Croatia Country Report - March, 2016

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Croatia Country Report - March, 2016

This report reviews key macroeconomic data and microeconomic developments for Croatia published between March 6 and March 31, 2016.
Moody’s has downgraded Croatia's long-term issuer and senior unsecured debt ratings to Ba2 from Ba1 and maintained the negative outlook due to large and increasing government debt burden, and weak medium-term growth prospects. Now, all three rating agencies, including Moody’s, Fitch and S&P, rate Croatia at two notches below the investment grade with negative outlooks.
The Zagreb Institute of Economics (ZEI) slightly revised its forecast for real GDP growth in 2016 to 1.5% in its latest quarterly economic outlook from a previous 1.3%, based on newly released data for 2015. ZEI forecasts 1.8% GDP growth in 2017.
The report also provides details on economic sentiment indicators, and construction output. It mentions latest developments in bilateral relations between Croatia and Slovenia. The report also reveals the latest investments in tourism sector, and the details on public borrowing.

Key Points:

• Croatia is targeting this year a budget deficit of HRK7.5bn equivalent to 2.2% of GDP and a general budget deficit of HRK9.2bn equivalent to 2.7% of GDP when state agencies and municipal authorities are taken into account. The finance ministry expects the economy to expand by 2% this year. Consumer prices inflation is seen at 0.1% and the government also plans to reduce the jobless rate below 16% this year.

• Croatia's consumer prices fell 1.4% y/y in February, deepening from a 0.8% annual decline the previous month.

• Croatia's registered unemployment rate stood at 17.8% in February, 0.1pp down compared to January and 1.8pp down compared to February 2015.
• Croatia's trade deficit widened by 9% y/y to HRK52.2bn in January from HRK3.17bn a year ago, as exports declined despite an increase in imports.


Table of Contents

EXECUTIVE SUMMARY 5
MACROECONOMIC OVERVIEW 6
Moody’s downgrades Croatia to Ba2, maintains negative outlook 6
Zagreb Institute of Economics revises upwards 2016 growth forecast for Croatia to 1.5% 8
Croatia’s economic sentiment remains flat in March ……………………………………………………………………………………. 9
CEE sentiment improves in March 10
REAL SECTOR 10
1. GDP, Inflation 10
Croatia's consumer prices continue decline in February 11
2. Industry and Trade 12
Croatia’s construction works index down 2.2% y/y in December 12
Croatia’s industrial output up 9.3% y/y in January 14
Prices of new homes in Croatia rise 1.6% y/y in 2015 14
Croatian new passenger car registrations rise 3.3% y/y in January-February ……………………………………………… 16
Croatia's gross electricity production falls 10% y/y in January ……………………………………………………………………. 16
Croatia's retail sales growth decelerates in January ……………………………………………………………………………………. 16
Croatian government cuts natural gas price for households by 18% …………………………………………………………… 16
Croatia’s adjusted industrial sales decline 7.2% y/y in January …………………………………………………………………… 18
Croatia's new car sales rise 16.6% y/y in February 20
3. Labour Market 20
Calendar-adjusted labour costs in Croatia inch up 0.7% y/y in Q4 20
Croatia’s average net monthly salary rises by nominal 1.6% y/y in January 22
Unemployment rate in Croatia declines to 17.8% in February 22
4. Tourism 23
Tourist arrivals in Croatia rise 8.8% y/y in January ……………………………………………………………………………………… 23
Slovenia’s Istrabenz Turizem sells Grand Hotel Adriatic in Croatia’s Opatija ………………………………………………. 24
Four Seasons to operate Dubai-based Arqaam’s hotel in Croatia ……………………………………………………………….. 24
Turkey’s Dogus Group to invest additional €100mn in Croatia 26
FISCAL SECTOR, MONETARY POLICY 26
Croatian central bank accepts all bids in weekly reverse repo auction 26
Croatia sells €103mn worth of kuna bills, below target 26
Croatia to borrow from both domestic and international markets in April, FinMin says 27
Croatian budget sends 'clear message' to carry out reforms 29
Croatia sells €77mn worth of 364-day kuna bills, below target …………………………………………………………………… 32
Croatia issues €531mn worth of 10-year domestic bonds ………………………………………………………………………….. 34
Croatian parliament approves 2016 budget ……………………………………………………………………………………………….. 36
Croatian central bank accepts all bids in weekly reverse repo auction 36
FINANCIAL INTERMEDIATION 37
Croatian insurers' premium income down 3.11% y/y in January-February 37
RBI books €77mn charge for mandatory CHF loan conversion in Croatia in 2015 37
Croatian mandatory pension funds’ assets up 6% y/y in February 38
SEE Link regional bourse platform to be unveiled in Skopje on March 29 – EBRD 38
SEE Link platform linking Macedonian, Bulgarian and Croatian bourses becomes operational 39
EXTERNAL SECTOR 40
Croatia's trade gap widens 9% y/y in January 40
STRUCTURAL REFORMS 41
Slovenia’s Impol aims to acquire Croatian aluminium producer TLM in 2016 41
Slovenia’s Impol starts production at Croatia’s TLM 42
Croatia to change central bank law to improve monitoring 43
Croatia’s HEP launches tender to chose contractor for EL-TO Zagreb upgrade project 43
China’s Poly Technologies in talks over infrastructure projects in Croatia's Zadar 43
INA-MOL drops plans to sue Bosnian Federation’s govt over Energopetrol capital hike 44
POLITICS 44
Croatian government proposes amendments on using army for border security 44
Switzerland and EU extend free movement deal to include Croatian workers 46
Slovenia starts repaying Yugoslav-era savers from Bosnia and Croatia 46
EU leaders confirm closure of Western Balkans migrant route……………………………………………………………………. 46
Croatian FM proposes scrapping border arbitration with Slovenia …………………………………………………………….. 49
Croatian and Slovenian FM’s highlight good bilateral relations despite border dispute ……………………………… 49
Romania, Bulgaria and Croatia most corrupt countries in EU, study shows ………………………………………………… 51
Bosnia divided over Karadzic conviction …………………………………………………………………………………………………….. 51
Probe into MiG-21 deal with Ukraine triggers corruption scandal in Croatia ………………………………………………. 54
COMMENT: China and the Balkans – ‘New Engine, New Power, New Platform’... and new graft ……………….. 54
Hungary and Croatia reportedly to reopen railway border crossings…………………………………………………………… 56

Number of pages: 56
Release Date: Mon, 25 Apr 2016