By Igor Ilic
ZAGREB, Oct 30 (Reuters) - Croatia has so far coped well with the global financial crisis but the expected slower growth makes it even more necessary to cut spending and reduce external vulnerabilities, a World Bank report said on Thursday.
The report said Croatia was likely to face a "moderate growth slowdown" due to the global turmoil. It said this year's growth would slow to slightly below 4 percent from 5.6 percent in 2007 and to around 3.5 percent in 2009.
"Slower growth will put pressure on fiscal balances. Stronger expenditure restraint remains essential for sustaining and strengthening ongoing fiscal consolidation. In the past Croatia has improved its fiscal position through growth-induced revenue overperformance," the report said.
Local analysts largely agreed.
"The government must show investors it is taking the situation seriously and avoid any widening of the deficit. But the central bank has enough space to ease the reins and thus prevent growth from suffering too much," an analyst at a leading local bank, who asked not to be named, said.
The government sees this year's growth at slightly above 4 percent and next year at between 3.5 and 4 percent.
It recently announced plans to reduce the budget gap in 2009 to below 1 percent of gross domestic product from 1.3 percent of GDP this year.
STRUCTURAL REFORMS
The report said global developments would make Croatia's external imbalances more difficult to finance.
Croatia's foreign debt is some 90 percent of gross domestic product and current account gap is almost 10 percent of GDP, as exports have dwindled and the economy is fuelled by tourism, state investments and loan-based household concumption.
Croatia needs to refinance some 800 million euros ($1.02 billion) in the next five months, most of it borrowed abroad, and the finance ministry has already initiated talks with local banks to explore refinancing possibilities.
"The government does not have to go abroad to refinance its maturing debt. There is enough capital at home at the moment, but the price will have to be higher than before," Hrvoje Stojic, an analyst at Hypo Alpe-Adria-Bank, said.
A source familiar with Croatia's official economic policies said the government was likely to seek local funding.
"The price will be higher, which will somewhat burden the future budgetary projections, but it's less of a problem than the inability to refinance the debt. The central bank will probably also help by easing some monetary measures," said the source, who asked not to be identified.
The World Bank also said Zagreb needed to speed up structural reforms, improve the investment climate and increase productivity as another tool to counter vulnerabilities of its economy.
"In the short term, given the structure of its economy, Croatia can do little to counter a growth slowdown. In the mid-term, the only solution is in faster structural reforms which would boost external demand," Stojic said. (Reporting by Igor Ilic, Editing by Zoran Radosavljevic and Stephen Nisbet)