Croatia Business Forecast Report Q3 2008

Publication Date	June 2008
Publisher	Business Monitor
Product Type	Report
Pages	57
ISBN Number	1745-0527
Product Code	BMI02051

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Summary

A Crucial Year For EU-related Reform Although politically the Croatian Democratic Union (HDZ) is in a strong position to implement reform with a fresh public mandate, Prime Minister Ivo Sanader's position and appetite for change is more difficult to gauge. The five crucial reform areas - in judicial and public administration, tackling corruption and reducing state subsidies to industry - could have been tackled at any time since 2003: they have not because they could cause huge social unrest. Judicial reform will require the closure of local courts, magistrates losing their jobs, and re-training for existing staff. The shipyards (all but one of five are loss-making) employ tens of thousands, as does the civil service. Moreover, Sanader cannot blame the current revolutionary changes needed on bad economic management over the last four years. The status quo has resulted a slow decline in Croatia's international competitiveness, but has not provided any strikingly visible deficiencies to a public who will struggle to understand wholesale change.

Croatia's formal invitation to join NATO came in April, along with a visit by US President George Bush. Informally, NATO membership serves the country well in its EU ambitions, and Croatia is also very clear that it wishes to 'side' with the EU and the West in recognising the independent status of Kosovo, and in securing Balkan stability. Active involvement in NATO's peace-keeping operations around the globe may raise military budgets and result in muttering dissent at home, but in positioning itself as a proactive and important regional player, Croatia is aware that its EU membership ambitions may be looked upon in a more favourable light.

Croatia's central bank is holding fast to its remit of maintaining a stable exchange rate, which gives it very little room for manoeuvre to fight inflation, currently running at multi-year highs. At present the bank has little choice but to pursue its current policy. The country's foreign debt pile now equals around 90% of GDP, and the bulk of this is owed by businesses and households, many of whom have euro or Swiss franc-denominated mortgages. Any nominal falls in the kuna's value against these important benchmarks could spark a vicious circle of household debt defaults and further kuna headwinds.

On 12 April, Trade Unions staged their biggest rally in five years to demand higher wages in the face of 6% inflationary rises. Between 20,000-50,000 people marched in Zagreb, and the prospect of a general strike looms in the autumn. Meanwhile, shipyards have asked for EUR1.2bn of state aid up to 2015 to help them restructure, as they grapple with rising steel prices. In late April, Economy Minister Damir Polancec admitted one or more of the five yards could face closure, but insisted there would be no lay-offs. A plan for achieving this implausible goal, has, however, yet to be revealed.

Content

Executive Summary
A Crucial Year For EU-related reform
Chapter 1: Political Outlook6
- SWOT analysis
- BMI Political Risk Ratings
- Domestic Political Outlook8
- Fifteen Months May Not Be Enough
- Croatia will be hard pushed to meet its EU membership date goal if it maintains its unreformed domestic economy
- Table: Croatian Political Overview
- Foreign Policy
- The Kosovan Conundrum
- Problems in the Balkans, as long as they remain bloodless, are good news for Croatia's euro-Atlantic ambitions
Chapter 2: Economic Outlook
- SWOT analysis12
- BMI Economic Risk Ratings
- Table: Croatia - Economic Activity
- Economic Activity
- Slowdown ahead
- We have downwardly revised our forecasts for Croatia's growth this year to 4.4%, on the back of a sharper than
- expected slowdown in Q407, a slowing of export growth and the prospects for consumers tightening their belts as
- inflation bites in coming months
- Balance of Payments
- Swelling Current Account Deficit
- We forecast that the Croatian current account deficit will widen further to 9.5% of GDP in 2008 after its jump to
- 8.6% in 2007
- Table: Croatia - Balance of Payments16
- Fiscal Policy
- New Salary Regulations Won't Impact Deficit Target
- Government measures approved at the end of May to raise the non-taxable part of salaries will be an important
- means of containing wage pressures and countering the effects of inflation on take-home pay
- Table: Croatia - Fiscal Policy
- Monetary Policy
- Strong Inflation Adds To Downside Kuna Pressures
- Price growth in Croatia shows no signs of abating from multi-year highs hit in January. We have raised our end-year
- inflation forecast to 5.1% y-o-y and annual average to 5.6%
- Table: Croatia - Monetary Policy
Chapter 3: Special Report
- Business outlook For Global Frontier Markets
- Growing Fast on the New Frontier
- The 41 states that BMI examines in a new report on our online service may make up only a small slice of the world
- economy, but they possess characteristics that will see them gain importance in the eyes of investors and global
- businesses over the coming years
- Table: Frontier Markets - Key Data and Projections For top 10 Countries
- Frontier investment
- Potential and Pitfalls
- The spectacular macroeconomic performance of frontier markets in recent years has been matched by mildly
- successful efforts to deepen capital markets
- Table: GDP Per Capita, US$ (in order of % increase)
- Table: Diversity Through Frontier Markets - Correlation Coefficients January 2004-April 2008
- Table: Frontier Market indices25
- regional overview
- Laos
- Neighbouring Economies the Key to Growth
- Laos's GDP growth has been boosted in recent years as neighbours China, Thailand and Vietnam compete for its
- natural resources
- Yemen
- Huge Potential, But Don't Bank on GCC Membership
- Markets do not come much more frontier than Yemen, and, as would be expected, there is huge potential for
- development, with the prospect of eventual GCC membership likely to act a key investment pull
- Table: Yemen Economic activity
- Democratic Republic of the Congo
- Mining industry to Drive Growth
- The Democratic Republic of the Congo's mining industry will be a key driver of growth and is likely to attract
- significant levels of FDI, with our real GDP forecasts standing at 8.3% and 7.9% in 2008 and 2009, respectively
- Table: Democratic republic of the Congo - Economic activity32
- Cuba
- investment Prospects after Fidel33
- The accession of a new leadership structure in Cuba has sparked excitement that the 45-year-old trade embargo
- with the US may be lifted and Cuba may move toward market liberalisation
- Table: Cuba Macroeconomic Data and Forecasts36
- Mongolia
- Minerals to Drive Economic Boom
- Mongolia is in the midst of a massive resource-led economic boom that should lift GDP growth into the double
- digits and underpin robust increases in exports and inflows of foreign investment capital over the long term
- Table: Mongolia - Economic activity
Chapter 4: Business Environment39
- SWOT analysis39
- BMI Business Environment risk ratings40
- Croatia Business Environment
- Table: BMI Business and operational risk ratings
- institutions
- Table: BMI Legal Framework ratings43
- infrastructure
- Table: Emerging Europe, Annual FDI Inflows
- Market outlook
- Table: BMI trade ratings48
- Table: top Export Destinations
Chapter 5: Key Sectors51
- Automotives
- Table: Croatia automotive industry Historical Data & Forecasts52
- Pharmaceuticals
- Table: Croatia's otC Market, 2006-2012 (US$mn unless otherwise stated)