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Croatia Country Risk Report Q1 2017

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

Core Views

Croatia's economic outlook has improved, but headwinds at home and abroad will hamper efforts by the country to catch up with its EU counterparts overt the medium term. Modest real GDP growth rates are the best the country can hope for in the coming years. After snap elections were again inconclusive, the likely return of the same government coalition that collapsed in June 2016 will not inspire confidence in political stability and the reform agenda. Bring public debt on a sustained downward path is vital to avoid the threat of a bailout in the medium to long term. Croatia's internal devaluation has further to run, with only modest inflation pressures to emerge from H216. Major Forecast Changes We have raised our forecast for real GDP growth in 2016 to 2.3%, with our forecast for 2017 climbing to 2.5% on account of a robust recovery in household consumption. The persistence of deflationary pressures in 9M16 has prompted us to lower our full-year inflation forecast to -0.3%, from a previous 0.1%. We still expect a return to inflation in 2017.

Table Of Contents

Croatia Country Risk Report Q1 2017
Executive Summary.................................................................................................................................. 5
Core Views.......................................................................................................................................................................................5
Major Forecast Changes.................................................................................................................................................................5
Key Risks.........................................................................................................................................................................................5
Chapter 1: Economic Outlook.................................................................................................................. 7
SWOT Analysis........................................................................................................................................................... 7
BMI Economic Risk Index.......................................................................................................................................... 7
Economic Growth Outlook........................................................................................................................................ 8
Structural Rigidities Undermine Improved Growth Outlook.......................................................................................................8
Strong data for the first half of the year, a bumper tourism season and a deflationary boost to real wages have prompted us to raise our
target for GDP growth in 2016 and 2017 to 2.3% and 2.5%.
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
Fiscal Policy And Public Debt Outlook.................................................................................................................. 11
Tackling Debt First Priority For New Government.....................................................................................................................11
The incoming government's main economic priority will be to reduce the budget deficit and set public debt on a sustained downward
trajectory. However, we expect political pressures to impede consolidation efforts, leaving the economy vulnerable to external
shocks.
Structural Fiscal Position........................................................................................................................................ 12
TABLE: FISCAL AND PUBLIC DEBT FORECASTS............................................................................................................................................... 12
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES............................................................................................................................. 13
Monetary Policy........................................................................................................................................................ 13
Return To Inflation Delayed Until 2017........................................................................................................................................13
Deflationary pressures have returned to Croatia in recent months, in line with another down-leg in food and energy costs. We have
lowered our estimate for average inflation in 2016 to -0.3%, but hold our core view of a return to inflation in 2017 and beyond.
Monetary Policy Framework.................................................................................................................................... 14
TABLE: MONETARY POLICY FORECASTS.......................................................................................................................................................... 15
External Trade And Investment Outlook................................................................................................................ 16
Growing Trade Deficit To Weigh On Current Account...............................................................................................................16
After peaking in 2015, the current account surplus is set to shrink over the coming years as soft external demand weighs on export
growth and imports rise in line with accelerating consumption. The tourism boom has further to run and will continue to offset a
deteriorating trade deficit.
Outlook On External Position.................................................................................................................................. 17
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE......................................................................................................................................... 17
TABLE: CURRENT ACCOUNT BALANCE FORECASTS....................................................................................................................................... 17
TABLE: TOP 5 GOODS EXPORTS ........................................................................................................................................................................ 18
TABLE: TOP 5 GOODS IMPORTS ......................................................................................................................................................................... 18
Chapter 2: 10-Year Forecast................................................................................................................... 19
The Croatian Economy To 2025.............................................................................................................................. 19
Steady But Insufficient Growth Ahead........................................................................................................................................19
With EU membership achieved in July 2013 and convergence gains still to be realised, we believe the Croatian economy has the
potential for robust long-term growth.
TABLE: LONG-TERM MACROECONOMIC FORECASTS..................................................................................................................................... 19
Chapter 3: Political Outlook................................................................................................................... 21
SWOT Analysis......................................................................................................................................................... 21
BMI Political Risk Index........................................................................................................................................... 21
Domestic Politics..................................................................................................................................................... 22
Sensitive Reforms Will Test Reunited Coalition.........................................................................................................................22
The HDZ-Most coalition is set to be reformed following the snap election caused when the same alliance broke down in June. While
there are reasons to believe this new coalition will be more durable, an undercurrent of political instability will weigh on confidence in the
coming quarters.
TABLE: POLITICAL OVERVIEW............................................................................................................................................................................. 22
Long-Term Political Outlook................................................................................................................................... 23
EU Anchor Supportive, But Risks Loom.....................................................................................................................................23
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................................................................................................................... 27
SWOT Analysis......................................................................................................................................................... 27
Operational Risk Index............................................................................................................................................ 27
Operational Risk....................................................................................................................................................... 28
TABLE: OPERATIONAL RISK................................................................................................................................................................................. 28
Business Crime ....................................................................................................................................................... 29
TABLE: BUSINESS RESPONSES TO RISK........................................................................................................................................................... 30
Government Intervention......................................................................................................................................... 34
TABLE: BUSINESS TAXES..................................................................................................................................................................................... 34
TABLE: PERSONAL INCOME TAX......................................................................................................................................................................... 35
Chapter 5: BMI Global Macro Outlook................................................................................................... 39
Global Macro Outlook.............................................................................................................................................. 39
Broad Recovery But Three Notes Of Caution.............................................................................................................................39
TABLE: GLOBAL FORECASTS, 2015-2020........................................................................................................................................................... 39
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %.................................................................................................................................... 40
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %................................................................................................................................... 41
TABLE: CROATIA - MACROECONOMIC DATA and FORECASTS.......................................................................................................................... 43

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