INTERVIEW-Croatia faces strong fiscal adjustment in 2015-16 -finmin

* This year focus on domestic borrowing

* IPOs of state power board, road company possible this year

By Igor Ilic

ZAGREB, May 8 (Reuters) - Croatia aims to win back investment grade by the end of 2016 by pressing a strong fiscal adjustment this year and next, cutting subsidies and restructuring public companies, Finance Minister Boris Lalovac said on Friday.

Lalovac said in an interview with Reuters that Croatia, which joined the European union in 2013, would focus on domestic borrowing this year, possibly tapping international markets only towards the end of the year.

"I believe that by the end of 2016 we could show the rating agencies that our strong fiscal effort, which has no alternative, deserves to be rewarded by an investment grade," Lalovac said.

Croatia was relegated to junk in 2012 and 2013 by all three rating agencies. After six recession years in a row, but with the prospect of around 0.5 percent growth this year, it is rated a notch below investment grade by all three.

Zagreb is under monitoring from Brussels for macroeconomic imbalances and excessive deficit. Its general budget gap last year amounted to 5.7 percent of gross domestic product and the public debt is around 85 percent and still rising.

Croatia plans to cut the budget deficit this year to 5.0 percent of GDP and reduce it to 2.7 percent in 2017, a year later than originally planned.

"Due to a new EU accounting methodology, last year's gap was wider than originally planned and we believe this is why the European Commission should accept our one-year delay in meeting the EU-tolerated deficit threshold," Lalovac said.

He also said Croatia's public debt should reach its peak in 2017, somewhat above 90 percent of GDP, but there was no danger it could become unable to serve its financial obligations.

"The measures to tackle imbalances are being put in place, while the EU monitoring is a very useful tool to help us," Lalovac said.

"In the coming period our focus will be on cutting expenditures through reduction of subsidies, restructuring of public companies and more efficient public administration. We will certainly not tackle pensions as they are already quite low for most people."

IPOs, DOMESTIC BORROWING LIKELY OPTIONS

He confirmed the government is considering an initial public offering of the state power board HEP and the state motorway company HAC by the end of the year. This would help reduce the public debt by several percentage points, he said.

The government also plans a capital boost for the only major state-owned bank, HPB, before the summer break.

"The European Commission will say whether it should be done from the state coffers or by a private investor. After that, privatisation is the next possible step," Lalovac said.

He said Croatia would now focus on domestic borrowing for covering its financing needs this year, confirming a Reuters report from earlier this week. In March, Croatia tapped the international markets with a bond worth 1.5 billion euros.

"There is enough local liquidity for that. There is only a possibility to seek funds abroad towards the end of this year, ahead of the elections, as pre-financing for 2016," he said.

A parliamentary election is due by mid-February 2016 at the latest and Lalovac said fiscal adjustment was unavoidable regardless of the election winner. The current centre-left coalition is trailing the conservative opposition in polls.

He said a conversion of Swiss franc-denominated loans into euros was the most likely solution for the local borrowers, severely hit by the surge of the Swiss currency over years.

"I'm waiting for the banks to offer a solution in that direction. I would prefer that to any legal intervention by the government," he said.

There are some 60,000 holders of the loans in Swiss francs in Croatia that recently staged protests and demanded the central bank governor resign for alleged inaction .

(Reporting by Igor Ilic, Editing by Ralph Boulton)