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Croatia Business Forecast Report Q4 2014

  • July 2014
  • -
  • Business Monitor International
  • -
  • 44 pages

Core Views
Croatia will remain in recession in 2014, with growth set to be undermined by weak consumer spending. Unless significant structural reforms are implemented to improve
export competitiveness and increase labour market flexibility, we believe the recovery will lag behind Europe. Government finances are in a dire state, with a growing public debt load and lack of progress tackling the fiscal deficit likely to weigh on Croatia’s credit risk profile. A euroised economy will continue limiting the central bank’s ability to
influence lending and spending, which partially underpins our weak outlook for household spending. The ruling Kukuriku coalition’s poor performance in the May EU
Parliament elections has weakened the government’s position, limiting its appetite for reform.

Major Forecast Changes
We have revised down our forecast for real GDP to decline by 0.7% in 2014 and grow by 0.6% in 2015, from a fall of 0.3% and growth of 0.7% previously, remaining firmly below consensus on growth in the process.

Table Of Contents

Croatia Business Forecast Report Q4 2014
Executive Summary.... 5
Core Views..5
Major Forecast Changes5
Key Risks To Outlook....5
Chapter 1: Political Outlook.. 7
SWOT Analysis.... 7
BMI Political Risk Ratings. 7
Domestic Politics 8
Reform Momentum To Remain Sluggish...8
The results of the EU parliament elections in May will increase tensions within the governing coalition, with the Kukuriku coalition likely
to come under increased pressure to slow the pace of fiscal adjustment in the country. However, the dire state of the economy will
ensure that the government's popularity continues to fall.
Table: Political Overview....8
Long-Term Political Outlook.. 9
EU Convergence To Pay Dividends Over Long-Term....9
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 Ratings. 13
Economic Activity.. 14
Recovery To Lag Behind Europe....14
Croatia's economic outlook is one of the least attractive in the EU, with growth set to remain painfully weak unless significant structural
reforms are implemented. Household spending will be the main factor holding back the recovery, due to a lack of progress on
deleveraging and steady erosion of disposable incomes.
table: Economic Activity....14
Balance Of Payments.. 16
Weak Economy To Keep Current Account In Surplus.16
Although Croatia will post current account surpluses in 2014 and 2015, this will reflect weak domestic demand rather than improving
export competitiveness. The composition of financial account flows will also limit the potential benefits of these surpluses over the next
few quarters.
Table: Balance Of Payments..16
Fiscal Policy.. 18
Fiscal Threat To Recovery18
Subdued revenues and lack of government reforms will widen Croatia's budget deficit over the coming quarters, and contribute to EU
fiscal deficit targets being missed. Alongside a growing public debt load, sluggish progress shrinking the deficit now will restrict the
government's ability to support growth over the long term.
Table: Fiscal Policy....18
Monetary Policy. 20
Subdued Demand To Keep A Lid On Inflation...20
Although higher spending during the summer tourist season and base effects from a period of low inflation last year will pull Croatia out
of deflation ove r the next few months, weak domestic demand will restrict headline price growth. We forecast inflation to average just
0.9% in 2014 and 1.7% in 2015.
Table: Monetary Policy.20
Exchange Rate Policy. 21
Don't Be Fooled By Kuna Strength.21
Although seasonal tourism receipts will help prop-up the Croatian kuna over the summer, the currency will depreciate against the
euro over the next few years. Weak exports, subdued demand for Croatian assets and a large net international investment liability will
contribute to the currency weakening to HRK7.6400/EUR in 2014 and HRK7.6800/EUR in 2015.
Table: Currency Forecast21
Banking Sector . 23
Worst Over For Banking Sector.23
Croatia's banking sector will improve in 2014, as steady deposit growth underpins a recovery in bank lending. Healthy capital buffers
also suggest the sector is well positioned to deal with any unforeseen shocks.
Chapter 3: 10-Year Forecast 25
The Croatian Economy To 2023 25
A Sluggish Recovery In The Years Ahead....25
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..25
Chapter 4: Business Environment 27
SWOT Analysis.. 27
BMI Business Environment Risk Ratings 27
Business Environment Outlook 28
Institutions.... 28
Infrastructure 30
Market Orientation.. 32
Operational Risk .... 34
Chapter 5: Key Sectors.. 35
Pharmaceuticals and Healthcare.. 35
Table: Pharmaceutical Sales, Historical Data And Forecasts36
table: Healthcare Expenditure Trends, Historical Data And Forecasts 36
Telecommunications... 37
Table: Government Healthcare Expenditure Trends, Historical Data And Forecasts .. 37
table: Private Healthcare Expenditure Trends, Historical Data And Forecasts... 37
Table: Telecoms Sector-Mobile-Historical Data and Forecasts38
Table: Telecoms Sector-Wireline-Historical Data and Forecasts. 39
Other Key Sectors.. 41
table: Oil and Gas Sector Key Indicators.41
table: Food and Drink Sector Key Indicators...41
TABLE: Autos Sector Key Indicators.42
table: Freight Key Indicators....42
Chapter 6: BMI Global Assumptions. 43
Global Outlook... 43
Global Recovery Still On Track..43
Table: Global Assumptions....43
Table: Developed States, Real GDP GrowtH, %.44
Table: Emerging Markets, Real GDP Growth, %45

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