Highlights

  • Budget rebalance to set the ground for Eurobond issue
  • S&P lowered local currency rating to ‘BBB’ outlook remains negative
  • Money market pressures eased
  • FX market stabilized in March
  • GDP growth slowed to 0.2% y/y in 4Q
  • 1Q monthly frequency indicators looking poor
  • Inflation accelerated to 4.2% in February

Budget rebalance: Cuts on expenditure side, deficit target revised to 1.6% of GDP

Last week, the first budget rebalance was presented to the public, the first step toward adjusting the fiscal side of the real economy’s performance. On the expenditures side, the adjustment amounted to HRK 5.4bn, bringing the figure to HRK 121.6bn. On the other hand, the revenue side is expected to underperform the initial budget by HRK 8bn, based on the GDP growth estimate of -2% (earlier: 2%) for 2009. Hence, the budget deficit gap has been revised from 0.9% of GDP to 1.6%. Taking into account the looming local elections, the budget rebalance and (especially) the public wage bill cut of HRK 1.4bn are a positive sign. A second round of adjustment after the elections (most likely after the tourist season) is likely, as the revenue side is likely to further underperform and the government must balance the need to sustain the deficit and tackle recession pressures. Overall, we continue to see the fiscal target as not being met, assuming a deficit of around 3% of GDP. Still, this first step should set a favorable basis for the announced Eurobond placement, which is likely to attract adequate investor interest and put off the need for an IMF deal.