Croatia Country Report - February, 2014

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Croatia Country Report - February, 2014

This report reviews key macroeconomic data and microeconomic developments for Croatia published between February 6 and March 5, 2014. The report also includes corporate news for firms such as HZ Infrastruktura, Agrokor, and Mercator.

During this period, the IMF significantly downgraded its 2014 GDP forecast for Croatia, saying it now expects the country will most likely plunge into a sixth consecutive year of recession. At the same time, the government revised this year's budget, reducing the deficit in order to align with the EC's excessive deficit procedure, which Croatia entered in January. Although reducing the economic growth estimate, the government still hopes for a modest increase of 0.2% this year with the rebalanced budget. The statistics office issued a flash estimate for 2013 GDP, confirming the economy continued to tumble, shrinking by 1% on lower manufacturing output and exports and subdued domestic demand.

On the financial front, central bank data showed half of the banks operating in the country ended last year in loss. On the other hand, two Croat businessmen succeeded in raising the capital of Karlovacka Banka, while the competition watchdog approved the acquisition of the largest insurer Croatia Osiguranje by local Adris Grupa.

The report also provides details on state tenders for oil and gas exploration, and motorway concessions. It contains the latest developments on the two hottest corporate sagas in Croatia and the region: the dispute between the government in Zagreb and Hungary's MOL over the management and ownership of energy firm INA, and the ongoing takeover of Slovenian retailer Mercator by privately held Croatian group Agrokor.

Key Points:

• Hungary’s MOL has asked oil and gas company INA to help it prepare the sale of its stake. Croatia's Agrokor and the consortium of Mercator sellers agreed to a lower sales price and to extend the deal wrap-up deadline. Railway operator HZ Infrastruktura has secured state guarantees for a EUR 40mn EBRD loan.

• GDP contracted by 1.2% year on year in Q4 2013. CPI inflation slowed to 0.1% year on year in January 2014 from 0.3% year on year a month earlier. The working-day adjusted industrial output recovered in January (up 2.2% year on year) after contracting nine months in a row on an annual level.

• The unemployment rate climbed to 22.4% in January from 21.6% in December 2013, according to a flash estimate. The average net monthly wage fell 1.5% in 2013, even though it rose by a real 1.0% year on year in December alone.

• The report also contains the latest EC forecasts on Croatia and Fitch's downgrade of the country's outlook to negative on prolonged fiscal deterioration.

Table of Contents

Executive Summary
1. Macroeconomic Overview
1.1 IMF sees Croatia's GDP contracting for sixth consecutive year in 2014
1.2 EC keeps its 2014 GDP growth forecast for Croatia unchanged at 0.5%
1.3 Fitch revises Croatia's outlook to negative on continued fiscal deterioration

2. Real Sector
2.1 GDP, Inflation
2.1.1 Croatia's GDP shrinks 1% in 2013, confirming fifth consecutive year in recession - flash estimate
2.1.2 Croatia's consumer price inflation slows down to 0.1% y/y in Jan 2014
2.1.3 Croatia's PPI down 2.4% y/y in January

2.2 Industry and Trade
2.2.1 Croatian govt sees industrial production rising by average 2.85% in 2014-2020
2.2.2 Croatia's working-day adjusted industrial output rises 2.2% y/y in Jan 2014
2.2.3 Croatia’s industrial turnover down 3.2% in 2013
2.2.4 Croatia's retail sales fall by real 1.2% y/y in December 2013 - detailed data

2.3 Labour Market
2.3.1 Croatia’s unemployment rate up to 22.4% in January – flash estimate
2.3.2 Croatia’s average net monthly salary down by real 1.5% in 2013

2.4 Tourism
2.4.1 Tourist arrivals in Croatia up 5.1% in 2013

3. Fiscal Sector, Monetary Policy
3.1 Croatia revises 2014 budget, cutting deficit target to 4.1%/GDP from 5.2%/GDP
3.2 Croatian banks subscribe for EUR 1.15bn worth of Croat bonds to be issued on Feb 10
3.3 Croatian PM says salaries in state administration to be reduced by 6%
3.4 Croatian c-bank FX reserves up 16.1% y/y to EUR 12.89bn at end-Jan
3.5 Croatia sells combined EUR 223.5mn worth of kuna, euro T-bills
3.6 Croatia sells EUR 208mn worth of kuna, euro T-bills

4. Financial Intermediation
4.1 Croat c-bank oks capital hike of Karlovacka Banka by two local investors
4.2 Croatian competition agency oks Adris Grupa's acquisition of local insurer CO
4.3 Half of Croatia's 30 banks end 2013 in loss

5. External Sector
5.1 Croatia's 2013 trade gap widens 4% to EUR 6.7bn - first results

6. Structural Reforms
6.1 Croatia to open oil and gas exploration tenders for Adriatic Sea blocks in April
6.2 Croat govt confirms state guarantees for railway firm HZ Infrastruktura's EUR 40mn EBRD loan
6.3 Croatia gets five bids in tender for concession of over 1,000km of motorways
6.4 Croatia appoints power utility HEP for natural gas wholesale operator in next three years
6.5 Hungary's MOL asks Croatia's INA to help organise data room ahead of possible stake sale
6.6 Croatia's Agrokor, Mercator sellers agree to cut sales price by 40% to EUR 86/share

Number of pages: 19
Release Date: Wed, 05 Mar 2014