Croatia Business Forecast Report Q2 2009

Publication Date	February 2009
Publisher	Business Monitor
Product Type	Report
Pages	64
ISBN Number	not applicable
Product Code	BMI03436

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Summary

Economy To Slip Into Recession In 2009 The deterioration in trade dynamics, unwinding of domestic demand, and contraction in external credit availability constricted growth dynamics during the third quarter. With the economy only mustering up growth of 1.6% year-on-year (y-o-y), down from 3.4% the previous quarter, this marked a multiyear low. Given the severity of the slowdown in the third quarter, and our belief that both domestic and external demand conditions will get worse before they get better, we have revised down our economic growth forecasts for 2009 and 2010. Specifically, whereas we were previously targeting growth of 2.1% in 2009, we now expect to see a contraction of 1.5%, coinciding with the deepening of the eurozone recession (with growth of -2.5% currently pencilled in). Moreover, we forecast a mild recovery to 1.0% growth in 2010, ticking up further to 3.2% in 2011.

Croatia's progression towards EU accession has been dealt a significant blow following the decision by Slovenia to veto the opening and concluding of several negotiating chapters on December 19 2008. Slovenia's disruption to the accession process has been spurred by the 17-year border dispute with Croatia which emerged following the break up of Yugoslavia. Though Prime Minister Ivo Sanadar is confident that the veto will be lifted in time for Croatia to complete accession talks in 2009, we caution that this is only likely to occur following a considerable concession on the Croatian side. As a new EU member with an implicit right to veto chapter initiations and closures, Slovenia is now in a more favourable position to negotiate. That Croatia has already made considerable progress towards EU accession and has shown an increasing eagerness to push for entry before the next parliamentary election in 2011, the importance of the disputed territory is likely to be subordinated by Zagreb's EU agenda.

The continued widening of Croatia's trade deficit during the first three quarters of 2008 has pushed the current account further into the red. The combined shortfall on the goods and services balance came to EUR3.3bn, expanding by 54.5% y-o-y, with the current account deficit concomitantly swelling to EUR2.5bn. As a result of the protracted deleveraging process and likely collapse in import growth, we expect to see a marked narrowing of the current account deficit through the medium term. We project the current account deficit peaking at 10.5% of GDP in 2008 (revised up from 9.0% as a result of the severity of the shortfall during Q1-Q308), before narrowing to 9.3% in 2009 and unwinding to 5.3% at the end of our five-year forecast period.

Disinflation in Croatia showed few signs of losing momentum in December 2008, with the latest release by the Central Bureau of Statistics showing headline inflation sinking to 2.9% y-o-y, shedding 1.8 percentage points (pp) from November. We believe that disinflation will continue to play out during 2009 owing to a confluence of domestic and external factors which will continue to weigh on both core and headline inflation. As such, we forecast consumer price growth moderating further to 1.1% by end-2009, while a mild improvement in economic growth in 2010 (concomitant with a return to positive growth for the eurozone economy) will see an uptick in inflation to 1.6% by end year.

Content

Executive Summary
- Economy To Slip Into Recession In 2009
Chapter 1: Political Outlook
- SWOT Analysis
- BMI Political Risk Ratings
- Political Outlook
- Resolving Boundary Dispute Key For EU Accession
- Despite a hastening of EU-orientated reform momentum in Croatia over recent months, the decision by Slovenia
- to block the opening and concluding of several chapters has significantly weighed on the speed of progress
- TABLE: CROATIA S POLITICAL OVERVIEW
Chapter 2: Economic Outlook
- SWOT Analysis
- BMI Economic Risk Ratings
- Economic Activity
- Heading Into Recession In 2009
- We believe that the contraction in global credit availability and shrinking export markets in the eurozone will
- choke Croatian growth dynamics in 2009, underscoring our projection for a recession
- TABLE: ECONOMIC ACTIVITY
- Balance Of Payments
- Improving Current Account Dynamics From 2010
- Despite the continued widening of the current account deficit during the first three quarters of 2008, we believe
- that a narrowing of the shortfall towards more benign levels will begin to materialise in 2009
- TABLE: BALANCE OF PAYMENTS (EURO)
- Monetary Policy
- Demand Destruction Key To Reining Inflation In Further
- The sharp moderation in Croatian headline inflation for December provides further indication that the
- disinflationary process has further to run
- TABLE: MONETARY POLICY
- External Debt
- Favourable Maturity Structure Limits External Debt Risks
- Though Croatia has yet to undergo a protracted period of deleveraging, with gross external debt continuing to
- swell in October, we believe that the foreign debt load will be unwound in an orderly fashion over the medium term
Chapter 3: 10-Year Forecast
- The Croatian Economy To 2018
- EU Convergence To Drive Above Trend Growth
- With EU membership still on the cards and convergence gains still to be realised, we maintain a positive
- long-term view for the Croatian economy
- TABLE: CROATIA Long-Term Macroeconomic Forecasts
Chapter 4: Special Report
- China
- A Seismic Upheaval In 2009?
- One of the biggest and least discussed wild cards that could rear its head in 2009 is dramatic political
- upheaval in China
- United States
- Europe
- The deteriorating global macroeconomic outlook, high levels of leverage, and a broken business model will
- combine to spell trouble for the financial services sector in 2009
- TABLE: Banks Leverage Ratios
- TA BLE: Assets As % of Home Country GDP
- TABLE: Assets As % of Home Country GDP When Eurozone Is Considered Home Country
- TABLE: Exposure As % of Total Exposure To Region
- TABLE: Banks Foreign Exposure (US$ mn)
- TABLE: Exposure As % of National GDP
Chapter 5: Business Environment
- SWOT Analysis
- BMI Business Environment Risk Ratings
- Business Environment Outlook
- Introduction
- TABLE: BMI BUSINESS AND OPERATIONAL RISK RATINGS
- Institutions
- TABLE: BMI LEGAL FRAMEWORK RATINGS
- Infrastructure
- TABLE: EUROPE, FDI ANNUAL INFLOWS
- Market Outlook
- TABLE: BMI TRADE RATINGS
- TABLE: TOP EXPORT DESTINATIONS
Chapter 6: Key Sectors
- Pharmaceuticals
Executive Summary
- Despite unfavourable government policy, multinational market activity should increase steadily
- TABLE: CROATIA - OTC MARKET INDICATOR S, 2004-2012 (HRK MN UNLESS OTHERWISE STATED
- Defence
Executive Summary
- The domestic defence industry is not yet ready to expand significantly, as restructuring remains a problem for
- many of the enterprises
- TABLE: CROATIA S ARMED FORCES, 2005-2012 (000)
Chapter 7: BMI Global Assumptions
- Global
- TABLE: GLOBAL ASSUMPTIONS
- TABLE: GLOBAL AND REGIONAL REAL GDP GRO WTH, % chg y-o-y
- Economic Activity
- Monetary Policy
- TA BLE: DEVELOPED STAT ES, REAL GDP GRO WTH FORECASTS
- TA BLE: EMERGING MARKETS, REAL GDP GRO WTH FORECASTS
- TA BLE: DEVELOPED MARKET EXCHANGE RATES
- Commodities
- TABLE: EMERGING MARKET EXCHANGE RATES