Population 4.402 million
GDP 57.493 US$ billion
@rating
country
Business climate
assessment
| 2010 | 2011 | 2012(e) | 2013(f) | |
|---|---|---|---|---|
|
GDP growth (%)
|
-1.2 |
0 |
-1.9 |
-0.2 |
|
Inflation (yearly average) (%)
|
1.1 |
2.3 |
3 |
2.4 |
|
Budget balance (% GDP)
|
-5.1 |
-5.2 |
-4.4 |
-4.5 |
|
Current account balance (% GDP)
|
-1.5 |
-0.7 |
-0.4 |
-0.7 |
|
Public debt (% GDP)
|
42.2 |
46.7 |
54.3 |
57 |
| (e) Estimate (f) Forecast | ||||
STRENGTHS
- Growth potential strengthened by prospect of joining the European Union
- Quality of infrastructures (transport, telecommunication, energy)
- Degree of economic convergence with the European Union already advanced
- Higher living standards, improved infrastructures
- Attractive to tourists
WEAKNESSES
- Low savings rate and dependence on foreign capital
- High public and external debt
- Erosion of growth potential
- Borrowers’ heavy exposure to exchange rate risk due to a high proportion of credit held in foreign currency
Risk assessment
The Croatian economy remains in recession
The country is facing an economic downturn that started in 2009. In 2012, the euro zone affected the Croatian economy through two channels: the fall in exports and the uncertainties related to foreign banks’ involvement in the country. Domestic demand will not be dynamic in 2013 due to the high levels of debt owed by households and businesses, and their common desire to reduce it. Private consumption will contract due to reduced credit availability, the erosion of household income and an employment rate above 15%. 91% of bank assets are held by European banks, mainly Italian, which could reduce their support for their Croatian subsidiaries in order to consolidate their balance sheets. Moreover, the government reform of the tax system will also adversely affect consumption: VAT went up by 2 points and civil service bonuses abolished in 2012. Inflation will decrease in 2013 in response to stable energy prices and sluggish domestic demand. Moreover, the trade balance, though positive, will not drive growth. A restricted export base, the poor competitiveness of the production apparatus and the sluggish demand of the main trading partners (Germany, Italy, and the Balkans) limit the capacity of exporting sectors. A weak textile industry, against strong competition from China and India, is putting downward pressure on clothing prices. Finally, tourism remains one of the country’s most competitive sectors and occupies an important place in the economy since it generates 20% of GDP. The hotel industry is being modernised in a drive to increase tourism revenues.
The burden of external debt is increasing exchange rate risk
The current account deficit will remain steady in 2013. Nevertheless, external debt ratios are at an extremely worrying level, both in terms of amount and flow. The situation is all the more disturbing because the refinancing of this debt could suffer from the euro zone banking and sovereign crisis. Insufficient foreign currency reserves could lead to tensions on the foreign exchange market in the event of a sharp reversal of investors’ confidence. The central bank intervened several times in the foreign exchange market in 2012 to support the kana. Moreover, the banks have to contend with a high degree of euroisation and are vulnerable to exchange rate risk.
Strong growth of public debt
The government has begun to reform its tax system in order to stem the growth of public debt. Rather than its level, similar to the regional average of public debt, it is its rate of growth that is worrying. The debt level is also swollen by the government’s contingent liabilities. Publicly guaranteed debt has reached 17.5% of GDP and could push the debt level to 70% of GDP. Moreover, although increasingly held by residents, public debt will remain vulnerable to exchange rate risk, as 60% of the debt is held in foreign currency. The State is committed to privatise the highly subsidised energy and transport sectors (particularly shipping, railways and airlines). Furthermore, the new government has made refocusing on investment one of its main priorities through a series of measures. These measures intend to promote competition between companies by privatising entirely those in which it holds less than 22% of assets. These measures will only have a partial effect on growth in 2013 due to deleveraging by the private sector.
Finalisation of the European Union accession process
The legislative elections of December 2011 went in favour of the centre-left coalition led by the Social Democratic Party (SDP). The new Croatian Prime Minister, Zoran Milanovic, leader of the SDP, pursues the process of joining the European Union. Croatia will then be the 28th Member State of the European Union from 1 July 2013.
The austerity policies adopted, along with the other reforms initiated particularly regarding privatisations, will lead to a wage cut aimed at restoring competitiveness. In this context, strikes such as the one held on 29th November 2012, could affect the Croatian economy in 2013.
