Country Report Croatia February 2009

Outlook for 2009-10

• The renewed mandate of the Croatian Democratic Union (HDZ) has contributed to a high degree of political continuity. However, the government will remain dependent on the support of smaller parties.
• In the wake of several gangland-style murders, there will be continuing domestic and external pressure on the government to combat the criminal underworld and enforce the rule of law.
• As much still needs to be done in accession negotiations, EU entry will not occur before 2011, and there is a risk to this date, because of uncertainty over the future of the EU's Lisbon treaty and the ongoing dispute with Slovenia.
• We forecast a slowdown in real GDP growth to 0.4% in 2009 and 1.8% in 2010, owing to reduced consumer spending and a weakening euro zone, which will have a negative impact on Croatia's exports and tourism earnings.
• We expect the kuna to depreciate to around HRK7.4:€1 in 2009, before regaining some ground in 2010.
• The current-account deficit should contract to an average of about 7% of GDP in 2009-10.

Monthly review

• The EU enlargement commissioner, Olli Rehn, has proposed the establishment of a three-person expert panel to help to resolve the border dispute between Croatia and Slovenia.
• The government announced far-reaching reforms in the healthcare system, but there is significant opposition to this.
• The Ministry of Finance has agreed a €750m (US$1bn) loan with a consortium of domestic banks to repay government liabilities due in February and March.
• The finance minister, Ivan Suker, has said that Croatia is not currently in need of any external assistance from the IMF.
• There has been depreciation pressure on the kuna owing to corporate demand for the euro, reduced inflows of foreign capital and the need to repay foreign debt. The central bank has been acting against this pressure.
• Industrial output contracted by 1.5% year on year in December; in 2008 as a whole industrial production expanded by only 1.6%—the lowest growth rate in the 2000s.
• Croatia's foreign reserves amounted to €9.1bn (US$13.4bn) at the end of December 2008, which is a decrease of 5.8% month on month, but still more than covers short-term external debt.

This report covers the following industry codes:
SIC Code: 15
NAICS Code: 23