Croatia Country Report - April, 2014

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Croatia Country Report - April, 2014

This report reviews key macroeconomic data and microeconomic developments for Croatia published between April 5 and May 6, 2014.

This was another difficult month for Croatia with both the IMF and the EC downgrading their 2014 growth forecasts for the country and predicting the economic contraction will continue this year as well. The main reason is the new wave of austerity, which comes with the second revision of this year’s budget as the EC urged the government to further reduce the fiscal imbalances.

As part of the second revision, the government also admits the economy might stagnate this year as an impact of the additional budget consolidation measures, equivalent to 0.4%/GDP. The central bank governor said he expects the GDP to drop in 2014.

On top of this, PM Zoran Milanovic sacked in early May his finance minister Slavko Linic over his participation in a land overvaluation deal that reportedly damaged the state budget by EUR 3.6mn. Linic was immediately replaced by his deputy Boris Lalovac and the rotation is not expected to affect the cabinet’s fiscal and financial policy.

The central bank, on the other hand, released a report stating the GDP might have dropped in annual comparison in the first quarter of 2014, even if somewhat rising on the quarter.

The report also contains details on a planned Eurobond issue of around EUR 1bn and provides the names of the four international banks selected to arrange the sale.
On the financial front, Fitch affirmed the ratings of Zagrebacka Banka and Privredna Banka Zagreb, while Hungary’s OTP completed the acquisition of Banco Popolare Croatia.

The report also provides information on the state-guaranteed loan for railway firm HZ Cargo, on the postponement of the talks between the Croatian government and Hungary’s MOL on the management of INA and on the potential investors in the new 500 MW Plomin-C thermal power plant. It also details the conditions put by the competition agency to retailer Agrokor for the completion of the acquisition of Slovenia’s Mercator.

Key points:

• CPI dropped by 0.4% year on year in March following a 0.6% year on year decrease in February 2014. The central bank said it sees the average inflation slowing to 0.2% this year from 2.2% in 2013.

• The working-day adjusted industrial output recovered in January-March (up 1.5% year on year) after contracting in the prior nine months in a row on an annual level. It rose by 0.7% year on year in March, building up on the 1.6% year on year increase a month earlier.

• The unemployment rate registered its first monthly drop since August 2013, sliding to 22.3% in March from 22.7% in February and 22.4% in January. However, it was still above the end-2013’s 21.6%. The average net monthly wage continued to recover in January, edging up by a real 0.2% year on year, after increasing 0.3% year on year in January.

Table of Contents

EXECUTIVE SUMMARY 4
MACROECONOMIC OVERVIEW 5
EC downgrades Croatia’s 2014 GDP forecast to 0.6% contraction 5
IMF downgrades Croatia's 2014 GDP outlook, expecting 0.6% contraction 6
Croatian PM replaces finance minister over overvalued property deal 6
Deutsche Bank, JP Morgan, SocGen, Intesa to arrange Croatia's new Eurobond planned at EUR 1bn 7
REAL SECTOR 7
1. GDP, Inflation 7
Croatian c-bank governor sees economy remaining in recession in 2014 7
Croatian c-bank sees Q1 GDP dropping y/y, rising 0.4% q/q 7
Croatia’s GDP to contract 0.5% in 2014, rise 0.7% in 2015 - Zagreb Institute of Economics 8
Croat c-bank sees avg 2014 inflation slowing down to 0.2% from 2.2% in 2013 8
Croatia's consumer prices drop 0.4% y/y in March 2014 9
Croatia's PPI down 3.1% y/y in March 9
2. Industry and Trade 10
Croatia's working-day adjusted industrial output rises 1.5% y/y in Q1 2014 10
Croatia’s industrial turnover down 0.7% y/y in Jan-Feb 2014 10
Croatia's retail sales rise 1.3% y/y, 0.6% m/m in March 2014 10
Croatia's retail sales flat y/y in February 2014 - detailed data 11
3. Labour Market 11
Croatia’s unemployment rate falls to 22.3% in March – flash estimate 11
Croatia’s average net monthly salary up by real 0.2% y/y in Feb 2014 11
4. Tourism 11
Tourist arrivals in Croatia down 7.4% y/y in March 2014 11
FISCAL SECTOR, MONETARY POLICY 12
Croat govt cuts 2014 GDP growth forecast to zero after pledging to reduce budget gap by further 0.4%/GDP 12
Croatia to introduce tax on savings from Jan 1, 2015 12
World Bank approves EUR 150mn economic recovery loan to Croatia 13
Croatia allows railway firm HZ Cargo to take EUR 32.7mn state-guaranteed loan from two local banks 13
Croatia sells kuna T-bills worth EUR 118.9mn, euro T-bills auction fails 13
Croatia sells combined EUR 139.6mn worth of kuna, euro T-bills 14
FINANCIAL INTERMEDIATION 14
Fitch affirms ratings of two Croatian banks 14
Hungary's OTP Bank completes acquisition of Banco Popolare Croatia 15
Croatian insurers Q1 gross written premiums fall 2.7% y/y to EUR 321.5mn 15
Zagreb bourse’s April turnover rises 3.6% m/m to EUR 48.2mn 16
EXTERNAL SECTOR 16
Croatia's trade gap shrinks 8.2% to EUR 938mn in Jan-Feb 2014 - first results 16
Croatia's FDI shrink 58.6% to EUR 436.9mn in 2013 - preliminary data 16
STRUCTURAL REFORMS 17
Hungary's MOL postpones talks with Croatia over INA's management 17
Croatia’s HEP receives three bids from unnamed investors for 500 MW Plomin-C project 17
Croatian competition agency announces conditions under which Agrokor will acquire Slovenia's Mercator 17

Number of pages: 18
Release Date: Wed, 07 May 2014