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Croatia Business Forecast Report Q3 2014

  • April 2014
  • -
  • Business Monitor International
  • -
  • 48 pages

Core Views

Croatia’s economy will shrink for a sixth consecutive year in 2014, with the outlook for private consumption set to show barely any improvement over the coming quarters.
Although structural and competitiveness issues will keep a lid on export growth, weak domestic demand will ensure Croatia’s current account remains in surplus over the next few quarters. We forecast the current account to come in at 0.1% of GDP in 2014.

Croatia’s fiscal position poses one of the most significant threats to the country’s economic recovery. Weak revenue growth will ensure that ambitious EU deficit reduction targets are missed, casting further doubts over the credibility of Croatia’s sovereign credit risk profile. Inflationary pressures will remain subdued over the coming quarters, averaging just 1.8% in 2014. Although absent demand-pull pressures will keep price growth dangerously close to deflation, increased spending during the summer tourist season should avert a potential deflationary spiral.

Regional tensions will remain elevated in 2014, due to Croatia’s ongoing disputes with both Serbia and Hungary. Croatia’s relationship with the EU is also likely to remain under strain, as the country’s position within the bloc comes under pressure from the fallout from a difficult first year as a member state.

Major Forecast Changes

We have revised down our real GDP forecast to -0.3% in 2014, from 0.4% previously, against the backdrop of an increasingly bleak outlook for consumer spending over the coming quarters. We now forecast the current account surplus to come in at 0.1% in 2014, from a previous forecast of 0.3%

Table Of Contents

Croatia Business Forecast Report Q3 2014
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 Ratings 7
Domestic Politics 8
Regional Tensions To Remain Elevated In 2014 8
Regional tensions will remain elevated in 2014, due to Croatia's ongoing disputes with Serbia and Hungary. Croatia's relationship with
the EU is also likely to remain under strain, as the country's position within the bloc comes under pressure from the fallout from a difficult
first year as member.
Table: POLITICAL Overview 8
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.
Chapter 2: Economic Outlook 13
SWOT Analysis 13
BMI Economic Risk Ratings 13
Economic Activity 14
A Further Year Of Negative Growth 14
Croatia's economy will contract for the sixth consecutive year in 2014, as household and corporate deleveraging scuppers any chance
of a significant economic recovery.
Table: ECONOMIC ACTIVITY 14
Balance Of Payments 16
Private Sector Deleveraging To Keep Current Account In Surplus 16
Although structural and competitiveness issues will keep a lid on export growth, weak domestic demand will ensure that Croatia's
current account remains in surplus over the next few quarters.
Table: BALANCE OF PAYMENTS (Euro) 16
Fiscal Policy 18
Fiscal Position Posing Increasing Risks 18
Croatia's fiscal position poses one of the most significant threats to the country's economic recovery, with the budget shortfall set to
widen again in 2014.
Table: FISCAL POLICY 18
Monetary Policy 20
Narrowly Avoiding Deflation In 2014 20
Inflationary pressures will remain subdued in Croatia over the coming quarters, averaging just 1.8% in 2014.
Table: MONETARY POLICY 21
Banking Sector 22
Worst Over For Banks 22
Although the Croatian banking sector will shrink further in 2014, we believe that the worst is now over.
Table: BANKING SECTOR OVERVIEW 22
Exchange Rate Policy 24
HRK: Summer Strength Will Not Last 24
Our long-held view that the Croatian kuna will depreciate in Q114 played out (see 'Kuna To Weaken In 2014, Despite Summer Strength',
December 11 2013), with the currency losing 0.7% against the euro against the backdrop of subdued demand for Croatian assets.
Table: Currency Forecast 24
Table: EXCHANGE RATE 24
Regional Economic Activity 25
Fixed Investment: Russia And Turkey To Underperform 25
Although fixed investment in CEE is likely to remain sluggish in 2014, we expect Russia and Turkey to underperform the region over the
coming quarters. On the other hand, the outlook for fixed investment looks slightly better in central and southeast Europe.
Chapter 3: 10-Year Forecast 27
The Croatian Economy To 2023 27
A Sluggish Recovery In The Years Ahead 27
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 Macroeconomic Forecasts 27
Chapter 4: Business Environment 29
SWOT Analysis 29
BMI Business Environment Risk Ratings 29
Business Environment Outlook 30
Institutions 30
TABLE: BMI BUSINES AND OPERATION RISK RATINGS 30
TABLE: BMI LEGAL FRAMEWORK RATING 31
Infrastructure 32
TABLE: LABOUR FORCE QUALITY 32
TABLE: EMERGING EUROPE - ANUAL FDI INFLOWS 33
Market Orientation 34
TABLE: TRADE AND INVESTMENT RATINGS 34
Operational Risk 36
Chapter 5: Key Sectors 37
Defence 37
table: Defence Expenditure, 2010-2018 37
Freight Transport 42
Table: Inland Waterway Freight 44
Table: Road Freight 44
Table: Rail Freight 44
Table: Maritime Freight 44
Table: Air Freight 44
Other Key Sectors 45
Table: Oil and Gas Sector Key Indicators 45
Table: Pharma Sector Key Indicators 45
Table: Infrastructure Sector Key Indicators 45
Table: Telecoms Sector Key Indicators 46
Table: Autos Sector Key Indicators 46
Table: Food and Drink Sector Key Indicators 46
Chapter 6: BMI Global Assumptions 47
Global Outlook 47
Chinese Economy Under Pressure 47
Table: Global Assumptions 47
Table: Developed States, Real GDP GrowtH, % 48
Table: BMI VERSUS BLOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, % 48
Table: Emerging Markets, Real GDP Growth, % 49

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