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Croatia Business Forecast Report Q1 2015

  • October 2014
  • -
  • Business Monitor International
  • -
  • 51 pages

Core Views
Croatia’s economy will continue along a low growth trajectory over the next few quarters, and may even remain in recession for a seventh consecutive year in 2015.
We believe Croatia will eventually need an EU/IMF loan arrangement to help cover its budget deficit and implement much needed structural reforms. However, this is unlikely to happen until at least 2016.

Croatia’s trade deficit will begin expanding amidst weak exports and a slight recovery in domestic demand. This will ensure that the current account surplus begins shrinking over the coming years. Inflationary pressures will remain weak in Croatia. The central bank will remain focused on kuna stability to anchor inflation expectations and protect the country’s large FX loan liability. C roatia’s dire domestic economy will continue eroding support for the ruling Kukuriku coalition. The economy would need to post a remarkable turnaround for the coalition to have any chance of winning re-election in the 2015 parliamentary elections.

Major Forecast Changes
O ur real GDP forecasts have been lowered to an estimated -0.8% in 2014 and 0.4% in 2015, from -0.6% and 0.6% previously. This reflects an even bleaker outlook for domestic demand. We have revised down our forecasts for the kuna to average HRK7.6400/EUR in 2014, from HRK7.6700/EUR previously, on the back of robust tourism receipts in the first half of the year.

Table Of Contents

Croatia Business Forecast Report Q1 2015
Executive Summary 5
Core Views..5
Major Forecast Changes.5
Key Risks To Outlook..5
Chapter 1: Political Outlook 7
SWOT Analysis. 7
BMI Political Risk Index.. 7
Domestic Politics .. 8
No Way Back For The Government.8
Croatia's governing coalition has little chance of winning the 2016 parliamentary elections. Reversing declining living standards and
reviving the economy will prove impossible, eroding support for the government.
Table: Political Overview8
Long-Term Political Outlook 10
EU Convergence To Pay Dividends Over Long Term.10
While we expect Croatia's long- term political risk profile to continue improving following its accession to the EU, we caution that further
progress and reforms are needed for the country to realise its full potential. We highlight the key challenges that could threaten stability
in Croatia over the next 10 years, and outline three possible long-term scenarios for the country.
Chapter 2: Economic Outlook. 13
SWOT Analysis.. 13
BMI Economic Risk Index 13
Economic Activity .. 14
Economy To Stagnate As Bailout Gets Closer..14
Croatia's economy will stagnate in 2015 and 2016. Real GDP growth will lag behind the rest of the EU, as domestic demand is
constrained by a lack of progress tackling competitiveness issues. The impacts of an increasingly likely EU/IMF aid deal could tip the
country back into recession at some point over the next five years.
Table : Economic Acti vit y14
Fiscal Policy. 16
Sliding Towards EU/IMF Help16
Favourable financing conditions will allow Croatia to cover its budget deficit in 2014 and 2015. But Croatia will eventually need an EU/
IMF aid package to plug funding gaps, as a deteriorating credit profile increases borrowing costs and restricts demand for government
debt. Loan conditionality will help Croatia implement the painful structural reforms needed to make the country more competitive.
Table: Fiscal Policy.16
Balance Of Payments 18
Surpluses Unlikely To Last18
Croatia's current account surplus will return to deficit over the coming years, as imports slowly recover and exports are restricted by
competitiveness issues. This suggests limited hope of Croatia exporting its way out of its current economic malaise.
Table : Balance Of Payme nts ..18
Monetary Policy 20
Central Bank Will Struggle To Ward Off Deflation20
Croatia's 'euroised' economy will restrict monetary policy to exchange rate targeting. The central bank will therefore struggle to boost
demand and prices away from deflationary territory, posing risks to our already dire outlook for consumer spending.
tA BLE: Monet ary Polic y..21
Exchange Rate Policy .. 22
HRK: Deprecation On The Cards22
Declining tourism receipts will contribute to kuna weakness over the winter months, with subdued demand for Croatian assets then
contributing to the unit's depreciation against the euro over the long term. Nevertheless, the government and households' large FX
liability means the central bank will be prepared to step in to prevent excessive currency weakness.
Table: Currency Forecast..22
Banking Sector . 23
Banking Sector On Firmer Foundations23
The recovery of Croatia's banking sector will move onto a firmer footing in 2015, in spite of subdued lending and profits. Steady deposits
mean banks are becoming less reliant on funding from foreign parents, while healthy capital buffers imply the sector is well positioned to
cope with any unforeseen credit shocks.
Chapter 3: 10-Year Forecast. 27
The Croatian Economy To 2023.. 27
A Sluggish Recovery In The Years Ahead27
With EU membership achieved in July 2013 and some convergence gains still to be realised, we maintain a slightly better long-term
view on the Croatian economy. We caution, however, that ongoing difficulties in the eurozone and a more protracted economic recovery
present key risks to this outlook over the longer term.
Table : Long-Term Macr oec onomic Forec asts 27
Chapter 4: Operational Risk. 29
Operational Risk Index. 29
Operational Risk 30
Table: Operational Risk..30
Transport Network 31
Table : Emergi ng Eur ope Transp ort Netw ork Risks ..32
Economic Openness.. 35
Table : Economic Ope nnes Risk ..35
Table : Top Five Products Imp orted (USDmn), 2007-2013..36
Table : Top Five Trade Part ners Product Exp orts (USDmn), 2007-2013.. 37
Chapter 5: Key Sectors.. 39
Oil and Gas 39
Table: Headline Forecasts..39
Table: Oil Production39
Table: Oil Production40
Table: Gas Production.40
Table: Gas Production.40
Tourism.. 41
Table : Inbound Tourism 42
Table : Outb ound Tourism ..43
Other Key Sectors 47
Table : Pharm a Sect or Key Indic ators .47
Table : Telec oms Sect or Key Indic ators 47
table: Defence and Security Sector Key Indicators..47
Table: Infrastructure Sector Key Indicators..47
Table: Food and Drink Sector Key Indicators.48
Table: Autos Sector Key Indicators.48
table: Freight Key Indicators..48
Chapter 6: BMI Global Assumptions.. 49
Global Outlook 49
Big Emerging Market Revisions.49
Table : Global Asumpti ons.49
Table: Developed States, Real GDP GrowtH, %..50
Table : Emergi ng Markets , Real GDP Growth , %.51

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