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Croatia Country Risk Reports Q2 2015

Croatia Country Risk Reports Q2 2015

Core Views

Croatia’s economy will barely grow in 2015, and remains at risk of staying in recession for a seventh consecutive year.

Weak domestic demand and declining commodity prices mean that price growth will struggle to pull away from deflationary territory in 2015.

The central bank’s unwillingness to tolerate currency deprecation suggests a painful internal devaluation may be the only way for Croatia to boost price competitiveness over the coming years.

We still think Croatia will eventually need an EU/IMF aid package to help plug funding gaps and implement the structural reforms needed to pull the country out of its prolonged economic slump.

Major Forecast Changes

We have lowered our real GDP forecast to 0.1% in 2015, from 0.4% previously, on the back of a weakening investment outlook.

We have lowered our forecasts for inflation to average 0.6% in 2015, from 1.1% previously, due to the collapse in oil prices and declining food price pressures


Executive Summary
Core Views
Major Forecast Changes
Key Risks To Outlook
Chapter 1: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
Kukuriku Coalition On The Ropes
Croatia's presidential election will have only a limited impact on the ruling Kukuriku coalition's slim chances of remaining in power
beyond the next parliamentary elections due by 2016. The next government will probably be formed by the opposition HDZ, which will
then struggle to push through the reforms needed to kick-start the country's moribund economy.
Table: Political OVERVIEW
Long-Term Political Outlook
EU Convergence To Pay Dividends Over Long Term
While we expect Croatia's long-term political risk profile to continue improving following its accession to the EU, we caution that further
progress and reforms are needed for the country to realise its full potential. We highlight the key challenges that could threaten stability
in Croatia over the next 10 years, and outline three possible long-term scenarios for the country.
Chapter 2: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Activity
No Recovery Without Reform
Croatia will remain one of the worst performing EU economies in 2015 and 2016. A lack of sustainable growth drivers will prevent the
economic recovery from reaching escape velocity, with slow progress implementing badly needed structural reform likely to continue
limiting investment and domestic spending.
Table: Economic Activity
Monetary Policy
Internal Devaluation On The Cards
Weak domestic demand and declining commodity prices mean price growth will struggle to pull away from deflationary territory in
2015. The central bank's unwillingness to tolerate currency deprecation suggests a painful internal devaluation may be the only way for
Croatia to boost price competitiveness over the coming years.
Table: Monetary Policy
Balance Of Payments
Current Account To Slide Back Into Deficit
Croatia's current account will move back into deficit by 2016, as imports recover and exports are restricted by competitiveness issues
and the central bank’s unwillingness to devalue the currency.
Table: Balance Of Payments
Fiscal Policy
External Assistance Looking Increasingly Inevitable
Croatia will eventually need an EU/IMF aid package to help plug funding gaps and implement the structural reforms needed to pull the
country out of its prolonged economic slump.
Table: Fiscal Policy
Currency Forecast
HRK: Central Bank In A Tricky Spot
Although the Croatian kuna will gradually depreciate against the euro over the coming years, this alone will be insufficient to tackle
competitiveness issues and boost exports. A more substantial currency devaluation will be prevented by the central bank, which will
remain wary of excessive kuna weakness given the country's large FX loan liabilities.
Table: Curency Forecast
Banking Sector
Bank Profits To Remain Under Pressure
Croatian banking sector profits will remain weak over the coming years, as loan demand is restricted by uncertainty surrounding the
country's dire economic outlook. Nevertheless, the sector has ample capital buffers to protect against unforeseen credit shocks and
rising bad loans.
Chapter 3: 10-Year Forecast
The Croatian Economy To 2024
A Sluggish Recovery In The Years Ahead
With EU membership achieved in July 2013 and some convergence gains still to be realised, we maintain a slightly better long-term
view on the Croatian economy. We caution, however, that ongoing difficulties in the eurozone and a more protracted economic recovery
present key risks to this outlook over the longer term.
Table: Long-Term Macroeconomic Forecasts
Chapter 4: Operational Risk
SWOT Analysis
Operational Risk Index
Operational Risk
Table: Operational Risk
Availability of Labour
Table: Europe – Availability Of Labour Risk
Table: Top 10 Migrant Source Countries w
Table: LABOUR FORCE EMPLOYMENT BY SECTOR (‘000)
Crime Risk
Table: Europe – Crime Risk
Table: Crime Statistics
Chapter 5: Key Sectors
Autos
Table: Autos Total Market – Historical Data And Forecasts
Table: Passenger Car Market – Historical Data And Forecasts
Table: Commercial Vehicle Market – Historical Data And Forecasts
Food & Drink
Table: Food Consumption Indicators – Historical Data & Forecasts
Table: Alcoholic Drinks Value/Volume Sales, Production & Trade – Historical Data & Forecasts
Table: Mass Grocery Retail Sales By Format – Historical Data & Forecasts
Other Key Sectors
Table: Oil and Gas Sector Key Indicators
Table: Pharma Sector Key Indicators
TABLE: Telecoms Sector Key Indicators
TABLE: Defence and Security Sector Key Indicators
TABLE: Infrastructure Sector Key Indicators
Chapter 6: BMI Global Assumptions
Global Outlook
New Era For Oil
Table: Global Asumptions
Table: Developed States, Real GDP GrowtH, %
Table: BMI VERSUS BLOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %
Table: Emerging Markets, Real GDP Growth, %

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