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Croatia Business Forecast Report Q2 2010

Published by: Business Monitor International

Published: Feb. 5, 2010 - 68 Pages


Table of Contents


Executive Summary
Slow Recovery Ahead
Chapter 1: Political Outlook
Domestic Politics
Josipovic To Focus Attention On Corruption
The election of Ivo Josipovic as president of Croatia on January 10 is a positive development for the country’s EU
accession drive.
TA BLE: POLITICA L OVERVIEW
Foreign Policy
Risks To 2012 EU Accession Target
Although we view positively the provisional closing of two further EU Acquis chapters on December 21, we still
believe that Croatia will find it difficult to meet its 2012 target for EU accession.
Chapter 2: Economic Outlook
Economic Activity
Weak Recovery In 2010
TA BLE: GDP BY EXPENDITURE
While the pace of economic contraction in Croatia continued to ease in Q309, we remain cautious of a quick recovery.
Balance Of Payments
C/A Deficit To Narrow To 3.5% Of GDP In 2010
We estimate that Croatia’s current account shortfall narrowed from 6.6% in 2008 to 3.7% in 2009.
TA BLE: CURRENT ACCO UNT
Monetary Policy
Inflation Will Remain Subdued In 2010
We believe that consumer price inflation in Croatia will remain subdued over the medium term on the back of a
slow economic recovery and weaker commodity prices (compared with the mid-2008 highs).
TA BLE: MONETAR Y POLICY
External Debt
External Debt To Level Off In 2010
Significant deleveraging in Croatia is becoming increasingly unlikely as global credit conditions continue to improve.
TA BLE: DEBT INDICATOR S
Banking Sector
Asset Growth To Remain Below Trend Average
In line with our forecast for the Croatian economy to undergo a slow economic recovery over the medium term, we
forecast growth within the banking sector to remain concomitantly subdued.
Chapter 3: 10-Year Forecast
The Croatian Economy To 2019
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 on the Croatian economy.
TA BLE: LONG-TERM MACRO ECONOMIC FORECA STS
Chapter 4: Special Report
Political Risk In The Next Decade
What To Expect In 2010-2019
Table: Countries Facing Major Leadership Succession In 2010-2019
Table: Countries At Risk Of Major Political Upheaval
Table: Countries At Risk Of Interstate Conflict Or Heightened Bilateral Tension
Table: Coun tries Facing Secess ionist Or Au tonomy Movemen ts, Insu rgen cies , Or Civil Wars
Table: Pivotal States
Chapter 5: Business Environment
Business Environment Outlook
TA BLE: BMI BUSINESS & OPERATIO NAL RISK RATI NGS
Institutions
TA BLE: BMI LEGAL FRAMEWORK RATI NGS
Infrastructure
TA BLE: LABOUR FORC E QUALITY
Market Outlook
TA BLE: EMERGING EURO PE, ANNUAL FDI INFLOWS
TA BLE: BMI TRADE RATI NGS
TA BLE: TOP EXPORT DESTINATIO NS
Chapter 6: Key Sectors
Defence
Table : Armed Forces , 2005-2014 (‘000 personnel )
Chapter 7: BMI Global Assumptions
Global Outlook
2010 Looking Rosier
TA BLE: GLOBAL AND REGIONAL REAL GDP GRO WTH
TA BLE: developed market exchange rates
Table: Emerging Market Exchange Rates
TA BLE: GLOBAL ASSUMPTIONS
TA BLE: DEVELOPED STAT ES
TA BLE: EMERGING MARKETS

Abstract

The Croatian economy contracted by 5.7% year-on-year (y-o-y) during Q309. This represents aslight improvement from the 6.3% y-o-y and 6.7% declines posted in Q2 and Q1, respectively. Whilethe main driver of the improved headline figure came from consumer spending, which accounts formore than 50% of GDP, we remain concerned over the rising unemployment rate which hit 16.1%in November. A falling real wage rate is likely to hold back any improvement in consumer demandgoing forward. However, we note that throughout 2009’s recession the external asymmetries builtinto the economy continued to unwind, with the current account deficit expected to have narrowedto 3.7% of GDP in 2009 from 6.6% in 2008. Going forward, we forecast a weak recovery beyond2010, with average growth of 1.6% expected over 2010-2014, down from 4.3% over the period2004-2008.

Although we view positively the provisional closing of two further EU Acquis chapters on December21, we still believe that Croatia will find it difficult to meet its self-imposed 2012 target for EUaccession. Indeed, we expect endemic public-sector corruption and outstanding issues relating tocompetition policy and the judiciary to require significant time to address. This leads us to believethat accession before 2013 is becoming increasingly unlikely.

Significant deleveraging in Croatia is also becoming increasingly unlikely as global credit conditionscontinue to improve. However, we expect the pace of accumulation in external debt to fall in 2010.We therefore forecast foreign debt as a percentage of GDP to fall to 86.2% in 2010, down from89.9% in 2009. Furthermore, going forward we see limited risks to the sustainability of Croatia’sexternal debt load owing to the favourable maturity profile. Indeed, short-term external debt inCroatia accounts for ‘only’ 11.9% of the total burden, with the corporate sector maintaining ashort-term stock of only 5.1%. Furthermore, we believe a stable exchange rate will further supportstability: the Croatian kuna has traded within a HRK7.0000-7.8500/EUR band since 1998, whichhas significantly mitigated exchange rate risk.

The Croatian Central Bank announced on December 16 that it will make it easier for commercialbanks to get access to short-term credit by widening the range of collateral instruments available tothem. Whereas previously banks were only able to offer treasury bills, sovereign bonds or centralbank liquidity bills as collateral in order to gain access to credit, new financial instruments will beintroduced soon. While the specifics on the new instruments have yet to be revealed, we believethe boost in liquidity for Croatia’s banks will help improve the availability of loans for businesses.

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