Croatia Business Forecast Report Q1 2015

Date: October 18, 2014
Pages: 51
US$ 1,195.00
Report type: Strategic Report
Delivery: E-mail Delivery (PDF), Download
ID: C1ED5A78463EN

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Croatia Business Forecast Report Q1 2015
Includes 3 FREE quarterly updates

Core Views

Croatia’s economy will continue along a low growth trajectory over the next few quarters, and may even remain in recession for a seventh consecutive year in 2015. We believe Croatia will eventually need an EU/IMF loan arrangement to help cover its budget deficit and implement much needed structural reforms. However, this is unlikely to happen until at least 2016.

Croatia’s trade deficit will begin expanding amidst weak exports and a slight recovery in domestic demand. This will ensure that the current account surplus begins shrinking over the coming years. Inflationary pressures will remain weak in Croatia. The central bank will remain focused on kuna stability to anchor inflation expectations and protect the country’s large FX loan liability.

Croatia’s dire domestic economy will continue eroding support for the ruling Kukuriku coalition. The economy would need to post a remarkable turnaround for the coalition to have any chance of winning re-election in the 2015 parliamentary elections.

Major Forecast Changes

Our real GDP forecasts have been lowered to an estimated -0.8% in 2014 and 0.4% in 2015, from -0.6% and 0.6% previously. This reflects an even bleaker outlook for domestic demand. We have revised down our forecasts for the kuna to average HRK7.6400/EUR in 2014, from HRK7.6700/EUR previously, on the back of robust tourism receipts in the first half of the year.
Executive Summary
Core Views
Major Forecast Changes
Key Risks To Outlook


SWOT Analysis
BMI Political Risk Index
Domestic Politics
No Way Back For The Government
Croatia's governing coalition has little chance of winning the 2016 parliamentary elections. Reversing declining living standards and
reviving the economy will prove impossible, eroding support for the government.
  Table: Political Overview
Long-Term Political Outlook
EU Convergence To Pay Dividends Over Long Term
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.


SWOT Analysis
BMI Economic Risk Index
Economic Activity
Economy To Stagnate As Bailout Gets Closer
Croatia's economy will stagnate in 2015 and 2016. Real GDP growth will lag behind the rest of the EU, as domestic demand is
constrained by a lack of progress tackling competitiveness issues. The impacts of an increasingly likely EU/IMF aid deal could tip the
country back into recession at some point over the next five years.
  Table: Economic Acti vit y
Fiscal Policy
Sliding Towards EU/IMF Help
Favourable financing conditions will allow Croatia to cover its budget deficit in 2014 and 2015. But Croatia will eventually need an EU/
IMF aid package to plug funding gaps, as a deteriorating credit profile increases borrowing costs and restricts demand for government
debt. Loan conditionality will help Croatia implement the painful structural reforms needed to make the country more competitive.
  Table: Fiscal Policy
Balance Of Payments
Surpluses Unlikely To Last
Croatia's current account surplus will return to deficit over the coming years, as imports slowly recover and exports are restricted by
competitiveness issues. This suggests limited hope of Croatia exporting its way out of its current economic malaise.
  Table: Balance Of Payme nts
Monetary Policy
Central Bank Will Struggle To Ward Off Deflation
Croatia's 'euroised' economy will restrict monetary policy to exchange rate targeting. The central bank will therefore struggle to boost
demand and prices away from deflationary territory, posing risks to our already dire outlook for consumer spending.
tA BLE: Monet ary Polic y
Exchange Rate Policy
HRK: Deprecation On The Cards
Declining tourism receipts will contribute to kuna weakness over the winter months, with subdued demand for Croatian assets then
contributing to the unit's depreciation against the euro over the long term. Nevertheless, the government and households' large FX
liability means the central bank will be prepared to step in to prevent excessive currency weakness.
  Table: Currency Forecast
Banking Sector
Banking Sector On Firmer Foundations
The recovery of Croatia's banking sector will move onto a firmer footing in 2015, in spite of subdued lending and profits. Steady deposits
mean banks are becoming less reliant on funding from foreign parents, while healthy capital buffers imply the sector is well positioned to
cope with any unforeseen credit shocks.


The Croatian Economy To 2023
A Sluggish Recovery In The Years Ahead
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 Macr oec onomic Forec asts


Operational Risk Index
Operational Risk
  Table: Operational Risk
Transport Network
  Table: Emergi ng Eur ope Transp ort Netw ork Risks
Economic Openness
  Table: Economic Ope nnes Risk
  Table: Top Five Products Imp orted (USDmn), 2007-2013
  Table: Top Five Trade Part ners Product Exp orts (USDmn), 2007-2013


Oil & Gas
  Table: Headline Forecasts
  Table: Oil Production
  Table: Oil Production
  Table: Gas Production
  Table: Gas Production
  Table: Inbound Tourism
  Table: Outb ound Tourism
Other Key Sectors
  Table: Pharm a Sect or Key Indic ators
  Table: Telec oms Sect or Key Indic ators
  Table: Defence and Security Sector Key Indicators
  Table: Infrastructure Sector Key Indicators
  Table: Food and Drink Sector Key Indicators
  Table: Autos Sector Key Indicators
  Table: Freight Key Indicators


Global Outlook
Big Emerging Market Revisions
  Table: Global Asumpti ons
  Table: Developed States, Real GDP GrowtH, %
  Table: Emergi ng Markets , Real GDP Growth , %
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