We do not expect the recent souring of relations between Croatia and
Serbia to threaten long-term international ties between the Balkan
nations or regional stability. Rather, in the short term, we expect
the Serbian government to use this event to deflect the electorate's
attention from domestic issues.
We see the end of Croatia's banking row with Slovenia as an important
step in the country's move towards full EU accession. With
Slovenia removing its opposition to Croatia's EU membership bid in
light of the deal, we reiterate our view that the country will become
the 28th member of the union of July 1 2013, but stress that ongoing
political instability will keep the country under close scrutiny for the
next few years.
We reiterate our view that Croatia's fiscal outlook is negative for 2013,
forecasting the deficit to widen to 4.2% of GDP in 2013, from 3.5%
in 2012. We expect Croatia to miss its deficit target of 3.8% of GDP
for this year, and believe weak revenues and difficulties reigning in
government expenditure will weigh on the country's fiscal outlook
for the next few quarters.
The mild rebound in economic growth will be driven primarily by the
country's accession to the EU, expected in 2013, as EU funds seep
into the economy and investor sentiment improves. However, weak
private and government consumption will continue to weigh on the
economy's rebound, and we caution that risks to our forecasts are
strongly weighted to the downside.
Major Forecast Revisions
We have revised down our forecast for real GDP growth to 0.1%
in 2013 from 0.3% previously as a result of weaker than expected
With recently released data showing a current account surplus of
0.1% of GDP in 2012, the first positive reading since data became
available in 1999, we have revised our forecast for Croatia's current
account deficit to be 0.7% of GDP in 2013 and 0.6% in 2014, from
0.8% and 1.0% previously
We expect the country to miss its recently increased deficit target of
3.8% of GDP this year, and have revised our forecast for the fiscal
deficit to 4.2% of GDP, from 4.0% previously.
Risks To Outlook
A more pronounced slowdown in eurozone growth than we are
currently forecasting would weigh considerably on Croatian growth.
The country is heavily reliant on the external market for growth,
particularly while government expenditures are dragged down by
fiscal austerity and as consumers struggle to bounce back from the