Croatia Business Projection Industry Update Quarter 3 2012

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

Includes 3 FREE quarterly updates

Core Views
The outlook for Croatia's economy in 2012 remains dour and we projection a full-year contraction of 1.5% in real terms. A combination of dampened household consumption and the start of fiscal austerity by the Kukuriku coalition government will return the Croatian economy to recession following flat growth in 2011. While we expect the Croatian government to miss its target for a 3.8% of Gross Domestic Product budget deficit in 2012 and projection a higher deficit of 4.7%, we remain relatively sanguine on the country's fiscal outlook. This is underpinned by strong commitment to fiscal austerity from the Kukuriku coalition government and supportive rhetoric from ratings agencies. The latter will also see to it that financing costs continue to fall, bolstering our bullish Croatian debt view.
We believe Croatia's Kukuriku coalition government is well placed to maintain its parliamentary majority and push through with necessary fiscal consolidation and economic restructuring. However, we see potential flashpoints that could undermine the cohesion of the coalition in the coming years, and stall the economy's reform process.

Major Projection Changes
We have revised down our projection for real Gross Domestic Product growth in Croatia to -1.5% in 2012 from 0.1% previously. This revision came on the heels of statements from the Kukuriku coalition outlining their intention to implement hefty expenditure cuts. We have revised upwards our projection for Croatia's average consumer price inflation in 2012 to 3.5%, from 3.0% previously. This was largely predicated on the government's plans to raise the VAT rate to 25% from 23%, effective March 1, and the sustained rise in global energy prices at the start of the year, which will boost imported inflationary pressure.

Key Risks To Outlook
A more pronounced slowdown in eurozone growth than we are currently projecting would weigh considerably on Croatian growth. The country is heavily reliant on the external industry for growth, particularly while government expenditures are dragged down by fiscal austerity and as consumers struggle to bounce back from the global recession.
One upside risk to our fiscal and investment projections would be the government's ability to find a buyer for the country's beleaguered shipyards. While this target remains a key EU accession process chapter, a lack of interest has meant the government has been unable to sell the shipyards. In the event that the new government finds a buyer, it would take a significant strain off public finances and could have the potential to increase investor interest in the country, thereby improving Croatia's investment outlook.

Table Of Contents

Executive Summary 5

Core Views
...5

Major Projection Changes
5

Key Risks To Outlook
....5
Chapter 1: Political Outlook.. 7
Industry SWOT Analysis 7
BMI Political Risk Ratings.. 7
Domestic Politics. 8
Potential Flashpoints For Kukuriku Government.8
We believe Croatia's Kukuriku coalition government is well placed to maintain its parliamentary majority and push through with
necessary fiscal consolidation and economic restructuring. However, we see potential flashpoints that could undermine the cohesion of
the coalition in the coming years, and stall the economy's reform process.
POLITICAL OVERVIEW...8
Chapter 2: Economic Outlook.. 11
Industry SWOT Analysis ... 11
BMI Economic Risk Ratings.. 11
Economic Activity... 12
Back To Recession In 2012....12
The outlook for Croatia's economy in 2012 remains dour and we projection a full-year contraction of 1.5% in real terms. A combination
of dampened household consumption and the start of fiscal austerity by the Kukuriku coalition government will return the Croatian
economy to recession following flat growth in 2011.
TABLE: ECONOMIC ACTIVITY....12
Fiscal Policy... 14
Sanguine On Fiscal Outlook Despite Likely Missed Target..14
While we expect the Croatian government to miss its target for a 3.8% of Gross Domestic Product budget deficit in 2012 and projection a higher deficit
of 4.7%, we remain relatively sanguine on the country's fiscal outlook. This is underpinned by strong commitment to fiscal austerity
from the Kukuriku coalition government and supportive rhetoric from ratings agencies. The latter will also see to it that financing costs
continue to fall, bolstering our bullish Croatian debt view.
TABLE: FISCAL POLICY....15
Balance Of Payments... 16
Strong Services Surplus To Preclude Deeper C/A Deficits...16
A weak external environment, which will weigh on Croatian exports, will see to it that the merchandise trade deficit remains deeply in the
red despite concomitant weak import growth. However, a strong services surplus will preclude a more significant widening of the deficit
this year. We also expect investment flows into Croatia to remain weak this year owing to the difficult economic climate, but note that
accession to the EU should see these recover somewhat from 2013 onwards.
TABLE: CURRENT ACCOUNT17
Monetary Policy.. 18
Rising Inflation Not Down To Recovering Domestic Demand...18
We have revised upwards our projection for Croatia's average consumer price inflation this year to 3.5%, from a previous projection of
3.0%. This revision comes on the heels of the government's plans to raise the VAT rate to 25% from 23%, effective March 1, and the
sustained rise in global energy prices at the start of the year, which will boost imported inflationary pressure. However, we highlight that
the weak state of the domestic economy will see to it that a more pronounced increase in the price level is not felt this year.
TABLE: MONETARY POLICY.18
Regional Outlook 19
Accession Prospects Brighten Balkan Energy Infrastructure Outlook...19
We hold a constructive outlook for western Balkan infrastructure investments, particularly in the power segment but also in upstream
oil and gas. We believe that despite ongoing regulatory and funding risks - stemming from challenging business environments and
exposure to the eurozone sovereign debt crisis - the EU policy anchor taking hold in the region will ameliorate these risks.
BMI BUSINESS ENVIRONMENT .21
Chapter 3: 10-Year Projection 25
The Croatian Economy To 2021. 25
EU Convergence To Continue Driving Growth ..25
With EU membership on the cards for 2013, we maintain a positive long-term view on the Croatian economy. We caution, however, that
delayed EU membership or a more protracted economic recovery present key risks to this outlook over the longer term.
TABLE: LONG-TERM MACROECONOMIC FORECASTS..25
Chapter 4: Business Environment 27
Industry SWOT Analysis ... 27
BMI Business Environment Risk Ratings 27

Environment Overview Outlook. 28
Institutions .... 28
TABLE: BMI BUSINESS AND OPERATION RISK RATINGS..28
TABLE: BMI LEGAL FRAMEWORK RATING..29
Infrastructure 30
TABLE: LABOUR FORCE QUALITY.30
TABLE: EMERGING Euros OPE - ANNUAL FDI INFLOWS..31
Market Orientation .. 32
TABLE: TRADE AND INVESTMENT RATINGS....32
TABLE: TOP EXPORTS.33
Operational Risk. 34
Chapter 5: Key Segments ... 35
Defence and Security . 35
TABLE: CROATIA'S MANPOWER AVAILABLE FOR MILITARY SERVICES, from 2009 to 2016 (AGED 16-49, UNLESS OTHERWISE STATED)... 40
Freight Transport .... 41
TABLE: AIR FREIGHT, from 2008 to 2016 ....41
TABLE: RAIL FREIGHT, from 2007 to 2016 ..42
TABLE: MARITIME FREIGHT - THROUGHPUT, from 2007 to 2016 ('000 TONNES)..43
Other Key Segments ... 44
TABLE: INFRASTRUCTURE SECTOR KEY INDICATORS44
TABLE: AUTOS SECTOR KEY INDICATORS.44
TABLE: FOOD AND DRINK SECTOR KEY INDICATORS..44
TABLE: OIL AND GAS SECTOR KEY INDICATORS....45
TABLE: PHARMA SECTOR KEY INDICATORS...45
TABLE: TELECOMS SECTOR KEY INDICATORS....45
Chapter 6: BMI World Assumptions. 47
World Outlook.... 47
World Economy Continues To Muddle Through ...47
TABLE: GLOBAL ASSUMPTIONS....47
TABLE: DEVELOPED STATES REAL Gross Domestic Product GROWTH FORECAST.48
TABLE: REAL Gross Domestic Product GROWTH CONSENSUS FORECASTS...48
TABLE: EMERGING MARKETS REAL Gross Domestic Product GROWTH FORECAST49

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