CEIC News@lert: Poor Outlook for Croatia’s Government Debt in Light of Weaker Indebtedness Indicators and Bleak Economy

April 22, 2014 OVERVIEW: Moody’s Investors Service lowered its outlook on Croatia’s government bond Ba1 rating to negative from stable on 21 March 2014. This decision follows similar rating actions by its peers, Fitch Ratings and Standard & Poor’s Rating Services, and was prompted by an increasingly negative assessment on Croatia’s government debt and overall economic outlook. DISSECTING THE TOWERING GOVERNMENT AND EXTERNAL DEBT Croatia’s government debt rose to HRK219.41 billion by the end of 2013 from HRK183.27 billion at the end of 2012. This translates into a significant deterioration in its government indebtedness ratios; general government debt amounted to approximately 66.84% of Gross Domestic Product (GDP) in 2013, rising from 55.78% during 2012 and 51.85% during 2011. These increases were exacerbated by the deterioration in GDP, placing further upward pressure on the debt-to-GDP ratio. Croatia’s soaring debt in relation to its GDP merits further analysis as it is an important component in determining its creditworthiness. Rising debt has been largely attributable to increased long-term domestic and foreign general government borrowings. Combined, long-term government debt amounts to HRK132.12 billion (40.25% of GDP), comprising HRK71.97 billion and HRK60.15 billion of domestic and foreign debt respectively. While the bulk of these government debts are of long-term maturity, negative growth prospects and the persistent inability to put a lid on government debt growth has been a constant theme in Croatia’s worsening debt profile. High general government debt is exacerbated by persistently high fiscal deficit. Croatian National Bank statistics reveal that fiscal deficits were consistently above 4% of GDP from 2009-2012. As of December 2012, the fiscal deficit stood at 4.02% of GDP. A deteriorating economic climate questions the government’s ability to close this gap. CROATIA’S WEAK ECONOMY Croatia’s economy was dealt a serious blow by the global financial crisis of 2008-2009, which saw real GDP growth falling sharply by 8.29% as of the first quarter of 2009. Since then, Croatia has been struggling to recover, experiencing negative GDP growth for eighteen consecutive quarters, with the exception of modest growth measuring 0.35% and 0.56% respectively during the second and third quarters of 2011. Considering the country’s currently weak economy, the Croatian government faces the twin pressures of balancing its books and creating economic growth. Furthermore, Croatia’s presently high external debt position (measuring 109.13% of GDP at the end of 2013) places tight constraints on Croatia’s external liquidity position as a whole. Combined with general deterioration of the Croatian government bond rating, the downgrades may place further challenges on Croatian-based entities to refinance their debt or raise new funds. CONCLUSION The turbulent economic climate and downright pessimistic growth scenario since the recent global financial crisis mean that Croatia’s indebtedness ratios are unlikely to improve in the near future, as reflected by the opinions of the three major rating agencies. However, Croatia’s entrance to the European Union offers a glimmer of hope, insofar as to support exports and capital flows in the context of closer Croatia-European Union integration. At the same time, closer Croatia-European Union integration brings about increased access into the European markets as well as possible allocations for European Union cohesion. At the same time, stricter scrutiny on government finances – in line with European Union guidelines – may help encourage greater fiscal discipline by the Croatian administration. That said, these integration benefits should also be viewed in the context of the presently volatile economic climate in the European Union as a whole. Discuss this post and many other topics in our LinkedIn Group (you must be a LinkedIn member to participate). Request a Free Trial Subscription. Back to Blog
22nd April 2014 CEIC News@lert: Poor Outlook for Croatia’s Government Debt in Light of Weaker Indebtedness Indicators and Bleak Economy