Country Report Croatia June 2009

Outlook for 2009-10

• The government assumes that real GDP will fall by 2% in 2009. In its new budget, it assumes lower revenue and expenditure, although the budget deficit will be larger than previously targeted.
• In the wake of several gangland-style murders, there will be continuing domestic and external pressure on the government to combat organised crime and enforce the rule of law.
• As much still needs to be done in accession negotiations, EU entry will not occur before 2011. There is a risk even to this date, because of uncertainty over the future of the EU's Lisbon treaty and the ongoing dispute with Slovenia.
• The Economist Intelligence Unit forecasts a 4% contraction in real GDP in 2009, owing to falling domestic demand and a weakening euro zone, which will hit Croatian exports and tourism. We forecast growth of 0.2% in 2010.
• The kuna is expected to depreciate to an average of around HRK7.45:1 in 2009, before regaining some ground in 2010.
• We forecast that average annual inflation will decline to 2.8% in 2009 and to 2.6% in 2010.
• The current-account deficit is forecast to narrow to 5.8% of GDP in 2009 and 5.3% of GDP in 2010.

Monthly review

• Despite losing ground in recent opinion polls, the Croatian Democratic Union (HDZ), together with the other members of the ruling coalition, won the majority of seats in 14 out of 21 counties in recent local elections.
• A number of officials from the Croatian Privatisation Fund (HFP) were found guilty of bribery and corruption. Branimir Glavas, formerly a prominent member of the HDZ, received a ten-year jail sentence for war crimes.
• The government sold 750m (US$1bn) worth of Eurobonds at the end of May. The 750m will be used partly to reschedule liabilities due in 2009 and partly to help to finance the budget deficit.
• Consumer price inflation increased marginally, from 3.8% year on year in March to 3.9% in April 2009, driven by a rise in tobacco prices.
• Total industrial output continued its negative trend for the sixth consecutive month, deteriorating from negative growth of 6.6% year on year in March 2009 to a contraction of 7.1% in April.
• The trade deficit in March was larger than in January or February, owing to a worse export performance than in February. Nevertheless, the first-quarter trade deficit was 32.5% smaller year on year, amounting to 1.8bn (US$2.4bn).

Source: Country Report