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Croatia Business Forecast Report Q1 2010Published by: Business Monitor International Published: Oct. 30, 2009 - 58 Pages Table of Contents
AbstractAlthough economic data for the second quarter of 2009 certainly inspire little confidence, we believethat this is likely to mark a turning point in the downturn. That the second-quarter decline in realGDP was less severe than during Q109 is telling, in our view. Both industrial production and retailsales showed tentative signs of improvement in August. This is broadly in line with our view that bothdomestic and external demand conditions would start to stabilise and improve during the secondhalf of 2009. In particular, we believe that the external outlook has already started to improve withthe eurozone tentatively emerging from recession. But we continue to warn of the risks posed byCroatia’s burgeoning fiscal deficit, which could yet spark a renewed bout of financial instability shouldthe government fail to get the public finances in order.Having previously failed to reach a compromise over a long-standing border dispute, effectivelyderailing progress on Zagreb’s EU candidacy, Slovenia and Croatia have agreed to remove theissue from the latter’s accession bid. Indeed, having vetoed Croatia’s accession back in December,Slovenia’s two parliamentary committees backed the government’s decision to lift the ban onSeptember 15, allowing Zagreb to resume talks with the EU. While the border dispute remainsunresolved, both parties have agreed to continue talks with the help of international mediation, andto keep the dispute separate from Croatia’s accession talks. Although Slovenia’s repealed veto iscertainly a positive step in the right direction for Croatia’s EU prospects, we continue to stress thatpolitical opposition inside the EU for a further enlargement of the bloc’s borders will remain a majorimpediment to swift accession. Moreover, Croatia still needs to sell off its loss-making shipyards,eradicate corruption and rein in the fiscal deficit. Croatia’s foreign debt pile continued to swell during the first half of the year, signalling that thedeleveraging process has yet to gain traction. Indeed, the gross external debt pile ticked up toEUR40.8bn in June from EUR39.9bn at the beginning of the year, reaching nearly 100% of forecast2009 GDP. The rate of debt accumulation has averaged a staggering 14.4% over the course ofJanuary to June, despite the still relatively unfavourable credit conditions compared with before theinternational financial crisis. Moreover, even in month-on-month (m-o-m) terms, the external liabilitycontinued to increase throughout the second quarter of the year. As a result of the limited efforts onthe part of the private sector to pay off its loans so far this year, we have revised up our end-yearexternal debt forecast to EUR37.5bn from a previous EUR33.6bn, equivalent to 90% of GDP. Alongside the lack of significant volatility, we expect the seasonal factors that have driven thekuna in previous years to remain dominant. Indeed, given its relative lack of liquidity, and strongcorrelation with tourism arrivals, we expect the broad trend for appreciation during the first half ofthe year (alongside the build-up in the tourism season), followed by depreciation during the secondhalf (as tourist demand for kuna subsides), to remain the dominant theme. With tourism accountingfor around 20% of nominal GDP, and given that the industry will remain a major source of income,the kuna will continue to be highly seasonal. Given that we expect the unit to follow a similar pathin 2010, we forecast the kuna reaching HRK7.3800/EUR at the end of that year. Get Full Details About This Report >> |
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