Croatia Business Projection Industry Update Quarter 3 2012

Executive Summary 5
Core Views 5
Major Forecast Revisions 5
Risks To Outlook 5
Chapter 1: Political Outlook 7
SWOT Analysis 7
BMI Political Risk Ratings 7
Domestic Politics 8
Slovenian Bank Deal Clears Way For EU Accession 8
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.
TABLE: POLITICAL OVERVIEW 8
Long-Term Political Outlook 10
EU Convergence To Pay Dividends
We expect Croatia's long-term political risk profile to continue improving in line with its continued push towards the EU and we maintain
our 2013 entry date to the bloc. However, we also highlight challenges that could threaten stability and outline three scenarios for the
next 10 years.
Chapter 2: Economic Outlook 13
SWOT Analysis 13
BMI Economic Risk Ratings 13
Economic Activity 14
Weak Recovery Losing Momentum
With real GDP declining by 2.3% year-on-year (y-o-y) in Q412, we reiterate our view that Croatia's economic recovery will be sluggish
in 2013. We have revised our forecast for real GDP growth to 0.1% in 2013, from 0.3% previously, expecting weak private consumption
and sluggish external demand to continue weighing on the country's growth rebound over the next few quarters.
TABLE: ECONOMIC ACTIVITY 14
Balance Of Payments 16
Return To Deficit For Current Account In 2013
Despite Croatia posting a current account surplus of 0.1% of GDP in 2012, we reiterate our view that the current account will return to
a deficit in 2013. We expect the deficit to be 0.7% of GDP in 2013 and 0.6% of GDP in 2014, as modestly improving domestic demand
and subdued conditions in the euro-area pushes the trade balance further into deficit, offsetting the country's recovering tourist sector.
TABLE: BALANCE OF PAYMENTS (EURO) 16
Fiscal Policy 17
Outlook Deteriorating, Deficit To Grow In 2013
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.
TABLE: FISCAL POLICY 18
Monetary Policy 19
Inflation To Ease Modestly
We have revised our forecast for Croatian consumer price inflation growth by 3.2% in 2013, from 3.4% previously, after data from the
Croatian Bureau of Statistics showed inflation falling from 5.2% y-o-y year-on-year in January to 4.9% in February. We expect weak
domestic demand and easing food price pressure to act as the main drivers of declining inflation over the next few quarters, but caution
that the liberalisation of the energy sector will see energy prices remain elevated in 2013.
TABLE: MONETARY POLICY 19
Exchange Rate Policy 21
Kuna To Head Lower After Summer Strength
With the Croatian kuna losing 0.6% against the euro from January 1 to April 17, we believe the currency will continue along a mild
depreciatory path. The kuna is trading at HRK7.6214/HRK at the time of writing in April, far exceeding the crisis low of HRK7.5493/EUR
in 2009, as stagnating foreign fund inflows, high outbound cross-border payments and deteriorating exports apply downward pressures
on the currency. Indeed, the economic outlook for Croatia remains bleak and we have previously highlighted our growing concerns that
the country's economic recovery is losing momentum, with real GDP growth forecast to come in at just 0.1% in 2013.
Chapter 3: 10-Year Forecast 23
The Croatian Economy To 2022 23
EU Convergence To Continue Driving Growth 23
With EU membership on the cards in 2013, we maintain a reasonably positive long-term view on the Croatian economy. We warn,
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 23
Chapter 4: Business Environment 25
SWOT Analysis 25
BMI Business Environment Risk Ratings 25
Business Environment 26
TABLE: BMI BUSINESS AND OPERATION RISK RATINGS 26
TABLE: BMI LEGAL FRAMEWORK RATING 27
Infrastructure 28
TABLE: LABOUR FORCE QUALITY 28
TABLE: EMERGING EUROPE - ANNUAL FDI INFLOWS 29
TABLE: TRADE AND INVESTMENT RATINGS 30
TABLE: TOP EXPORTS 31
Operational Risk 32
Chapter 5: Key Sectors 33
Defence & Security 33
TABLE: DEFENCE EXPENDITURE 34
Freight Transport 37
TABLE: AIR FREIGHT 38
TABLE: MARITIME FREIGHT 38
TABLE: RAIL FREIGHT 38
TABLE: ROAD FREIGHT 39
TABLE: INLAND WATERWAY FREIGHT 39
Other Key Sectors 41
TABLE: INFRASTRUCTURE SECTOR KEY INDICATORS 41
TABLE: AUTOS SECTOR KEY INDICATORS 41
TABLE: FOOD AND DRINK SECTOR KEY INDICATORS 41
TABLE: PHARMA SECTOR KEY INDICATORS 42
TABLE: TELECOMS SECTOR KEY INDICATORS 42
Chapter 6: BMI Global Assumptions 43
Global Outlook 43
Lowering Our US And Eurozone Growth Forecasts
TABLE: GLOBAL ASSUMPTIONS 43
TABLE: DEVELOPED STATES, REAL GDP GROWTH, % 44
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, % 44
TABLE: EMERGING MARKETS, REAL GDP GROWTH, % 45

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