Croatia Country Risk Report Q4 2018
Croatia's short-term economic outlook has improved considerably as domestic demand has recovered faster than anticipated and robust growth has eased some of the country's macroeconomic imbalances. Despite this, real GDP is only expected to regain pre-crisis levels by 2019.
Public debt remains high by both emerging and developed market standards, leaving the country vulnerable to shocks. While the public debt ratio peaked in 2015 and will continue to fall gradually, reforms to boost medium-term growth will be vital to ensure debt remains on a sustainable path once global interest rates begin to rise.
The Croatian National Bank will maintain its quasi euro peg, which we view as stable, and thus continue to track European Central Bank monetary policy.
The country's ambition to join the eurozone will remain elusive for the foreseeable future, in part due to rising euroscepticism within core countries which will lessen the willingness to absorb new members. That said, Croatia is already a very euro-ised economy, with a large chunk of banking sector activity conducted in the common currency.
After a volatile 2017, we expect a return to relative political calm in the coming quarters, though caution that the government coalition remains vulnerable to internal divisions over sensitive reform issues.
The burdensome debt pile leaves the country highly exposed to shocks in financial markets or interest rate hikes that raise the cost of servicing debt.
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