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Croatia Country Risk Report Q4 2016

  • July 2016
  • -
  • Business Monitor International
  • -
  • 43 pages

Core Views

Croatia's economic recovery will continue over the coming quarters,but will be hampered by renewed headwinds and the country willcontinue falling further behind its EU counterparts over the mediumterm. Modest real GDP growth rates are the best the country canhope for in the coming years.After the governing coalition collapsed just six months into its mandate,early elections do not provide a guarantee of stability as thereis a strong likelihood of another inconclusive result.Debt sustainability remains the most evident risk to financial stability.Without rapid reforms, we believe Croatia will require some form ofIMF aid package at some stage over the next few years.Croatia's internal devaluation has further to run, with only modestinflation pressures to emerge from H216.Major Forecast ChangesWe have adjusted our estimate for the 2016 budget deficit to 2.9% ofGDP, after the unexpected reduction in the previous year's shortfallto 3.2% of GDP.We expect average inflation to come in at just 0.1% in 2016 asdeflationary pressures deepened in the first half of the year.We have lowered our forecast for the current account surplus in2016 to 3.9% of GDP as export growth wanes on increased externalheadwinds in the eurozone.

Table Of Contents

Croatia Country Risk Report Q4 2016
Executive Summary. 5
Core Views5
Major Forecast Changes..5
Chapter 1: Economic Outlook 7
SWOT Analysis.. 7
BMI Economic Risk Index 7
Economic Growth Outlook. 8
Recovery Threatened By Political Chaos At Home And Abroad8
Croatia's economic recovery showed more promise at the start of 2016, but now faces growing headwinds both at home and abroad
following the collapse of the government and the shock Brexit vote. For now we are holding our below-consensus growth forecast of
1.4% in 2016, noting increased downside risks to economic activity in the coming years.
GDP By Expenditure Outlook 9
TABLE: GDP GROWTH FORECASTS.9
TABLE: PRIVATE CONSUMPTION FORECASTS.9
TABLE: GOVERNMENT CONSUMPTION FORECASTS..9
TABLE: FIXED INVESTMENT FORECASTS.10
TABLE: NET EXPORTS FORECASTS..10
Monetary Policy.. 11
Inflation To Remain Subdued.11
Croatia will exit its prolonged bout of deflation by end-2016 on the back of rising commodity prices and improving domestic demand.
Inflation will continue to accelerate in the years ahead, though remain relatively modest amid sluggish economic growth, stable oil prices
and elevated unemployment.
Monetary Policy Framework 11
TABLE: MONETARY POLICY FORECASTS.12
Fiscal Policy And Public Debt Outlook 13
Mounting Risks To Stability Of Public Finances13
The collapse of Croatia's government coalition deals a blow to efforts to correct the precarious state of public finances, in particular the
bloated public debt pile. 2017 is a potential flashpoint given debt repayments due, and economic stability will be in jeopardy if political
instability continues into the new year.
Structural Fiscal Position. 14
TABLE: FISCAL and PUBLIC DEBT FORECASTS.14
External Trade And Investment Outlook. 15
Tourism Boom Will Prop Up Current Account Surplus.15
The current account surplus will narrow sharply this year after a record result in 2015, though we expect the balance to remain positive
over the medium term based on a strong outlook for the country's vibrant tourism sector. A persistent current account surplus will
provide some relief to Croatia's relatively precarious net external position given high external debt.
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES..15
Outlook On External Position. 16
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE..17
TABLE: CURRENT ACCOUNT BALANCE FORECASTS17
TABLE: CURRENT ACCOUNT BALANCE FORECASTS17
TABLE: TOP 5 GOODS EXPORTS 17
Regional Economic Activity 18
Brexit Contagion Could Reignite Eurozone Crisis18
The UK vote to leave the EU on June 23 will act as a significant drag on domestic and regional growth in the coming year. However, in
terms of systemic risks to the global economy, a deeper crisis would be much more likely to emerge from the eurozone as opposed to
the UK, via political contagion or banking sector instability. We highlight Italy as a potential next epicentre of instability.
TABLE: TOP 5 GOODS IMPORTS .18
4 www.bmiresearch.com Business Monitor International Ltd
CROATIA Q4 2016
Chapter 2: 10-Year Forecast. 21
The Croatian Economy To 2025 21
A Sluggish Recovery In The Years Ahead.21
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 structural economic inefficiencies
present key risks to this outlook over the longer term.
TABLE: LONG-TERM MACROECONOMIC FORECASTS.21
Chapter 3: Political Outlook. 23
SWOT Analysis 23
BMI Political Risk Index. 23
Domestic Politics.. 24
Government Collapse Risks Prolonged Period Of Political Instability24
The already fragile political climate in Croatia has descended into turmoil after the government coalition broke apart and early elections
were called. A period of political uncertainty - exacerbated by the external shock of the Brexit vote - will threaten the economic
recovery, while an inconclusive result in the snap election will spell trouble for the stability of public finances.
TABLE: POLITICAL OVERVIEW..24
Long-Term Political Outlook.. 26
EU Anchor Supportive, But Risks Loom.26
While we expect Croatia's long-term political risk profile to continue improving, we caution that further progress on reforms are needed
for the country to realise its full economic potential. The major risks over the coming decade include corruption, poor demographics,
still-powerful nationalist currents in the Balkans and a potential weakening of the post-Brexit EU, which would be less able to champion
political and economic reforms amongst newer EU members.
Chapter 4: Operational Risk. 29
SWOT Analysis 29
Operational Risk Index.. 29
Operational Risk. 30
TABLE: OPERATIONAL RISK30
Market Size And Utilities 31
TABLE: EMERGING EUROPE - MARKET SIZE AND UTILITIES RISK.32
Labour Costs 35
TABLE: LABOUR REGULATIONS GOVERNING FLEXIBILITY OF WORKFORCE.. 36
Chapter 5:BMI Global Macro Outlook. 39
Global Macro Outlook. 39
Brexit Risk Casts A Long Shadow..39
TABLE: GLOBAL ASSUMPTIONS..39
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %40
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %..41
MACROECONOMIC FORECAST.43
TABLE: CROATIA - MACROECONOMIC DATA and FORECASTS..43

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