Croatia Country Report - May, 2014

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Croatia Country Report - May, 2014

This report reviews key macroeconomic data and microeconomic developments for Croatia published between May 6 and June 2, 2014.

The IMF downgraded its 2014 growth forecast for Croatia yet again in May, only a month after the previous downgrade. Under the latest estimates, the Fund now sees the economy contracting by 0.8% and not by just 0.6% this year.

The EBRD also released a gloomy forecast for Croatia, saying the GDP will contract 0.5% this year in the absence of any growth drivers. Back in January, the EBRD still believed the Croatian economy could expand by 1% this year and thus end a five-year recession period.

The flash estimate of the statistics office confirmed last month that the Jan-March GDP dropped by 0.4% y/y, signalling the recession is continuing for a sixth year in a row. Both the EBRD and the IMF now expect the recovery to begin only in 2015 once the external environment improves and thanks to Croatia’s EU funds absorption.
The government placed a EUR 1.25bn Eurobond at a yield of just over 4% in May and finance minister Boris Lalovac already voiced plans for another Eurobond in the second half of the year, if the investment climate is favourable, targeting financing for early 2015.

The central bank, on the other hand, released new data showing the combined first-quarter pre-tax profit of the banking system dropped 15% y/y to EUR 107mn.

The report also contains talks about the Jan-April EU funds absorption rate and the World Bank’s EUR 75mn loan for the Croatian health system.

It also provides information on the plans of the stocks exchanges in Zagreb, Sofia and Skopje to create a regional trading infrastructure, as well as on the government and the state pension funds’ plans to participate in Petrokemija’s capital hike. In May, French-led consortium MLZL started the construction of Zagreb airport’s new terminal, while Moody’s placed privately-held consortium Agrokor under review for a possible upgrade.

Key points:

• CPI dropped by 0.5% y/y in April following a 0.4% y/y decrease in March 2014. Retail sales rose 1.3% y/y in March after remaining flat in annual terms the previous month.

• The working-day adjusted industrial output recovered in January-April (up 1.3% y/y) after contracting in the prior nine months in a row on an annual level. It rose by 0.6% y/y in April alone, building up on the 0.7% y/y increase a month earlier.

• The unemployment rate continued to decline in monthly terms in April to 21.1% from 22.3% in March and 22.7% in February. It was also below the end-2013’s 21.6%. The average net monthly wage continued to recover in March, edging up by a real 0.1% y/y, after increasing 0.2% y/y in February.

Table of Contents

EXECUTIVE SUMMARY 4
MACROECONOMIC OVERVIEW 5
IMF says Croatia's economy to contract 0.8% in 2014 5
EBRD sees Croatia’s economy contracting 0.5% in 2014 6
Moody’s says Croatia still constrained by weak growth and fiscal metrics 6
Croatia considers new Eurobond issue later in 2014 – FinMin 6
REAL SECTOR 7
1. GDP, Inflation 7
Croatia’s Q1 GDP down by real 0.4% y/y – flash estimate 7
Croatia's consumer prices drop 0.5% y/y in April 2014 8
Croatia's PPI down 3% y/y in April 2014 8
2. Industry and Trade 9
Croatia's working-day adjusted industrial output rises 1.3% y/y in Jan-Apr 2014 9
Croatia's retail sales rise 1.3% y/y in March 2014 - detailed data 10
3. Labour Market 11
Croatia’s unemployment rate falls to 21.1% in April 11
Number of unemployed in Croatia inches down 0.3% y/y in April 2014 11
Croatia’s ILO-defined unemployment rate rises to 17.1% in 2013 - Labour Force Survey 11
Croatia’s average net monthly salary up by real 0.1% y/y in March 2014 12
4. Tourism 12
Tourist arrivals in Croatia up 17% y/y in April 2014 12
FISCAL SECTOR, MONETARY POLICY 12
Croatia sells EUR 1.25bn in 2022 Eurobonds 12
Croatia’s budget deficit widens to 4.9% of GDP in 2013 13
Croatian c-bank FX reserves down 3.1% y/y to EUR 11.68bn at end-April 13
Croatia sells combined EUR 112.9mn worth of kuna, euro T-bills 13
Croatia sells kuna T-bills worth EUR 118.9mn, euro T-bills auction fails 14
FINANCIAL INTERMEDIATION 14
Share of bad loans in Croatian banking sector up to 16.1% at end-March 2014 14
Croatia’s Q1 banking sector pre-tax profit shrinks 14.9% y/y to EUR 107.4mn 14
Austria’s Hypo group gets two bids for ex-Yugoslavia units – report 15
Total gross written premiums in Croatia down 2.7% y/y in Jan-April 2014 15
EIB lends EUR 50mn to Croatian unit of Erste for SMEs financing 15
Bulgarian, Macedonian and Croatian bourses to create regional trading infrastructure 16
Croatian mandatory pension funds’ assets up 7.2% y/y at end-April 2014 16
Croatian open-end investment funds’ net assets up 0.31% m/m at end-April 17
Value of new contracts signed by Croatia’s leasing firms up 22.32% y/y in Q1 2014 17
EXTERNAL SECTOR 17
Croatia's Q1 trade gap shrinks 5.8% y/y to EUR 1.5bn 17
Croatia's gross foreign debt up 0.4% m/m to EUR 46.07bn at end-Feb 2014 18
STRUCTURAL REFORMS 18
Croatia absorbs EUR 340mn EU funds in four months 18
World Bank approves EUR 75mn loan to Croatia to support health care 18
Croatian govt, pension funds to recapitalise troubled fertilizers Petrokemija - EconMin 19
French-led consortium starts construction of new terminal at Zagreb Airport 19
Moody’s places Croatia’s Agrokor on review for possible downgrade 20
POLITICS 20
Croatia’s opposition HDZ wins elections for European Parliament 20
EBRD mulls supporting business, infrastructure recovery in the Balkans after flooding 21
Croatia to apply for Schengen membership in July 2015 - PM 21

Number of pages: 21
Release Date: Mon, 02 Jun 2014