The latest data from the Croatian Bureau of Statistics (DZS) on the deficit in 2015 of 3.2 percent of GDP is a pleasant surprise, and the public debt at a level of 86.7 percent of GDP is slowing down growth, says the chief economist of Societe Generale Splitska banka, Zdeslav Šantić.
According to DZS data, the consolidated general government budget deficit in 2015 amounted to 10.7 billion kuna or 3.2 percent of gross domestic product (GDP), while the consolidated general government debt reached 289.7 billion kuna, or 86.7 percent of GDP.
– Certainly, the most pleasant surprise is the level of the budget deficit, which stands at 3.2 percent of GDP. This should especially be put in the context of 2014, when the deficit exceeded 5 percent of GDP, emphasizes Šantić.
For comparison, the general government deficit for 2014 amounted to 18.1 billion kuna or 5.5 percent of GDP, while the general government debt at the end of 2014 was 284.2 billion kuna, or 86.5 percent of GDP, according to revised DZS data.
A significant impact on the amount of the deficit in 2015 was the substantial decline in the budget balance of the state budget compared to the planned, from 12.5 to 8.85 billion kuna, the DZS report states. Citing positive factors that influenced the reduction of the deficit, Šantić highlights economic growth that exceeded expectations. Last year, GDP grew by 1.6 percent, while at the beginning of the year analysts expected economic growth of no more than 0.5 percent. On the other hand, Šantić says, the decline in consumer prices last year negatively affected the reduction of the deficit, as it adversely reflected on the level of budget revenues. Last year, Croatia recorded deflation for the second consecutive year, with consumer prices falling by 0.5 percent.
– Along with the simultaneous reduction of the budget deficit and GDP growth, we also note a slowdown in public debt, especially since the data for 2014 was revised upwards, so public debt almost stagnated last year, says Šantić.
However, he notes that it is necessary to take into account the factual situation, namely that the level of Croatian public debt is significantly higher than in comparable economies of EU member states from Central and Eastern Europe.
– Looking deeper, we can notice that certain negative trends have continued, for example, when looking at general government expenditures, we will notice that in 2015 there was a significant reduction in public sector capital investment, but also that the pressure on the growth of interest rates paid by the state has continued, notes Šantić.
According to DZS data, interest expenses last year amounted to 11.93 billion kuna, which is 460 million more than in 2014. Gross investments in fixed capital, on the other hand, amounted to 9.4 billion kuna last year, which is 2.7 billion less than the previous year.
He adds that it is necessary to take into account the fact that last year favorable sentiment in international financial markets continued, primarily due to ECB measures.
– However, this rise in interest rates indicates that Croatia is extremely sensitive to potential changes in ECB monetary policy and that when this period of exceptionally low, even negative interest rates ends, Croatia will be extremely sensitive. This will create pressure for further interest rate increases, especially with the current risk premium, which will then require the state to increase its primary surplus, recorded in 2015, to control the growth of public debt, concludes Šantić.
In 2015, a primary surplus of the general government of 1.22 billion kuna or 0.36 percent of GDP is recorded for the first time, as noted in the DZS report.
The Croatian Chamber of Economy (HGK) assessed on Thursday that the data from the Croatian Bureau of Statistics (DZS) on the deficit and debt in 2015 warns that Croatia still does not meet European fiscal sustainability criteria and must make additional efforts to eliminate macroeconomic imbalances and satisfy the procedure for eliminating excessive budget deficits.
– The April report for Croatia confirmed expectations of significant fiscal consolidation during 2015, but to a level that is still above the allowed values, states the HGK comment.
Favorable developments, they emphasize in HGK, were more contributed by the acceleration of economic growth and thus increased budget revenues from measures aimed at stopping the growth of state consumption – budget revenues increased by 4.4 percent, while expenditures decreased by 0.8 percent.
– This shows that, as in previous years, fiscal consolidation was carried out in a suboptimal manner, relying more on increasing budget revenues than on sustainable reductions in budget expenditures and that the implementation of stronger structural reforms was lacking.
The Director General of the Croatian Employers’ Association (HUP), Davor Majetić, said on Thursday that the data from the Croatian Bureau of Statistics (DZS) on the deficit in 2015 confirms that some progress has been made in reducing the budget deficit, but not in public debt, and warns that this issue needs to be addressed urgently.
– The data published today by the DZS confirms what is already well known – last year some progress was made in reducing the budget deficit, but not in public debt. The issue of debt remains very critical and needs to be addressed urgently as such debt exposes us to excessive risks, said Majetić.
He notes that Croatia is currently struggling to bring budget expenditures into sustainable frameworks through thoughtful and comprehensive reforms.
– It has long been clear what needs to be done, but we are still waiting for the moment when words will turn into action, emphasized Majetić.
– Such a public debt makes our situation extremely difficult and complex, so when we manage to stop this growth, the battle for reducing such public debt begins. The recipe is simple and difficult. We must ensure economic growth, and we can only ensure that through structural and comprehensive changes, which unfortunately we still only announce and wait for, concluded Majetić.
