The recent decision by the rating agency Standard & Poor’s (S&P) to maintain Croatia’s rating at A– was not surprising, but we can forget about further rapid normalization of public finances that we have witnessed in recent years.
The reason is, of course, the gradual calming of inflation. In mid-March, S&P assessed that moderate fiscal consolidation would help reduce the budget deficit to around two percent of GDP by 2028, down from an estimated 2.6 percent in 2024. This will lead to a decrease in the general government’s debt ratio to approximately 51 percent of GDP by 2028, down from 68 percent in 2022.
It is worth noting that domestic public finances have become exemplary in the eyes of rating agencies largely thanks to – rising prices – especially when we take 2020 as a reference year, which saw a significant increase in government spending due to massive public expenditures triggered by the outbreak of the pandemic. The consolidated general government debt jumped from 70.9 percent at the end of 2019 to 86.5 percent of GDP at the end of 2020, significantly above the 60 percent ceiling according to the European Union’s fiscal rules, which were then suspended due to the closure of economies and recession. On the other hand, the recovery from the pandemic crisis brought that ratio down to just over 78 percent by the end of 2021.
However, the strong price increase that began in 2021 and peaked the following year significantly contributed to reducing public debt below 60 percent of GDP, according to the latest available data for the end of September last year. The trend of recovery in public finances should also include a reduction in gross foreign debt from 81.3 percent to 78 percent, and the treasury deficit fell below three percent of the economy’s value.
Much more moderate pace
The expected weaker growth of nominal revenues in the context of anticipated inflation normalization will require additional focus on controlling the growth of budget expenditures because both revenues and expenditures have been influenced by inflationary movements and labor market dynamics, assesses the chief economist of Erste Bank, Alen Kovač.
– Global geopolitical circumstances also suggest an increase in defense spending, which will also be a fiscal burden in the upcoming period. In this context, we see the deficit in 2025 at levels of around 2.5 percent of GDP with a further gradual decline in the debt ratio to below 60 percent, but at a much more moderate pace than in previous years, Kovač believes.
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