Croatia

Croatia: Macroeconomic Snapshot
1. Overview
Croatia’s economy has entered a recession in 2009,as slowing credit weakens domestic demand, the Eurozone recession affects exports, and tourism revenues decline. The economy contracted 6.7% yoy in the first quarter of 2009. Croatia’s significant external debt (94% of GDP in 2008) and large external financing needs (around one-third of country’s GDP) underline the country’s external vulnerabilities in a global environment of limited capital flows.

2. Growth Performance
Real GDP growth slowed from 5.4% in 2007 to 2.5% in 2008, due to the weak growth of domestic consumption and smaller increase in Croatian exports; Croatia’s economy contracted by 6.7% in the first quarter of 2009. Economic growth in Croatia for 2009 and 2010 will be influenced by reduced demand from the country’s main trading partners, namely the EU and Southeast Europe markets. Forecasts for GDP indicate a 4% decrease in 2009 and a slight increase for 2010 (EUI).

3. Balance of Payments
Current Account Deficit was around 11% of GDP in 2008 and is expected to narrow to 6.5% of GDP in 2009 due to shrinking imports. In the first quarter of 2009, FDI decreased significantly (-64% yoy), covering around 20% of the C/A deficit for first quarter of 2009.

4. Inflation
Monetary Policy: Inflation rose to 6.1% in 2008; the drop in global food and oil prices along with lower local demand is expected to decrease average inflation rate at 3.2% in 2009 and 2.6% in 2010. Credit growth is projected to be minimal in 2009, as conditions in international financial markets are not expected to change dramatically within the year. As 2/3 of bank lending is FX-linked, maintaining f/x stability is the main aim of Croatian monetary policy. IMF acknowledges that a weaker kuna will boost Croatia’s competitiveness, while it indicates the credit risk for private sector deriving from currency volatility. The exchange rate stabilized by July 2009 after some depreciation in the beginning of the year. The National Bank of Croatia has reduced minimum reserve requirements to ease liquidity and has controlled money market interest rates by regular repo auctions.

5. Fiscal Position
While the government assumption for the budget gap is at 1.6% for 2009, Fitch forecasts the deficit will amount to 3.2% of GDP in 2009 from 1.1% in 2008. The global crisis has prompted the Croatian government to announce a revision of its 2009 budget. IMF is concerned about rising external imbalances and indicates that the government should reduce its redistributive role through deeper and faster structural reform. Croatia has currently a healthy stock of foreign reserves and denies any IMF funding.

6. Business Environment
Croatia improved or remained steady in all global rankings. According to WEF Global Competitiveness Report, the three most problematic factors for doing business in Croatia are inefficient government bureaucracy, corruption and tax rates.

7. Key issues
Slovenia has blocked Croatia's EU accession negotiations over a border dispute since December 2008. It is projected that this dispute will push Croatia’s entry date after 2011, undermining investors' confidence and their growth expectations for the country.