Core Views
Our long-held view that Croatia will join the EU in 2013 has been reaffirmed by the European Commission’s proposal to close the remaining accession chapters. However, there are a number of challenges to Croatia’s bid in the form of EU enlargement fatigue
and a likely change in government this year. The economic recovery in Croatia continues to struggle. We hold to our forecast for 1.7% real GDP growth in 2011 as, despite disappointing first-quarter tourist-arrival figures, we believe the firming economic recovery in the eurozone will pay dividends to Croatia in tourist arrivals. Given the high reliance on tourism for economic growth, this will feed through to lower unemployment, improved consumer spending and higher retail sales.
Despite Croatia’s consolidated central government revenues taking a dive in the first quarter, we hold to our view that the government will be able to maintain its deficit at 4.8% of GDP this year, from 4.4% of GDP in 2010. That said, the upcoming election and a weake than forecast recovery in domestic demand could lead to a more aggressive widening of the fiscal deficit this year.
Major Forecast Changes
No major forecast changes since Q311 Business Forecast Report.
Key Risks To Outlook
Given the high reliance of Croatia’s economy on the external sector, a pronounced slowdown in the eurozone or an escalation in the Greek debt crisis would likely have a highly deleterious impact on all aspects of Croatia’s economy.
Despite ongoing positive momentum behind Croatia’s EU accession process, we note that the bid must gain unanimous approval
from all EU members. Any delay in joining the EU would, in our opinion, have a negative impact on investor sentiment towards the country, potentially endangering Croatia’s long-term economic prospects.
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Executive Summary 5
Core Views5
Major Forecast Changes5
Key Risks To Outlook5
Chapter 1: Political Outlook 7
SWOT Analysis 7
BMI Political Risk Ratings 7
Domestic Politics 8
One Step Closer To EU Accession
Our long-held view that Croatia will join the EU in 2013 has been reaffirmed by the European Commission’s
proposal to close the remaining accession chapters
Table: Political Overview 8
Long-Term Political Outlook 10
EU Convergence To Pay Dividends
We expect Croatia’s long-term political risk profile to continue improving in line with its continued push towards
the EU and we maintain our 2013 entry date to the bloc
Chapter 2: Economic Outlook 13
SWOT Analysis 13
BMI Economic Risk Ratings 13
Economic Activity 14
Economic Recovery Still Nascent
The economic recovery in Croatia continues to struggle However, we hold to our forecast for 17% real GDP
growth in 2011, as, despite disappointing Q1 tourist-arrival figures, we believe the firming economic recovery
in the eurozone will pay dividends to Croatia in tourist arrivals
Table: ECONOMIC ACTIVITY 14
Monetary Policy 15
Economic Recovery To Push Inflation Higher
We forecast consumer price inflation in Croatia to average 22% this year, up from 10% in 2010
Table: MONETARY POLICY 15
Balance Of Payments 16
Economic Recovery To Drive Current Account Deficit Wider
We forecast Croatia’s current account deficit to expand to 20% of GDP this year, from 14% in 2010
Table: CURRENT ACCOUNT 16
Fiscal Policy 18
Remaining Sanguine On State Fiscal Deficit
Despite Croatia’s consolidated central government revenues taking a dive in the first quarter of 2011, we are
holding to our view that the government will be able to maintain its deficit at 44% of GDP this year, from 43%
of GDP in 2010
Table: FISCAL POLICY 18
Banking Sector 19
Weak Recovery Persists
On account of the weak economic recovery, we expect Croatia’s commercial banking sector to continue
experiencing a muted revival, with only meagre improvements in client deposit and loan growth
Exchange Rate Policy 20
HRK: Consolidation On The Horizon
Chapter 3: 10-Year Forecast 23
The Croatian Economy To 2020 23
EU Convergence To Drive Above-Trend Growth
With EU membership on the cards for 2013 and convergence gains still to be realised, we maintain a positive
long-term view on the Croatian economy
Table: Croatia Long-Term Forecasts 23
Chapter 4: Business Environment 25
SWOT Analysis 25
BMI Business Environment Risk Ratings 25
Investment Climate 26
Western Balkan Business Environments: Improving On EU Policy Anchor
Our core view that business environments across the Western Balkans will continue to improve on the basis of the
EU convergence anchor remains in play
Business Environment Outlook 28
Institutions 28
Table: BMI Business & Operation Risk Ratings 28
Table: BMI Legal Framework Rating 29
Infrastructure 30
Market Orientation 31
Table: Labour Force Quality 31
Table: Emerging Europe – Annual FDI Inflows 32
Table: Trade And Investment Ratings 33
Operational Risk 34
Table: Top Exports 34
Chapter 5: Key Sectors 35
Pharmaceutical 35
Table: OTC Medicine Sales Indicators 2007-2015 36
Table: Medical Devices Sales Indicators 2007-2015 37
Telecommunications 38
Table: Telecoms Sector – Internet – Historical Data & Forecasts 40
Other Key Sectors 41
Table: Autos Sector Key Indicators 41
Table: Infrastructure Sector Key Indicators 41
Table: Food & Drink Sector Key Indicators 41
Table: Oil & Gas Sector Key Indicators 42
Table: Defence & Security Sector Key Indicators 42
Table: Freight Transport Sector Key Indicators 42
Chapter 6: BMI Global Assumptions 43
Global Outlook 43
Second Half Risks
TABLE: GLOBAL ASSUMPTIONS 43
Table: EMERGING MARKETS AGGREGATE GROWTH 44
Table: DEVELOPED STATES REAL GDP GROWTH FORECAST 45
Table: REAL GDP GROWTH CONSENSUS FORECASTS 45
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