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Croatia Country Risk Report Q2 2016

Croatia Country Risk Report Q2 2016

Core ViewsCroatia’s economy will improve over the coming quarters, but willcontinue falling further behind its EU counterparts over the long-term.

Modest real GDP growth rates are the best the country can hopefor in future.

The new governing coalition is built on shaky ground and will struggleto remain united in the face of major political and economicchallenges.

Debt sustainability remains the most evident risk to financial stability.

Without rapid reforms, we believe Croatia will require some form ofIMF aid package at some stage over the next few years.

Croatia’s internal devaluation has further to run, with a furtherdownturn in oil prices likely to increase disinflationary forces overthe coming months.

Major Forecast Changes

We have revised up our estimates for Croatian real GDP growthto 1.1% in 2015, from 0.6% previously, and to 1.2% in 2016 (from1.0%). This reflects better than expected growth figures for H115,as well as strong external demand from key export partners.

We have adjusted our estimate for the 2015 budget deficit to 4.6%,from 4.8%, due to improved revenue growth on better economicactivity. Our forecast for 2016 dropped from 4.5% to 4.2%.

The current account surplus for 2015 is now estimated to come inat 2.2% of GDP, up from our previous forecast of 1.0%, due largelyto a bumper tourist season.


Executive Summary
Core Views
Major Forecast Changes
Key Risks
Chapter 1: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Analysis
Severe Risks Undermine Improved Growth Figures
Economic conditions continue to improve in Croatia, and we have raised our short-term forecasts to 1.1% in 2015 and 1.2% in 2016.
Nonetheless, we maintain our broadly bearish outlook due to ongoing economic headwinds and increased political instability.
GDP By Expenditure Outlook
TABLE: GDP GROWTH FORECASTS
TABLE: PRIVATE CONSUMPTION FORECASTS
TABLE: GOVERNMENT CONSUMPTION FORECASTS
TABLE: FIXED INVESTMENT FORECASTS
TABLE: NET EXPORTS FORECASTS
External Trade And Investment Outlook
Tourist Sector Will Support Current Account Surpluses
Croatia will continue to post current account surpluses over the coming years, supported by subdued import growth, a booming tourism
sector, and accelerating exports to EU markets. Although the improved external position does not reflect better local competitiveness, it
does leave Croatia more financially stable in what remains a testing economic climate.
Outlook On External Position
TABLE: CAPITAL & FINANCIAL ACCOUNT BALANCE
TABLE: TOP 5 GOODS EXPORTS IN 9M15
TABLE: TOP 5 GOODS IMPORTS IN 9M15
Fiscal And Debt Outlook
Unsustainable Public Finances The Main Threat To Stability
Although the budget deficit is falling, Croatia's public finances will remain the principal threat to economic stability in the coming years,
with the new government struggling to bring state debt on to a more sustainable path.
Structural Fiscal Position
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES
TABLE: FISCAL POLICY
Monetary Policy
Oil Slump Will Extend Period Of Low Inflation
The low inflation environment is set to persist in Croatia, largely due to the impact of falling oil prices. The recovery in domestic demand
will gradually generate new price pressures, although we expect these to remain minimal amid subdued wage growth.
Monetary Policy Framework
TABLE: MONETARY POLICY
Chapter 2: 10-Year Forecast
The Croatian Economy To 2025
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 structural economic inefficiencies
present key risks to this outlook over the longer term.
TABLE:: LONG-TERM MACROECONOMIC FORECASTS
Chapter 3: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestics Politics
New Government Coalition Built On Shaky Ground
After a long delay, we expect Croatia to form a new government in the very near future, marking an important step in the return to
normality. However, we believe that the new coalition is built on shaky ground and will face immediate pressure given the country's
political and economic challenges.
TABLE: POLITICAL OVERVIEW
Long-Term Political Outlook
EU Anchor To Support A Maturing Democracy
While we expect Croatia's Long-Term Political Risk profile to continue improving, 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 4: Operational Risk
SWOT Analysis
Operational Risk Index
Operational Risk
TABLE: OPERATIONAL RISK
Trade Procedures And Governance
TABLE: EMERGING EUROPE – TRADE PROCEDURES AND GOVERNANCE RISK
TABLE: IMPORT AND EXPORT DOCUMENTS
Vulnerability To Crime
TABLE: TRADE PROCEDURES BREAKDOWN
Chapter 5: BMI Global Macro Outlook
Global Macro Outlook
Unfinished Business In 2016
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %
TABLE: CROATIA – MACROECONOMIC DATA & FORECASTS

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