Croatia's gross external debt reached €41.1 billion at the end of August 2020, increasing by 0.5% from the end of 2019, according to data from the Croatian Central Bank (HNB).

A strong decline in economic activity resulted in external debt reaching nearly 80% of GDP in the first half of the year, Raiffeisenbank Austria (RBA) said in its comment on the HNB report on Thursday, predicting that external debt would surpass 85% of GDP by the end of the year.

The increase in external debt was mainly the result of increased central government borrowing on the secondary market where foreign institutional investors purchased a portion of government bonds from domestic creditors. On the other hand, the central bank and other domestic sectors (companies) improved their external positions by increasing their loan growth.

“We expect gross external debt to jump over 85% of GDP by the end of the year, mostly due to an economic decline,” RBA said.

The long-running trend in the reduction of external imbalances ended with a deterioration in the balance of payments account and increasing external debt. Risks to the external position have increased, raising the issue of stability and maintaining the credit rating at investment grade, RBA said.

RBA analysts said they expect that Croatia, supported by continued expansionary monetary policies by leading central banks, will continue to meet its external obligations under favourable financing terms.

RBA expects Croatia’s gross external debt to decline with the start of recovery in the year ahead.