Croatia is among 11 EU member states with high mid-term public finance sustainability risks, according to a fiscal sustainability report, released by the European Commission on Monday.
For the EU as a whole, the size of long-term sustainability challenges has nonetheless decreased significantly relative to the beginning of the crisis, under the effects of pension reforms introduced in the past, as well as recent fiscal consolidation, the report said.
Countries that appear to face potential high medium-term risks are Belgium, Ireland, Spain, France, Croatia, Italy, Portugal, Romania, Slovenia, Finland and United Kingdom.
"Overall, for Croatia no significant short-term risks of fiscal stress appear at the horizon, though some variables (namely the primary deficit, the net international investment position and the level and the change in the share of non-performing loans) point to important short-term challenges," read the report.
"Risks appear to be high in the medium term from a debt sustainability analysis perspective, given the still high stock of debt at the end of projections (2026) and high sensitivity of the projections to shocks to nominal growth and interest rates," the report said.
The share of short-term debt has been decreasing, so there appears to be no major refinancing risks in the short run, the European Commission said, adding that even though a large part of the public debt is denominated in non-domestic currency – mainly euros - relatively stable exchange rate due to tightly managed float of HRK to EUR by the Croatian National Bank mitigates the exposure to currency risk.
The Commission also warns that gross public debt is projected to continue rising, from 89.2% of GDP in 2015 to 92.9% in 2017, and represents a major source of vulnerability for the Croatian economy.
The report was prepared in the Directorate-General for Economic and Financial Affairs.