Croatia Country Report - November, 2013

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Croatia Country Report - November, 2013

The following report covers key macroeconomic data relating to Croatia published from November 5 to December 5, 2013. It also includes news on privatization developments involving the firms Croatia Osiguranje, HPB, Croatia Airlines, and Hungary’s MOL.

In this one-month period, most international institutions issued revised forecasts on Croatia’s GDP growth for this year, signaling the country will close a fifth year of recession with the economy seen shrinking between 0.7% and 1.0%. The government, however, still believes it might clinch a modest growth of 0.2%, revising downward its previous 0.7% growth forecast in the second budget revision for this year. Foreign and domestic projections for 2014, however, agree the economy is set to end the lasting recession and turn to growth. In the meantime, the EC has confirmed it decided to recommend opening an excessive deficit procedure for Croatia as Eurostat data revealed the budget deficit hit 5.0% of GDP in 2012. The state of fiscal health will improve neither this year nor next, with consolidated budget gaps set at 5.5% for both years.

Shrinking consumption will remain the major growth challenge next year, as high unemployment and stagnating wages hamper personal spending. Flash data showed that third-quarter GDP fell by a real 0.6% year on year, marking an eighth consecutive quarter of contraction. The switch in retail sales to a drop in September and October, coupled with dwindling industrial output, already signal the fourth-quarter results will remain gloomy.

Key Points:

• In privatization news, Croatia has extended the bidding deadlines in the privatization of insurer Croatia Osiguranje and lender Hrvatska Postanska Banka (HPB). Zagreb has received no bids in its tender for a 49% stake in national carrier Croatia Airlines. And Hungary's MOL has offered its 49.1% stake in Croatian oil and gas company INA to the government in Zagreb.

• Croatia’s annual consumer price inflation again eased to 0.2% in October from 1.1% in September. Industrial production declined for a seventh month in a row in October, shrinking 3.4% y/y with manufacturing production continuing to be the worst performer, negatively affecting the country’s overall economy.

• The jobless rate rose to 20.3% in October from 19.1% in September with the end of the summer tourism season, which typically supplies many seasonal jobs. It was also 0.7pps higher compared to October 2012.

Table of Contents

Executive Summary
1. Macroeconomic Overview
1.1 IMF downgrades Croatia's 2013 GDP growth forecasts to 0.75% decline
1.2 EBRD revises down Croatia’s 2013 forecast to negative 0.8%
1.3 EC softens Croatia’s 2013 GDP contraction forecast to 0.7%
1.4 EC to recommend opening of excessive deficit procedure for Croatia
1.5 Croatia might seek IMF assistance in 2014 – FinMin Linic
1.6 Croatia needs to step up reforms to boost competitiveness - EBRD

2. Real Sector
2.1 GDP, Inflation
2.1.1 Croatia Q3 GDP declines by real 0.6% y/y - flash estimate
2.1.2 Consumer price inflation in Croatia eases to 0.2% y/y in Oct 2013
2.1.3 Croatia’s producer price index down 2.8% y/y in Oct 2013

2.2 Industry and Trade
2.2.1 Croatia's working-day adjusted industrial output falls 3.4% y/y in Oct
2.2.2 Croatia’s industrial turnover up 0.9% y/y in Sep 2013
2.2.3 Croatia's building output falls 12.1% y/y in August 2013
2.2.4 Croatia's retail sales down by real 0.4% y/y in October 2013
2.2.5 Croatia's retail trade turnover down 0.5% y/y in Sep 2013

2.3 Labor Market
2.3.1 Croatia’s unemployment rate up 1.2pps m/m to 20.3% in Oct 2013 – flash estimate
2.3.2 Number of registered unemployed Croats up 3.3% y/y at end-Oct 2013
2.3.3 Croatia's average net salary falls by real 2.1% m/m in Sep

3. Fiscal Sector, Monetary Policy
3.1 Croatian parliament endorses second 2013 budget rebalance, approves 2014 budget plan
3.2 Croatia to keep proceedings from USD 1.75bn bond as preliminary financing for 2014
3.3 Croatian c-bank FX reserves up 1.8% y/y to EUR 11.6bn at end-Oct 2013
3.4 Croatian c-bank reduces commercial banks' mandatory reserves rate to 12% from 13.5%
3.5 Croatia sells euro T-bills below target, kuna T-bills above target
3.6 Croatia sells EUR 232mn worth of T-bills on Nov 26

4. Financial Intermediation
4.1 Croatia extends deadlines in privatisation of Croatia Osiguranje, lender HPB - report
4.2 Share of bad loans in Croatian banking sector up to 15.32% at end-Sep 2013
4.3 Croatia’s banking sector pre-tax profit shrinks 31% y/y to EUR 280mn in Jan-Sep 2013
4.4 Croatia to raise intermediate VAT to 13% from 10% and replace tax breaks

5. External Sector
5.1 Croatia’s trade gap widens 5.7% y/y in Jan-August 2013

6. Structural Reforms
6.1 Zagreb receives no bids in tender for 49% in national carrier Croatia Airlines
6.2 Hungary's MOL offers for sale its INA stake to Croat government

7. Politics
7.1 Croatia improves by five places in 2013 corruption perception index

Number of pages: 16
Release Date: Thu, 05 Dec 2013