Intellinews Croatia Country Report - Dec 2011

Additional Information

Croatia's central bank warned the economy might shrink 2% in 2012, or face stagnation, if the government fails to implement fiscal consolidation and structural reforms. The economic slowdown will be also influenced by lower growth of foreign demand. There is a threat of a credit rating downgrade if the government does not implement fiscal measures. The bank estimated the GDP rose 0.4% in 2011.

In the meantime rating agency Fitch is said to start its regular annual visit to Croatia in February. The agency will check how the new government, which took office at the end of December, is progressing towards its pledge to cut the budget gap to 3% of GDP while limiting the ratio of public sector debt to GDP at 60%. Fitch has said the cabinet should prop up growth via fiscal consolidation and structural reform if it wants to ease the pressure on the country’s ‘BBB-’ rating. The grim economic prospects across Europe have cast a shadow over Croatia’s European Union entry, expected in July 2013. The membership will have a long-term positive impact but the country needs to work hard on delivering a sound fiscal policy first.

The new centre-left government revealed plans to hike VAT rate to 25% from current 23% and to simultaneously take measures that will protect the people with low incomes. The cabinet is still preparing its 2012 budget draft, which should be sent to parliament in February.

Croatia's consolidated central government budget deficit widened 12.7% on the year to EUR 1.61bn in the first eleven months of 2011, according to latest finance ministry data. Last year’s budget bill projects a deficit equal to 4.3% of GDP. Croatia's public debt rose by 13.2% on the year to EUR 20.2bn at end-September, accounting for 43.9% of GDP, according to latest available data of the finance ministry. The public debt is expected to continue rising on the need for financing the budget deficit and refinancing the existing debt.

Annual consumer price inflation was 2.1% at the end of 2011, speeding up from a revised 1.8% at end-2010. Industrial producer price index rose 5.2% on the year in December after climbing an annual 6.8% a month earlier.

FDI inflow increased by an annual 5.5% in January-September thanks to higher amount of equity investments, but the inflows are seen stagnating in the next period due to the debt crisis in Croatia’s main investors, the EU countries.