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Croatia Country Risk Report Q2 2016

  • January 2016
  • -
  • Business Monitor International
  • -
  • 39 pages

Core Views

Croatia’s economy will improve over the coming quarters, but willcontinue falling further behind its EU counterparts over the long-term.Modest real GDP growth rates are the best the country can hopefor in future.The new governing coalition is built on shaky ground and will struggleto remain united in the face of major political and economicchallenges.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 a furtherdownturn in oil prices likely to increase disinflationary forces overthe coming months.

Major Forecast ChangesWe have revised up our estimates for Croatian real GDP growthto 1.1% in 2015, from 0.6% previously, and to 1.2% in 2016 (from1.0%). This reflects better than expected growth figures for H115,as well as strong external demand from key export partners.We have adjusted our estimate for the 2015 budget deficit to 4.6%,from 4.8%, due to improved revenue growth on better economicactivity. Our forecast for 2016 dropped from 4.5% to 4.2%.The current account surplus for 2015 is now estimated to come inat 2.2% of GDP, up from our previous forecast of 1.0%, due largelyto a bumper tourist season.

Table Of Contents

Croatia Country Risk Report Q2 2016
Executive Summary 5
Core Views5
Major Forecast Changes5
Key Risks5
Chapter 1: Economic Outlook 7
SWOT Analysis 7
BMI Economic Risk Index 7
Economic Analysis 8
Severe Risks Undermine Improved Growth Figures8
Economic conditions continue to improve in Croatia, and we have raised our short-term forecasts to 11% in 2015 and 12% in 2016
Nonetheless, we maintain our broadly bearish outlook due to ongoing economic headwinds and increased political instability
GDP By Expenditure Outlook 9
TABLE: GDP GROWTH FORECASTS9
TABLE: PRIVATE CONSUMPTION FORECASTS9
TABLE: GOVERNMENT CONSUMPTION FORECASTS10
TABLE: FIXED INVESTMENT FORECASTS10
TABLE: NET EXPORTS FORECASTS10
External Trade And Investment Outlook 10
Tourist Sector Will Support Current Account Surpluses10
Croatia will continue to post current account surpluses over the coming years, supported by subdued import growth, a booming tourism
sector, and accelerating exports to EU markets Although the improved external position does not reflect better local competitiveness, it
does leave Croatia more financially stable in what remains a testing economic climate
Outlook On External Position 11
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE11
TABLE: TOP 5 GOODS EXPORTS IN 9M1512
TABLE: TOP 5 GOODS IMPORTS IN 9M1512
Fiscal And Debt Outlook 13
Unsustainable Public Finances The Main Threat To Stability13
Although the budget deficit is falling, Croatia's public finances will remain the principal threat to economic stability in the coming years,
with the new government struggling to bring state debt on to a more sustainable path
Structural Fiscal Position 14
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES14
TABLE: FISCAL POLICY15
Monetary Policy 16
Oil Slump Will Extend Period Of Low Inflation16
The low inflation environment is set to persist in Croatia, largely due to the impact of falling oil prices The recovery in domestic demand
will gradually generate new price pressures, although we expect these to remain minimal amid subdued wage growth
Monetary Policy Framework 17
TABLE: MONETARY POLICY17
Chapter 2: 10-Year Forecast 19
The Croatian Economy To 2025 19
A Sluggish Recovery In The Years Ahead19
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 FORECASTS19
Chapter 3: Political Outlook 21
SWOT Analysis 21
BMI Political Risk Index 21
Domestics Politics 22
New Government Coalition Built On Shaky Ground22
After a long delay, we expect Croatia to form a new government in the very near future, marking an important step in the return to
normality However, we believe that the new coalition is built on shaky ground and will face immediate pressure given the country's
political and economic challenges
TABLE: POLITICAL OVERVIEW22
Long-Term Political Outlook 23
EU Anchor To Support A Maturing Democracy23
While we expect Croatia's Long-Term Political Risk profile to continue improving, 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 4: Operational Risk 27
SWOT Analysis 27
Operational Risk Index 27
Operational Risk 28
TABLE: OPERATIONAL RISK28
Trade Procedures And Governance 29
TABLE: EMERGING EUROPE - TRADE PROCEDURES AND GOVERNANCE RISK 29
TABLE: IMPORT AND EXPORT DOCUMENTS30
Vulnerability To Crime 31
TABLE: TRADE PROCEDURES BREAKDOWN31
Chapter 5: BMI Global Macro Outlook 35
Global Macro Outlook 35
Unfinished Business In 201635
TABLE: GLOBAL ASSUMPTIONS35
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %36
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, % 36
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %37
TABLE: CROATIA - MACROECONOMIC DATA and FORECASTS39

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