カントリーリスク評価
Croatia

Croatia

Population 4.2 million
GDP 13,473 US$
B
Country risk assessment
A3
Business Climate
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Synthesis

major macro economic indicators

  2013 2014 2015(f)  2016(f)
GDP growth (%) -1.1 -0.4 1.6 1.9
Inflation (yearly average) (%) 2.3 -0.2 0.5 0.1
Budget balance (% GDP) -5.4 -5.6 -4.3 -3.6
Current account balance (% GDP) 0.1 0.6 5.2 2.5
Public debt (% GDP) 80.8 85.1 86.5 87.5

 

(f) Forecast

STRENGTHS

  • Advanced social convergence: per capital GDP (as PPP) = 63% of European average
  • Hydroelectricity covering 75% of electrical power needs
  • Tourist attractiveness and long coastline
  • Oil and gas potential
  • Kuna pegged to the euro
  • High-quality infrastructures

WEAKNESSES

  • Weak industrial development/lack of competitiveness
  • Large informal economy
  • High external private debt
  • Little leeway on budget and monetary policy
  • Poor absorption of European funds (52% under the 2008-2013 programme)
  • High unemployment rate
  • Dependence on oil from abroad (80% of imported oil comes from Russia)

RISK ASSESSMENT

A tentative recovery thanks to a surge in domestic demand

After six consecutive years of recession, Croatia enjoyed weak growth in 2015. This recovery is expected to be confirmed and to pick up somewhat in 2016. The trend reflects the rebound in domestic demand. Following an income tax reduction and wage increases (the first since 2008) in the huge public sector in 2015, households are expected to take advantage from an end to the slide in employment this year to increase their purchases. Profiting from security problems in other Mediterranean destinations, the sharp rise in tourists receipts in Croatia is also benefiting to numerous households connected to this sector.
Investment is also likely to rise slightly. This will be primarily public sector investment, thanks to better absorption of European structural funds. A liquefied natural gas terminal on the island of Krk, a railway line linking Zagreb and Rijeka, on the coast, and irrigation in the agricultural region of Slavonia are on top of the list. Private businesses, like households, will remain cautious in their spending given their levels of debt (80 and 40% of GDP respectively) and still high unemployment (15%, and 40% among young people). Tourism (20% of GDP including catering, hotels, and transport) and exports of refined petroleum products, electricity, timber, medicines, lingerie, electric transformers and turbines are still expected to perform well, thanks to robust European demand. Despite acceleration in imports, the contribution of external trade is expected remain slightly positive.

 

Fragile public accounts despite an improvement driven by Brussels

The country is subject to the European excessive deficit procedure (EDP). Under direction from Brussels, the public accounts, which had continuously deteriorated with the contraction in activity since the crisis, are slowly improving. The government successfully pushed through the adoption of a 2016 budget which broadly freezes spending in order to reduce the deficit below 3% of GDP, contain public debt, and therefore get out of the EDP. However, while the primary structural balance (excluding debt interest representing 3% of GDP and cyclical effects) has almost returned to equilibrium, following spending adjustments made since 2009, the overall balance will probably still show a high deficit, which means the public debt burden is expected to slightly rise again. However, 75% of this debt is denominated in euros and is mostly held by domestic institutional investors. Progress is made hard by the size of the informal economy (28%) and the large number of state-owned enterprises (one third of assets and a fifth of jobs in all businesses), some generating few or no profits and subsidised to the tune of 2% of GDP.

 

Tourism, essential for the current account surplus and reduction in external debt 

The current account balance has run a surplus since 2013. The strong growth in 2015 is mostly due to the temporary positive impact of household loans conversion from Swiss franc to euro, as well as the rise in European transfers linked to the termination of the funding program for 2007-2013. The surplus covers a large deficit (16% of GDP in 2015) in the trade in goods, broadly offset by the tourism surplus. However, it is fragile, as it is mainly due to the sluggishness of domestic demand. The local manufacturing industry is fairly underdeveloped because productivity is not in line with the relatively high wage levels, which affects competitiveness. Foreign investment (2% of GDP), deriving mainly from the European Union, previously concentrated in the banking sector, is flowing into construction, property, energy and chemicals in response to the development needs of tourism and energy resources. External debt represents 104% of GDP, but is expected to decline. Mainly denominated in euros, it represents a foreign exchange risk for the public sector (42% of the outstanding debt), as well as for non-financial companies (35%) and banks (15%). However, the risk is mitigated by the fact that the annual debt service is fully covered by the foreign exchange reserves and the pegging of the local currency, the kuna, to the euro is strongly defended.

 

Foreign-owned banks exposed to exchange rate risk

90% of bank assets belong to subsidiaries of foreign groups, mainly Austrian and Italian. The sector is fairly concentrated with four institutions having a market share of 68%. Non-performing loans represent 17% of their portfolio, but they are 50% provisioned and the high level of capital (20%) covers the unfunded portion. The fact that nearly three-quarters of outstanding credit to the private sector, i.e. 60% of GDP, is denominated in foreign currency (overwhelmingly in euro) exposes them indirectly to foreign exchange risk. Meanwhile, in accordance with a vote passed by parliament in September 2015, the banks had to convert, at their own cost, their mortgage loans in Swiss francs (10% of foreign currency loans) into euros at the conversion rate prevailing before the Swiss National Bank abandoned its minimum exchange rate in January 2015. The cost for the banks is estimated at three times their 2014 profits,

 

The reform program risks being delayed by the absence of a government

Following November 2015 elections, the two main parties, the centre-left Social Democrat Party (SDP) led by Zoran Milanovic, until then in power, and the nationalist, centre-right Democratic Union (HDZ) led by Tomislav Karamarko, and their respective allies, won, respectively, 56 and 59 seats in the 151-seat Parliament. With none of them winning an outright majority, MOST (“Bridge”), a new party created in 2012 by Bozo Petrov made up of independents and holding 15 seats became the kingmaker. Tihomir Oreskovic, a non-politician, was designated as prime minister by the centre-right coalition at the end of December, with the support of MOST
On June 16th 2016, the Prime Minister T. Orekovic was removed from office, following a no-confidence vote in Parliament. The vote, initiated by HDZ in power and supported by opponents in SDP, was without appeal, with 125 members of Parliament voting for the no-confidence vote, 15 against and 2 abstentions. The coalition lasted only 5 months in power. A period of political uncertainty is expected. If HDZ cannot form a new government within 30 days, the holding of early parliamentary election should be taken place in September 2016, with no guarantee that a clear majority emerges.

 

Last update : July 2016
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