Croatia Country Report - December, 2013

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Croatia Country Report - December, 2013

The following report covers key macroeconomic data relating to Croatia published from December 5, 2013 to January 3, 2014. It also includes corporate news for firms including HPB, Croatia Osiguranje, Hrvatske Ceste, and Croatia Airlines.

The period coincided not only with Passion week for Catholic Croatia but turned into a rather passionate month for the government after the EC proposed the opening of an excessive deficit procedure for the EU’s newest member state, telling the local authorities their 2014 budget bill is not enough to tame structural deficits. The EC also recommended an adjustment path that would lead the country out of the procedure by 2016. In response, the government started preparing new fiscal measures, saying it would revise the 2014 budget by end March.

The third-quarter GDP contraction was confirmed at 0.6% year on year, marking an eighth consecutive quarter of contraction. On a more positive note, most international lenders, banks and rating agencies believe Croatia will exit the five-year recession in 2014—although the anticipated recovery will hardly be significant and probably stay below 1%.

Key Points:

• In corporate news, the government turned down Erste Group’s offer for the purchase of local lender HPB, saying the single-arrived bid was too low. Still, the privatisation of the country’s largest insurer Croatia Osiguranje will probably be successfully wrapped up in 2014 with the buyer being local Adris Group.

• The Croatian government has given its consent to motorway operator Hrvatske Ceste to borrow EUR 56.5mn from four local lenders for the construction and maintenance of motorways and to cover its 2013 credit obligations.

• The government has also consented to allow state-owned flag carrier Croatia Airlines to borrow EUR 1.35mn from local lender Privredna Banka Zagreb (PBZ) to finance the airline’s restructuring process.

Table of Contents

Executive Summary
1. Macroeconomic Overview
1.1 EC proposes start of excessive deficit procedure in Croatia, sets adjustment path
1.2 World Bank sees Croatia's GDP up 0.8% in 2014 after falling 0.8% in 2013
1.3 Erste Group projects zero growth of Croatia's GDP in 2014, ending five-year recession
1.4 Fitch expects minimal loan growth in Croatia in 2014 due to weak economic recovery

2. Real Sector
2.1 GDP, Inflation
2.1.1 Croatia Q3 GDP contraction confirmed at 0.6% y/y
2.1.2 Croat c-bank sees GDP growing 0.7% in 2014 after 0.8% contraction in 2013
2.1.3 Croatia's 2012 GDP per capita 38% below EU28 average
2.1.4 Croatia's consumer price inflation quickens to 0.4% in Nov
2.1.5 Croatia's PPI down 2.5% y/y in Nov 2013

2.2 Industry and Trade
2.2.1 Croatia's working-day adjusted industrial output falls 1.9% in Jan-Nov
2.2.2 Croatia’s industrial turnover down 4.8% y/y in Oct 2013
2.2.3 Croatia's Oct retail sales fall by real 0.4% y/y - matching preliminary data

2.3 Labor Market
2.3.1 Number of unemployed persons in Croatia rises 2.8% y/y at end-Nov
2.3.2 Croatia’s average net monthly salary up by real 0.1% y/y in Oct 2013
2.4 Tourism
2.4.1 Tourist arrivals in Croatia up 5.0% y/y in Jan-Oct 2013

3. Fiscal Sector, Monetary Policy
3.1 Croatia to rebalance 2014 budget by end-March to meet EC recommendations
3.2 Croatia could consider IMF borrowing after entering EC's excessive deficit procedure next year - economist
3.3 Croatia borrows EUR 200mn to finance 2013 budget due to lower privatisation revenue
3.4 Croatia plans to attract 2014 privatisation revenue of up to EUR 460mn
3.5 Croatia raises minimum gross wage by 1.1% to EUR 396 for Jan-Dec 2014 period
3.6 Croatia plans to cut privileged pensions of over EUR 655 by 10% to save EUR 40mn in 2014
3.7 Croatian c-bank FX reserves up 14.2% y/y to EUR 12.9bn at end-Nov 2013
3.8 Croatia sells EUR 15.7mn worth of T-bills, more than planned

4. Financial Intermediation
4.1 Croatia rejects Erste Bank's bid for 99.13% stake in HPB
4.2 Croatia selects local firm Adris Grupa as best bidder for insurer Croatia Osiguranje
4.3 Croatian banks' credit portfolio falls 0.9% m/m and 0.5% y/y at end-Oct

5. External Sector
5.1 Croatia's current account surplus rises 9.1% y/y to EUR 2.85bn in Q3 2013
5.2 Croatia turns to EUR 100mn trade surplus in Oct - Eurostat
5.3 Croatia's 9-mo trade gap widens to EUR 5.5bn from EUR 5.2bn a year earlier

6. Structural Reforms
6.1 Croatia approves motorway operator Hrvatske Ceste to borrow EUR 56.5mn
6.2 Croat govt oks EUR 1.35mn bank loan for Croatia Airlines, approves capital hike

Number of pages: 17
Release Date: Tue, 07 Jan 2014