Croatia Business Forecast Q1 2007

Content

• Executive Summary
  • Focus On 2007
• Chapter 1: Political Outlook
  • SWOT Analysis
  • EU accession negotiations have begun, and the arrest of war crimes fugitive Ante Gotovina has smoothed
  • Croatia's path to eventual membership However, we currently forecast 2010 as the earliest achievable
  • date for entry into the bloc, with further delay more than possible
  • BMI Political Risk Ratings
  • Domestic Political Outlook
  • War Crimes Still An Issue
  • In December, the war crimes case against deposed independent MP Branimir Glavas grabbed headlines once
  • more, following his release from custody after a 37-day hunger strike, and the current suspension of investigations
  • on fears for his health The ruling Croatian Democratic Union (HDZ) party has a lot to lose in terms of reform
  • and anti-corruption credentials in the run-up to his trial Furthermore, the outside possibility of official charges
  • emerging against parliamentary Speaker and HDZ member Vladimir Seks could prove a fatal blow for the
  • party's chances in 2007's general elections
  • Table: Croation Cabinet & Other Key Posts (As Of September 2006)
  • Regional Outlook
  • Western Balkans: Waiting In Line
  • Any lingering hopes for speedy EU accession in the Western Balkans have been laid to rest by the European
  • Commission's latest enlargement report, with Croatia the only state almost certain to accede in the next 10 years
  • A closer focus on developing the domestic business and investment climate, as well as forging tighter regional
  • co-operation, should be the new short-term focus for the Balkan states, softening the latest blow to EU ambitions
  • Table: Selected EU Accession Programmes
• Chapter 2: Economic Outlook
  • SWOT Analysis
  • BMI Economic Risk Ratings
  • Introduction
  • Privatisation Agenda: Delays Expected
  • A renewed drive to privatise Croatian state-owned industries is promising, but we are concerned about the
  • timeline of the process being delayed, as has been the case in previous efforts Investors have yet to be found
  • for loss-making steel and aluminium plants, while details have not been released concerning the restructuring
  • of four of the five large shipbuilding firms on the Adriatic The government has also failed to specifically outline
  • its plan for its holdings in the insurance sector Parliamentary elections in late 2007 may also place political
  • pressure on the process should opposition parties make corruption and joblessness election issues
  • Economic Activity
  • Solid, But Unspectacular Growth To Continue
  • We expect that economic growth in Croatia will continue at a fair clip through to the end of the decade - at
  • an average of 46% - but this will mean that the Croatian economy will underperform compared to its regional
  • peers The central bank's efforts to cap strong credit growth, at the same time as consumer spending remains
  • slow, will constrain domestic demand This means that the motors of economic growth will have to become
  • investment, and a better performance by the externally orientated sectors of the economy The CEFTA trade
  • deal will help on this score, as will ongoing structural aid from the EU, and government spending on infrastructure
  • Table: GDP, Output & Population
  • Fiscal Policy
  • Fiscal Policy Heading In The Right Direction
  • The government's 28% of GDP general government deficit target for 2007 is certainly prudent, and could be
  • achieved with an ongoing commitment to potentially unpopular spending reforms and the restructuring of
  • state-owned enterprises However, with elections due in 2007, and Croatia's track-record of a slow but
  • steady pace of economic reform, we think that the risks are certainly to the upside EU accession, though,
  • will act as a significant policy anchor
  • Table: Fiscal & Monetary Indicators
  • Table: Balance of Payments
  • Balance of Payments
  • Current Account Shortfall To Expand This Year
  • Croatia's current account deficit is still on track to accelerate to 68% of GDP in 2006 Looking to 2007,
  • an agreement to extend the Central European Free Trade Agreement, should prove of net benefit to Croatian
  • exporters, and contribute to a marginal improvement in the external position
  • External Debt Policy
  • Debt Pile A Major Driver Of Policy
  • Croatia's 83% of GDP external debt pile remains the most challenging problem facing the country at present
  • Bringing it down to more manageable levels will be the prime determinant of local financial market and exchange
  • rate policy
  • Table: Foreign Debt & Reserves
• Chapter 3: Special Report
  • BMI Sovereign Risk Ratings
  • What And Where Are The Risks?
  • Table: BMI Sovereign RIsk Ratings
  • Emerging Europe
  • Diverging Ratings Trends
  • Table: Emerging Europe Sovereign Ratings - Evolution of Ability to Pay
  • Table: Emerging Europe Sovereign Ratings - Evolution of Willingness to Pay
• Chapter 4: Business Environmen
  • SWOT Analysis
  • Progress towards EU accession will provide a solid anchor for business environment reform
  • Legal Framework
  • Labour Force
  • Table: Demographic Indicators (2005)
  • Table: Employment Indicators
  • Foreign Investment Policy
  • Table: Emerging Europe, Annual FDI Inflows
  • Table: Croatia Annual FDI Inflows
  • Foreign Trade Regime
  • Table: Top Export Destinations, US$mn
  • Tax Regime
• Chapter 5: Key Sectors
  • Information Technology
  • Market Overview
  • The IT sector should be sustained by the implementation of programmes to drive convergence with existing
  • EU countries across a range of ICT indicators The total size of the IT market is forecast by BMI to increase
  • from US$672mn in 2005 to around US$985mn in 2010, with software and services (40% of total spending)
  • growing on the back of a steady rise in private sector investments and industry consolidation However, progress
  • will continue to be delayed by infrastructural and regulatory weaknesses, as well as relatively low incomes
  • Table: Croatia IT Historical Data And Forecasts
  • Oil & Gas
  • Overview
  • BMI forecasts that Croatia will account for 18% of CEE regional oil demand by 2010, while providing just
  • 01% of supply Croatia's share of consumption in 2005 was 07%, while its share of production was 06%
  • By 2010, its share of demand is forecast to be 09%, with the country accounting for 05% of supply
  • Table 14: Croatia Oil & Gas - Historic Data & Forecasts 45