kredietrisico-beperken-kredietverzekering
Croatia

Croatia

Population 4.2 million
GDP 11572 US$
B
Country risk assessment
A3
Business Climate
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Synthesis

major macro economic indicators

  2014 2015  2016(f) 2017(f)
GDP growth (%) -0.5 1.6 2.9 3.0
Inflation (yearly average) (%) -0.2 -0.3 -1.0 1.7
Budget balance (% GDP) -5.4 -3.3 -2.2 -2.0
Current account balance (% GDP) 1.1 5.3 3.3 2.5
Public debt (% GDP) 86.5 86.7 86.0 85.0

 

(f) Forecast

STRENGTHS

  • Advanced social convergence: per capita GDP (as PPP) = 63% of European average
  • Hydroelectricity covering 75% of electricity needs
  • Tourist attractiveness and long coastline
  • Oil and gas potential
  • Kuna pegged to the euro
  • High-quality infrastructure

WEAKNESSES

  • Weak industrial development/lack of competitiveness
  • Low sophistication of exports which represent only 24% of GDP
  • Mass tourism
  • Large informal economy
  • High external private debt
  • Little leeway on fiscal and monetary policy (strong euroisation)
  • Poor absorption of European funds/poor local management
  • High unemployment rate (15%, 44% among young people) and low activity rates (50%)

RISK ASSESSMENT

Consolidation of the recovery driven by domestic demand and foreign tourism

After six years of recession, Croatia enjoyed weak growth in 2015. This recovery was more robust in 2016 with a surge in tourism and a rebound in domestic demand. Growth in 2017 is likely to be similar to 2016: tourism (20% of GDP) will continue to benefit from the setbacks suffered by many Mediterranean countries. Against this, the contribution of trade in goods to growth could be negative, as sales momentum (wood, lingerie, shoes, electric transformers, turbines, car parts, medicines, electricity) linked to EU integration will wane, while imports will receive a boost from vigorous domestic demand. Public investment, especially in energy, will benefit from better absorption of European funds, while the growth of private investment will be slow because of corporate debt levels (80% of GDP), against a backdrop of resumption in borrowing, less political uncertainty, lower taxes on SMEs and greater tourist industry needs. The improved labour market orientation, tourism benefits and a likely income tax cut will continue to sustain household consumption, even if the return of inflationary pressures could temper the urge to buy.

 

Fragile public accounts despite an improvement driven by Brussels

The country is expected to exit the European excessive deficit procedure. The public accounts, which had deteriorated with the contraction in activity since the crisis, are slowly improving. Thanks to budget adjustments focused on spending, with the scope for any revenue increase being hampered by already high taxes (44% of GDP), the deficit dropped below 3% in 2016 resulting in a primary surplus (i.e. excluding debt interest). This surplus together with growth will generate a slow reduction in the heavy debt burden, three quarters of which is denominated in euro and held to a great extent by domestic institutional investors including banks, 90% of which are subsidiaries of Austrian and Italian groups. Progress is made difficult by the size of the informal economy (28%) and the large number of state-owned enterprises, some generating few or no profits, subsidised to the tune of 1.5% of GDP and which employ 13% of the economically active population.

 

Tourism and European funds essential for external equilibrium

The current account balance has run a surplus since 2013. The strong growth in 2015 is explained by the fall in dividend outflows linked to losses reported by the foreign bank subsidiaries following the conversion of household loans from Swiss francs to euro. The surplus covers a large deficit (15% of GDP in 2015) in the trade in goods, offset by the tourism surplus. However, it is expected to fall as the recovery in domestic demand is accompanied by a rebound in imports, while the local manufacturing industry struggles to meet this demand. Total remittances by foreign workers and European structural funds exceed outflows of dividend and interest payments. Modest foreign direct investments (FDIs), from the European Union, formerly concentrated in the banking sector, are flowing into construction, property, energy and chemicals in response to the development needs of tourism and energy resources. Thanks to the current account surplus, the gross external debt, which at the end of June 2016 represented 97% of GDP, has declined since 2015. Denominated primarily in euro, it exposes the public sector (which holds 42% of the outstanding debt), non-financial companies (35%) and the banks (15%) to foreign exchange risk. However, the risk is lessened by the fact that foreign exchange reserves broadly cover the debt due in the short term and by the pegging of the local currency, the kuna, to the euro, together with the strong "euroisation" (70%) of credit.

 

Huge public sector reform programme provokes opposition

Less than a year after the previous elections, the early elections held in September 2016 brought back to power the coalition formed by the centre-right Democratic Union (HDZ) and the reformist party, MOST ("Bridge"). It holds 75 seats (of which 61 for the HDZ) out of 151 and has the support of the ethnic minority MPs (12 seats). The new prime minister and leader of the HDZ, Andrej Plenkovic, unlike his predecessor, intends to concentrate on economic and administrative reform, improving relations with Serbia and Bosnia Herzegovina, and to abandon the populist and nationalist discourse which contributed to the previous government's collapse after 5 months in office. The reform programme remains focused on restructuring the administration and the state-owned enterprises (1/3 of employment), if necessary through privatisation and job cuts, the changes to social benefits and the pension system and reform of the hospital system. Regional elections scheduled for May 2017 could delay implementation. While MOST sees itself as the guardian of orthodoxy, the HDZ MPs are sensitive to the social cost of the reforms. 

 

 

Last update : March 2017
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