Croatia's public debt at the end of the first quarter of 2016 was HRK 288.3 billion, HRK 4.7 billion less on the year (-1.6%), which was the first public debt decrease annually since 1999, the Croatian Chamber of Commerce (HGK) said on Sunday.

The HGK said this was due to the continuation of positive budget trends. The consolidated central government budget deficit in Q1 2016 stood at HRK 2.6 billion, over half as much as in Q1 2015, which reduced financing needs.

Better budgetary and public debt trends were partly due to the fact that temporary financing with a limited possibility to create new liabilities was in force in Q1 2016, the HGK said. However, a decrease in the public debt to GDP ratio from 86.7% at the end of 2015 to 85.8% at the end of Q1 2016 shows that, if some state assets were sold, the general government debt trend could stabilise by the end of the year.

Compared to February, the public debt in March decreased by HRK 1.3 billion despite the issue of a government bond on the domestic market for HRK 4 billion with a 10-year maturity and a yield of 3.99%. The bond increased the general government's internal debt by HRK 2.6 billion, while the foreign debt was decreased by over HRK 3.9 billion during March, the HGK said.

In Q1 2016, the public debt decreased by HRK 1.3 billion, with the internal debt increasing by HRK 3.7 billion and the foreign debt decreasing by HRK 5 billion. The government borrowed on the domestic market by issuing bonds, which increased the debt by HRK 5.4 billion, and resorted to short term borrowing, mainly treasury notes, which increased the short term debt by HRK 800 million.

The government delayed a foreign bond issue planned for the middle of the year because of the unstable political situation and the resulting unfavourable interest rates demanded by investors. This will not have marked repercussions for now, given that the necessary funds can be obtained on the domestic capital market, the HGK said.

The temporary budget financing, followed by a period of time with a caretaker government, reduce the intensity of creating additional liabilities in the short term, resulting in a somewhat better pace of public debt trends, the HGK said. It added, however, that the political instability jeopardised the continuation of the favourable tendencies, slowing down structural reforms and limiting the possibility of a credit rating upgrade, which makes the servicing of liabilities riskier.

Those circumstances limit the possibility of restructuring liabilities in a period of historically low interest rates on the world market by buying expensive bonds and replacing them with new ones with lower interest rates.

Given the caretaker government, it is difficult to expect that the planned sale of state assets will be carried our wholly, which would impact public debt trends, the HGK said, adding that there is still no progress in defining a more efficient public debt management strategy.

Therefore, achieving the public debt goals from the National Reform Programme and the Convergence Programme is becoming increasingly challenging, all the more so given that the public debt to GDP ratio is somewhat higher than the European average and much higher than in similar countries, the HGK said.

(EUR 1 = HRK 7.5)

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