2.3 billion kuna. In financing the high budget deficit on the domestic market, the government relied most on issuing bonds – in the first eight months of this year, the debt level increased by 6.6 billion kuna – and on credit borrowings, which grew by 1.6 billion kuna, while at the same time short-term financing through treasury bills decreased by 2.7 billion kuna. In financing on the foreign market, bonds also dominate – the debt level increased by five billion kuna – but at the same time, the level of credit and short-term debt decreased by 2.7 billion kuna.

– The seriousness of the public debt situation was also confirmed by the autumn projections of the European Commission, which indicate that until 2017, no halt in the growth of the general government debt share in GDP is expected in Croatia. According to these projections, the share of public debt in GDP in Croatia is expected to reach 89.2 percent this year, increase to 91.7 percent in 2016, and amount to 92.9 percent in 2017, HGK analysts emphasized.

They add that with this share, Croatia positions itself above the EU average for the first time this year, with a tendency for further deterioration of the situation, given that 2015 was a turning point when the trend of reducing the share of public debt in GDP began at the EU average level.

– During this year, this share at the EU level will decrease by 0.8 percentage points, while in Croatia it will increase by as much as 4.1 percentage points, the Chamber states, adding that such movement of public debt “puts the country at risk of further reducing its already low credit rating, while the costs of servicing obligations become a brake on the possibility of achieving accelerated economic growth.”