Croatia Business Forecast Report Q1 2009

Growth To Slow Over Medium Term

In Business Monitor Internationals latest Croatia Business Forecast Report we examine the countrys political and economic outlook heading into 2009 and beyond. In the medium term, we highlight the impact that the ongoing slowdown in eurozone economic activity, in addition to tighter global credit conditions, will have on Croatias underlying growth potential. Indeed, we believe that Croatias tourism industry, which has hitherto been a key driver of the countrys growth, will likely be hit hard by the deteriorating external environment. Furthermore, we also assess the prospects for Croatias progress on its path towards the European Union (EU), which we expect to be slowed by the countrys ongoing failure to adequately address problems of endemic corruption.

Croatia is certainly closing in on EU membership, having opened 21 of the 35 pre-accession negotiating chapters, and closed three of them. The government has indicated that it is hoping to close several more by year-end, and open the remaining chapters at the same time. The corruption, graft and mafia issues will be crucial, especially considering the very slow progress that has been made in Bulgaria and Romania in this regard. Either a major improvement will have to be evident this year, or we would expect that the EUs annual progress report, which is due in November, will not be as positive as the Croatian government is hoping for. Indeed, for the countrys ambition of joining the EU in 2011, we would expect that a rather upbeat report will be required.

We forecast a significant slowdown in the Croatian economy over our forecast period, though stress that the landing will be a soft one. After last years 5.6% jump in real GDP, which was well above the 10-year average of 4.1%, we anticipate a cooling in growth to 3.9% in 2008. This is in line with the recently revised forecasts of the Croatian National Bank, which have seen the monetary authority write down its projection for 2008 from 4.4% to 3.7-3.9%. Beyond 2008, we are expecting the economy to experience a soft landing, while the eurozone flirts with recession. In 2009, we forecast the Croatian economy to expand by 3.1%, and suffer a few lean years, before growth heads back towards trend from around 2012 onwards. Over our five-year forecast period, we expect growth to average 3.4% per annum.

Further supporting Croatias bid to accede to the European Union, the World Bank has approved a new four-year loan worth US$1.8bn to help in the reform effort. The loan forms part of the World Banks Country Partnership Strategy which outlines the co-operation between Croatia and the bank over the course of 2009-2012. Croatias eventual membership to the EU will open up new export opportunities for domestic producers as well as attracting more capital inflows, and by extension will further drive the countrys economic convergence with the more developed member states.