This year’s bond issues of 3.35 billion euros have covered almost 80 percent of this year’s gross financing needs. Moreover, Croatia has so far received 5.5 billion euros in grants from EU funds, and this year plans to withdraw another tranche worth 700 million euros, which does not raise either the deficit or public debt but is a revenue that can reduce the deficit.
In this and the next year, gross financing needs amount to about 11 percent of GDP, which is the lowest level in 15 years (since 2008), and the Ministry of Finance has a budget reserve of about seven percent of GDP. This effectively already reduces net public debt significantly below the Maastricht threshold of 60 percent of GDP.
Although the deterioration of wholesale financing conditions carries some uncertainty regarding the terms of (re)financing around 3.25 billion euros maturing in the next six months, we believe that membership in the euro area, stronger medium-term growth prospects for productivity and GDP, a better than expected fiscal picture, and a strong domestic investor base positively influence the movement of spreads on Croatian bonds, as well as the improvement of the credit rating to ‘A-‘ in 2024, according to new HUP analyses signed by their chief economist Hrvoje Stojić.
Croatia is one of the few countries in the CEE region that is improving its public finance indicators and is one of only three that will not face entry into excessive deficit procedures in 2024. In a situation of force majeure, Croatia can rely on a strong base of domestic investors (pension funds, the population) and on the ECB’s instrument to curb the fragmentation of spreads of peripheral euro area members.
Moreover, by using the credit component from the new generation EU funds for investments in energy transition (instead of borrowing on the market), Croatia can anchor long-term yields at the cost of EU funding.
Spreads on Croatian euro bonds during the third quarter of this year recorded a solid reduction of an additional 20 basis points, thanks to improved appetite for bonds from euro area members with lower credit ratings and candidates for rating improvement. The more cautious rhetoric of central banks regarding the ultimate tightening of monetary policy has also helped.
In the current spreads, the ‘A’ rating has not yet been fully accounted for, which gives room for continued decline in spreads (by 30-50 basis points) below 100 basis points by the end of 2024, in the absence of market shocks. Mainly due to lower liquidity, Croatian spreads are 60-70 basis points above Portuguese ones, although Croatia has better credit fundamentals through more orderly public finances, higher potential GDP growth, and greater flexibility, the analysis states.
