ZAGREB (Reuters) - Croatia, the EU’s newest member state, is set for a sixth straight year of recession and it may take an international bailout to enforce painful changes needed to make the economy productive, a Reuters poll showed on Monday.
Successive governments since 2000 have shunned market reforms and increased spending and debt. But that will become much harder to finance when major central banks start to reverse the flood of cheap funds that has encouraged bond investors to chase higher returns in states like Croatia.
Croatian officials still rule out outside aid. However, in the past month analysts have started floating the idea of asking the European Union and International Monetary Fund for an aid program conditional on rolling back public spending and encouraging new businesses in the ex-Communist state.
Croatia, which joined the EU in July 2013, has had no economic growth since 2008. The government still hopes the economy will flatline this year but the analysts’ median forecast is for 0.7 percent shrinkage.
As part of the EU’s Excessive Deficit Procedure, a tool Brussels uses to impose fiscal discipline in the member states, Zagreb is meant to cut the budget gap to below three percent of gross domestic product (GDP) by the end of 2016.
But only three of the 11 analysts polled saw that happening. The median forecast is for a budget gap this year of 4.8 percent of GDP, and 4.5 percent in 2015, an election year.
While Croatia is not a euro zone member, “the fact that we now have favorable financing terms and good liquidity could backfire the moment the European Central Bank starts tightening. It is understandable that the issue of outside supervision is being raised,” said Zrinka Zivkovic Matijevic of Raiffeisenbank.
“Our public finances have lost credibility. The public debt dynamic is unsustainable. The state may not go bankrupt but the postponement of reforms will make the recovery slow and painful,” she added.
Analysts’ median projection for 2015 is for GDP to grow 0.7 percent, but two out of 11 analysts see a seventh year of recession and two expect zero growth.
“Consumer spending accounts for some 60 percent of Croatia’s output and I don’t see a recovery there as a deleveraging process is still going on. Also, reforms are long overdue,” said Ivan Drazetic from InterCapital, a leading local brokerage.
Croatia’s public debt, under the new EU methodology, is set to surpass 80 percent of GDP this year and keep rising without decisive reforms.
“Spending is enormous and no one has the guts to cut it. Every year we spend some 20 billion kuna ($3.4 billion) more than we earn. We are going strongly in the wrong direction,” said Ante Babic of the Centre for International Development, a local think-tank.
Some analysts say Croatia will need a deal with Brussels and the International Monetary Fund (IMF) straight after the general election due in late 2015. Four analysts said that was likely and four said the chances were 50-50. Three ruled it out.
“I don’t see it happening before the general election, but after that it is quite a possible scenario,” said Hrvoje Stojic of Hypo Group Alpe Adria bank.
Croatia, as a new EU member, is obliged to adopt the euro eventually, but there is no fixed timetable yet. Most analysts believe that could happen only after 2020 at the earliest.
However, they think the central bank will manage to preserve the stability of the kuna currency. The central bank keeps the kuna in a managed float against the euro, intervening occasionally on the foreign exchange market.
($1 = 5.8901 Croatian kuna)
Reporting by Igor Ilic; Editing by Zoran Radosavljevic and Ruth Pitchford