Croatia Country Report - March, 2014

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Croatia Country Report - March, 2014

This report reviews key macroeconomic data and microeconomic developments for Croatia published between March 6 and April 4, 2014. During this period, Croatia’s public finances experienced another major blow with the European Commission reportedly rejecting the government’s budget revision as inadequate and asking for more cuts. The government is thus already facing a second budget rebalance, which might be implemented by June.

However, the IMF has warned the fiscal consolidation within the first year of Croatia’s excessive deficit procedure should not be too stern since this might additionally suffocate the waning domestic demand. The IMF has warned it sees the Croatian economy shrinking for a sixth consecutive year in 2014.

On the other hand, Moody’s downgraded Croatia’s rating outlook to negative from stable on March 21 due to the worsening economic prospects, the government’s slow reaction to consolidate fiscal spending and the continuing external liquidity programs.

The statistics office confirmed the 2013 GDP declined 1% because of the declining manufacturing output, weak exports and subdued domestic demand. The report also contains details on the two IBRD credit lines of combined EUR 225mn, which Croatia plans to spend for health sector and fiscal support.

On the financial front, Vaba Banka is eyeing recapitalisation by Czech peer J&T. On the other hand, the EBRD is reportedly screening again the financial state of lender HPB although unofficial sources indicate no equity investment has been under consideration.

The report also provides details on the opening of the state tender for oil and gas exploration, and the interested participants. It contains the latest developments on the dispute between the government in Zagreb and Hungary's MOL over the management and ownership of energy firm INA, describing how the relations between the two parties have deteriorated.

Key points:

• Croatia says 2009 contracts with Hungary’s MOL related to oil and gas company INA should be cancelled. Diversified Zagrebacki Holding intends to issue bond to refinance existing debt of EUR 300mn.

• CPI dropped by 0.6% year on year in February following a 0.1% year on year increase in January 2014. The working-day adjusted industrial output recovered in January-February (up 1.9% year on year) after contracting nine months in a row on an annual level. It rose by 1.6% year on year in February, building up on the 2.2% year on year increase a month earlier. The government debt jumped to 66.8%/GDP at end-2013 from 55.8%/GDP a year earlier.

• The unemployment rate climbed further to 22.7% in the second month of 2014 from 22.4% in January and 21.6% at end-2013, according to a flash estimate. The average net monthly wage somewhat recovered in January, edging up by a real 0.3% year on year, after dropping 1.5% in 2013.

Table of Contents

EXECUTIVE SUMMARY 4
MACROECONOMIC OVERVIEW 5
Moody's downgrades Croatia's outlook to negative from stable, affirms rating at Ba1 5
EC warns Croatia's excessive macroeconomic imbalances require monitoring and strong policy actions 5
REAL SECTOR 7
1. GDP, Inflation 7
Croatia's 2013 GDP drop confirmed at 1% - stats office 7
Croatia's consumer prices drop 0.6% y/y in Feb 2014 7
Croatia's harmonised CPI falls 0.2% y/y in February 8
Croatia's PPI down 2.7% y/y in February 8
2. Industry and Trade 9
Croatia's working-day adjusted industrial output rises 1.9% y/y in Jan-Feb 2014 9
Croatia’s industrial turnover up 3.7% y/y in January 2014 9
Croatia's retail sales stay flat y/y, edge up 0.1% m/m in Feb 2014 10
3. Labour Market 10
Croatia’s unemployment rate up to 22.7% in February – flash estimate 10
Croatia’s average net monthly salary up by real 0.3% y/y in Jan 2014 10
Total labour cost in Croatia rise 0.2% y/y in Q4 2013 10
4. Tourism 10
Croatia sees tourism investments of some EUR 410mn in 2014 11
Tourist arrivals in Croatia up 5.9% y/y in Feb 2014 - first results 11
FISCAL SECTOR, MONETARY POLICY 11
Croatian parliament endorses 2014 budget rebalance 11
Croatia eyes second 2014 budget revision as EU seeks additional deficit cut of EUR 170mn, or 0.4%/GDP 12
Croatia eyes two IBRD credit lines worth combined EUR 225mn for health sector, fiscal support 12
Croatia's government debt climbs to 66.8%/GDP at end-2013 13
Croatian c-bank FX reserves up 13.2% y/y to EUR 12.57bn at end-Feb 13
Croatia sells combined EUR 127.6mn worth of kuna, euro T-bills 13
Croatia sells EUR 87.6mn worth of one-year kuna T-bills 14
Croatia sells combined EUR 236.8mn worth of kuna, euro T-bills 14
FINANCIAL INTERMEDIATION 15
Croatia's Vaba shareholders to vote on planned recapitalisation by Czech bank J&T on May 12 15
Moody's lowers outlook on Croatian development bank HBOR's Ba1 rating to negative 15
EBRD to examine again financial state of Croatian lender HPB - report 16
Croat govt oks insurer Croatia Osiguranje privatisation to local Adris Grupa 16
EXTERNAL SECTOR 16
Croatia turns to current account surplus of EUR 564.3mn in 2013 16
Croatia's trade gap shrinks 10% to EUR 463mn in January - first results 17
Croatia's 2013 trade gap widens 4.1% to EUR 6.7bn – detailed figures 17
STRUCTURAL REFORMS 18
Croatia opens tender for oil and gas exploration and production licences 18
Croatia says 2009 contracts signed with Hungary's MOL for INA should be terminated 18
Croatian govt says motorway operator HAC can borrow EUR 120mn from lender HPB 19
Croatia's Agrokor signs EUR 600mn loan deal with Russia's Sberbank 19
Croatia's Zagrebacki Holding plans new bond issue to refinance EUR 300mn bond debt 19
POLITICS 20
Zagreb court sentences former Croatian PM Ivo Sanader to nine years in jail for corruption 20
Croatia's anticorruption agency presses charges against Hungary's MOL CEO 20

Number of pages: 21
Release Date: Mon, 07 Apr 2014