Croatia Country Report - July , 2014

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Croatia Country Report - July , 2014

This report reviews key macroeconomic data and microeconomic developments for Croatia published between July 5 and August 11, 2014.

Fitch downgraded Croatia’s ratings by one notch in early August, warning about increasing risks to the public debt-to-GDP ratio as the economy is continuing to contract, while the government again fails to exercise prudence in its fiscal dealings.

PM Zoran Milovanovic admitted that this year’s budget deficit will miss the target set by the EC and will end slightly higher. Moreover, the government will have to make another budget revision in September considering that the current performance of the tourism industry is not successful in yielding the planned results. Even though the number of tourists rose in the first seven months of the year, in July alone less travellers visited Croatia compared a year earlier due to the bad weather.

The central bank said it sees the national output shrinking 0.2% this year, which is somewhat more optimistic that the World Bank’s expectation for a 0.5% drop and the IMF’s forecast for a 0.8% contraction. Local economists believe the GDP will fall 0.7% in 2014.

The report provides details on Slovenia’s Nova Ljubljanska Banka deciding to shut down its Croatian operations, on the opening of bankruptcy proceedings at Nava Banka, and on Croatia’s application to use funds from EU’s solidarity fund to finance the floods recovery.

The report also contains information about the opening of an onshore hydrocarbons exploration tender, and Croatia’s plans to build an LNG terminal by 2020 via EU financing. It also speaks about the government’s plans to award motorway concessions, and about the latest events in the INA-MOL case and the Agrokor-Mercator deal.

Key points:

• CPI dropped by 0.4% y/y in June following a 0.2% y/y decrease in May 2014. Retail sales edged up 0.1% y/y in June after climbing 1.8% y/y in the previous month.

• The working-day adjusted industrial output recovered in January-June (up 0.7% y/y) after contracting in the prior nine months in a row on an annual level. It, however, dropped by 1.7% y/y in June alone, reversing the 1.2% y/y increase recorded a month earlier.

• The unemployment rate continued to decline in monthly terms in June to 18.3% from 19.66% in May, 21.1% in April and 22.3% in March. It was also below the end-2013’s 21.6%. The average net monthly wage fell by a real 1.3% y/y in May after rising by 0.9% y/y in April.

Table of Contents

EXECUTIVE SUMMARY 4
MACROECONOMIC OVERVIEW 5
Fitch downgrades Croatia’s ratings on fiscal slippage 5
Croatia not to meet 2014 deficit target agreed with EC, PM Milanovic says 5
Croatia to revise 2014 state budget in September 6
S&P affirms Croatia at B/B, outlook stable 6
World Bank still expects Croatia's economy to contract by 0.5% in 2014 7
Erste Group downgrades Croatia’s 2014 GDP forecast to 0.5% contraction 7
REAL SECTOR 8
1. GDP, Inflation 8
Croatian c-bank expects GDP to contract 0.2% in 2014, expand 0.4% in 2015 8
Croatian economy to contract 0.7% in 2014 - local economists 9
Croatia's consumer prices fall 0.4% y/y in June 2014 10
Croatia's PPI falls 2.1% y/y in June 2014 11
Croatia’s June industrial producer prices fall 2.8% y/y - Eurostat 12
2. Industry and Trade 13
Croatia's industrial output falls 1.7% y/y in June 2014 13
Croatia's retail sales edge up 0.1% y/y in June 2014 – first results 14
Croatia’s industrial turnover down 12% y/y in May 2014 14
3. Labour Market 16
Croatia’s unemployment rate drops to 18.3% in June 2014 – flash estimate 16
Number of unemployed in Croatia falls 6.4% y/y in July 2014 16
Number of unemployed in Croatia falls 4.1% y/y in June 2014 16
Croatia's ILO-defined unemployment rate rises to 18.8% in Q1 2014 16
Croatia’s average net monthly salary falls by real 1.3% y/y in May 2014 17
4. Tourism 17
Tourist numbers in Croatia rise 3% y/y in Jan-July 2014 17
Tourist arrivals in Croatia rise 9.9% y/y in June 2014 - first results 17
Passenger traffic at Croatian airports up 3% y/y in H1 2014 18
FISCAL SECTOR, MONETARY POLICY 19
Croatia’s general government expenditure rises to 46.1% of GDP in 2013 – fiscal policy committee 19
Croatia's general government debt rises to 68% of GDP at end-March 2014 - Eurostat 19
Croatia pays up to 1.3% of GDP annually to EU budget - central bank 19
Croatian c-bank FX reserves up 2.6% y/y to EUR 12.3bn at end-June 2014 20
Croatia's M4 money supply up 2.7% y/y to EUR 35.5bn at end-June 20
FINANCIAL INTERMEDIATION 20
Slovenian lender Nova Ljubljanska Banka to shut operations in Croatia 20
Croatian c-bank orders opening of bankruptcy proceedings at Nava Banka 21
Croatian insurers’ H1 premium income falls 4.8% y/y to EUR 615mn 21
Croatian mandatory pension funds’ assets up 14.3% y/y at end-June 2014 22
Net assets of Croatian open-end investment funds fall 0.8% m/m at end-June 2014 22
Zagreb bourse’s turnover falls 2.4% m/m to EUR 37.5mn in July 2014 22
EXTERNAL SECTOR 23
Croatia's gross foreign debt up 0.7% m/m to EUR 46.4bn at end-March 2014 23
Croatia's trade gap shrinks 7.5% y/y to EUR 3.4bn in H1 2014 - first results 23
Croatia's Jan-May trade gap widens 0.3% y/y to EUR 2.9bn 23
Croatia attracts EUR 204.3mn of FDI in Q1 2014 - preliminary data 24
STRUCTURAL REFORMS 24
Croatia calls tender for onshore hydrocarbons exploration, production 24
Croatia applies for financial aid to EU solidarity fund 25
Croatia might award motorway concessions by end-2014 - report 25
Croatia’s planned LNG terminal to be completed by 2020 thanks to EU financing 25
Croatia plans to seek strategic partner for post operator Hrvatska Posta, lender HPB – report 26
Hungary's MOL wants to stay in Croatian energy firm INA 26
Croatia’s Agrokor launches buyout bid for Slovenia's Mercator at EUR 86/share 27
Sweden’s IKEA to open first store in Croatia on August 21 27
POLITICS 27
Croatian parliament passes new labour act 27

Number of pages: 28
Release Date: Tue, 12 Aug 2014