ZAGREB, February 28, 2019 - Finance Minister Zdravko Marić said on Wednesday the government had anticipated the slowing down of economic growth in the last quarter of 2018, adding that industrial production and high imports gave cause for concern, while the growth of consumption and investment reflected good economic sentiment.

Speaking to Hina, Marić said the government had expected the slowing down of economic growth in Q4 to 2.3%, as had the central bank and leading analysts given the available analyses of macroeconomic indicators, notably industrial production and net exports. "The total growth in 2018 of 2.6% is in line with our expectations," he said, recalling that the last government projection was that the economy would grow 2.7% last year.

Marić said the 2.5% annual decline in the manufacturing industry and the 1.3% rise in exports in Q4, slower than in the previous quarters, were cause for concern. He said "that's not just due to shipbuilding... but other industries and the export of commodities."

He said the dependence on imports remained high. In Q4 2018, they went up 6.6%, with the import of commodities rising 9% and the import of services falling by 2.8%. "We have to do everything in our power to additionally boost the domestic economy so it can perform better and reduce its dependence on imports."

As for the good indicators, Marić said personal consumption went up 3.9% on the year thanks to the positive sentiment among citizens and in the economy. He said the latest tax cuts had managed to increase citizens' disposable income, resulting in higher consumption.

GDP was also supported by a 6.1% rise in investments, which points to good economic sentiment thanks to tax cuts and better absorption of European Union funds, he said, adding that both the private and public sectors had done their share.

"The total real annual growth rate in 2018 of 2.6% is mildly higher than the potential growth rate, which is not satisfactory in the middle term. We should all strive for higher growth rates which will contribute to sustainable growth, which the European Commission too highlighted today in its European semester report."

The Commission said Croatia was no longer recording excessive economic balances but economic imbalances. "We expected to come out of the group of countries with excessive imbalances because we are working on reducing and eliminating them," said Marić.

The Commission too says domestic demand is the main economic growth driver in Croatia but that there are certain challenges to be dealt with, first and foremost domestic production, he said. On the other hand, one should take into account the neighbourhood as some countries, primarily Italy, do not have the best economic results, yet are major trade partners to Croatia, he added.

Those are objective circumstances one should consider and the Commission too concludes that it is necessary to improve the domestic business climate and conditions for doing business so that the economic growth rate could be higher, Marić said.

"I'm glad this report too concludes that we are pursuing a sensible fiscal policy, which means that it acknowledges everything the government has been doing for three years in a row to reduce the public debt, to reduce interest rates, to improve borrowing conditions, to successfully reschedule the debts of the road sector, to step up reforms."

He voiced hope and confidence that the Commission's latest report would send a positive signal to financial markets and rating agencies, also in light of plans to reschedule the domestic and dollar debts due in November.

More news on Croatia’s economic growth can be found in the Business section.

ZAGREB, February 27, 2019 - Croatia's GDP grew by 2.3% in the last quarter of 2018, thus decelerating in comparison to Q3 when it grew at a rate of 2.8% year on year, the national statistical office (DZS) reported on Wednesday.

The DZS first estimates of the GDP growth in the last quarter of 2018 were actually lower than expected by eight economic analysts polled by Hina, whose average estimate was 2.6%.

A major positive contribution to the economic growth was made by household consumption in Q4. It grew 3.9% as against 2.7% in Q3 on the year.

The exports of commodities and services rose by 1.3% in Q4 2018 on the year. In parallel, the imports jumped by 6.6%.

Croatia's GDP was on the ascending line for 18 quarters in a row.

The seasonally adjusted data show that Q4 GDP strengthened by 0.1% compared to Q3 quarter to quarter.

In terms of quarter to quarter rates, Croatia's growth was slower than the European Union average (0.2%).

On the other hand, seasonally adjusted data show that Croatia's GDP increased 2.4% in Q4 compared to Q4 2017, and thus Croatia fared better than the EU average, 1.4%, year on year.

Croatia's economy throughout 2018 grew by 2.6% compared to 2017 when the growth rate was 2.9%.

Economic analyst Zdeslav Šantić underscores a positive accelerated growth of more than 6% in gross fixed capital formation in Q4 2018 as against 3.7% in the previous quarter. He told Hina that such a robust growth in investments was a record high since Q1 2017.

These figures show that the growth of national economy was not based only on tourism but also on investments, according to Šantić's explanation.

The director general of the Croatian Employers Association (HUP), Davor Majetić, told Hina on Wednesday that the slower growth of Croatia's GDP was not unexpected, saying that a further slowdown could be expected if Croatia continues to be slower than its competition in reform implementation and if reforms are not quick and comprehensive.

"The growth slowdown is not unexpected," said Majetić, adding that employers on several occasions stressed that, at the pace changes and reforms are implemented by the government, Croatia cannot expect bigger growth than between 2 and 3 percent.

Majetić said that in the last quarter of 2018, the biggest increase was recorded due to consumption. He said this was related to measures implemented by the Finance Ministry which enabled employers to pay out additional bonuses free of tax. He said that over one billion kuna was issued to citizens, adding that this was visible in consumption statistics.

"The result of that is that at this moment, productivity grows at a slower pace than salaries, which is expected, given the disruption on the labour market," Majetic said

More news about Croatia’s GDP can be found in the Business section.

ZAGREB, February 27, 2019 - Croatia, which was identified with excessive imbalances in 2018, is found to be experiencing imbalances now, according to the conclusions which the European Commission made in its European Semester Winter Package in which Brussels assesses member states' progress on economic and social priorities.

The European Semester was introduced as a tool to coordinate economic policies so as to fend off future crises.

In 2014, the EC established that Croatia was in the category of countries in excessive deficit procedure, and Zagreb managed to leave that procedure in 2017.

The latest report underscores that Croatia is found to be experiencing imbalances. "Economic developments have been contributing to a gradual correction of existing imbalances, notably those related to high stocks of public, private and external debt, and in that way leading to a reduction of risks," the report says.

"Policy action and commitments that would help a sustainable correction of imbalances have been stepped up recently, and their full, swift and effective implementation will be crucial," reads the Croatia section.

The EC warns that remaining vulnerabilities are linked to high levels of public, private and external debt in a context of low potential growth. However, they have been narrowing over the past years, which is was supported by robust nominal growth, above estimated potential.

"The negative net external position remains large, but has been improving due to continued current account surpluses," the Commission says.

"Private sector deleveraging is ongoing, though its pace is set to abate as credit growth and investment recover. The budget balance has been in surplus since 2017 and public debt has declined notably since its 2014 peak," the Commission says, praising "a prudent fiscal policy."

"The financial sector is well-capitalised and profitable while non-performing loans, although declining, remain elevated.

"The foreign currency exposure of corporations and households has reduced, but remains a vulnerability. Policy action has been stepped up with the adoption of a pension reform and new legislation to improve the fiscal framework. Other relevant policy measures are in the pipeline and their thorough implementation remains crucial for strengthening the resilience of the economy," the Commission says.

In its latest document, the EC says that apart from Croatia, another nine member-states are experiences imbalances: Bulgaria, France, Germany, Ireland, Romania, the Netherlands, Portugal, Spain and Sweden.

Three countries -- Cyprus, Greece and Italy -- are found to have excessive imbalances.

More news about Croatia economy can be found in the Business section.

ZAGREB, February 22, 2019 - Economy Minister Darko Horvat said on Friday the current growth rates, 2.7% of GDP, 4% of exports and 4.3% of investments, were a good foundation but not enough to equate Croatia with the countries it would like to stand side by side.

Speaking at an investment conference, Horvat underlined the need for further reform and said that Croatia was in the middle of European rankings when it came to attracting investment. Right now, Croatia has one of the most stimulating frameworks for investors, he added.

By eliminating administrative obstacles and reducing non-tax levies and the cost of labour, we wish to relieve businesses in paying for labour but also increase every worker's net income, Horvat said.

He said some parts of Croatia attracted investment much faster than others and that some parts of the country needed to make drastic changes in this respect.

Starting a business must be possible in two days and an application for that is being developed, the wish being that every entrepreneur can start a business electronically in one step in only two days, Horvat said.

He said Construction Minister Predrag Štromar was implementing an action plan so that obtaining a building permit could be possible in 15 steps instead of 22.

Horvat said foreigners perceived Croatia primarily as a country of sea and sun as a lot of money had been invested in such a brand. On the other hand, Croatia is not recognised as an investment destination because it is not being marketed as such, he added.

Croatian Banking Association (HUB) director Zdenko Adrović said the HUB was pushing for a debate on how to encourage and increase investment, on measures for faster economic growth and on the position and influence of the financial and banking sector.

He said the results of HUB's "fight for the legal certainty of doing business... were not satisfactory. Our ultimate goal is to ensure a stable and predictable regulatory framework and the legal certainty of doing business, clear regulations and respect for expertise criteria."

Adrović said maintaining a stable and competitive banking system not only improved Croatia's perception among investors but the whole system of attracting investments as well.

Economic analyst Velimir Šonje said the investment climate had been improving over the past three years, primarily owing to private investment, while state investment slowed down the growth. "Investment recovery is the result of tourism, trade, the manufacturing industry, and electricity and gas supply. More than 50% of investments are financed from own sources, while 30% are loans and leasing."

More news on Croatia’s economy can be found in the Business section.

In late March, the first of the three world's leading credit rating agencies, S&P, will publish a revision of the Croatian credit rating, and local economic experts believe that this announcement will bring a return of the credit rating to the investment level, reports Večernji List on February 17, 2019.

S&P was also the first agency to drop the country's credit rating to the junk bond status in 2012 after it saw the government's lack of control over public finances and its lack of capacity for structural reforms. Seven years later, Croatia has not really implemented any reforms, but it does better manage its public finances, reducing the public debt and reaching a positive budget balance.

Many local economic experts believe that rating agencies are too strict in assessing Croatian situation, with the current rating being underestimated. “For almost two years, Croatia has been in a situation where financial markets value its debt at the investment level, while official ratings of the agencies are a step (or even two steps) behind the market,” said bond expert Goran Pavlović.

According to Pavlović, credit rating agencies should take into account the fact that Croatia has remained one of few transition countries that did not nationalize private pension savings, which means that the public finances are not much worse than those in neighbouring countries. If Croatia had nationalised its pension system according to the Hungarian model (complete abolishment), it would formally meet the Maastricht fiscal criteria in 2016 (public debt below 60% of GDP) and if it were to apply a milder Polish model in 2017.

The Economic Institute analyst Željko Lovrinčević agrees. “Regardless of the fact that the markets are already behaving as if we had investment rating, it is important that this also happens formally in order to distinguish ourselves from a group of countries that are perceived as risky if the situation in the European and global economies turn for the worse,” says Lovrinčević.

The improvement in the credit rating would also bring further reduction in interest rates, as well as the reduction of regulatory costs for the banking and insurance industries. Pavlović explains that some institutional investors are not allowed to invest in bonds issued by issuers who do not have an investment credit rating. Demand for bonds which do not have an investment rating is much weaker, which is normally offset by higher interest rates.

Bank analyst Zdeslav Šantić believes that the rating improvement will not immediately affect the price of borrowing because the market already behave as if this has happened but the future risk perception will be significantly reduced as Croatia approaches the euro. "I believe that the decision to keep the non-investment level has been affected by the situation in Agrokor, but that has largely been eliminated as a risk," concludes Šantić.

Translated from Večernji List (reported by Ljubica Gatarić).

More news about Croatia’s credit rating can be found in the Business section.

ZAGREB, February 13, 2019 - The International Monetary Fund's (IMF) executive directors have established that in 2018 Croatia continued its fourth year of positive economic growth as well as its fiscal consolidation albeit at a slower rate, and they also call for improving the business climate in Croatia and rationalisation of the public companies' sectors as well as improvements in bankruptcy legislation.

"The economic expansion continues, driven primarily by private consumption and exports of goods and services," the IMF says in a press release after the conclusion of 2018 Article IV Consultation, on 8 February.

The fund's Executive Directors welcome "Croatia’s continued economic recovery, which has helped further reduce indebtedness and build external buffers," according to the press release issued on the IMF website on Wednesday. "Directors commended the attainment of the first fiscal surplus in 2017 since independence.

"They encouraged the authorities to seize the opportunity presented by favourable macroeconomic conditions to advance the reform agenda by stimulating more inclusive growth, persevering with fiscal consolidation and debt reduction, and fully implementing structural reforms."

The report reads that in Croatia "wages are growing, employment is rising, and inflation remains benign."

"Over the next few years, growth is expected to moderate, as the economy moves closer to its potential. The current account is projected to decline but remain in surplus, while external indebtedness is expected to continue to decline."

After the 2.7% growth in 2018, Croatia's economy is likely to grow by 2.6% in 2019, according to the IMF estimates.

"Fiscal performance has been strong, but the materialization of contingent liabilities from government guarantees is likely to reduce the overall surplus. Low public and private investment, and continued emigration weigh on medium-term growth prospects. Downside risks in the near-term stem from possible changes in regional or global economic and financial conditions, and the further realization of contingent liabilities," reads the press release.

Directors welcomed the Croatian authorities’ commitment to fiscal discipline, and "stressed the importance of pursuing growth-friendly fiscal consolidation, while improving the structure of revenues and the quality of expenditure.

"To this end, they encouraged the authorities to broaden the tax base and take measures to reduce the informal economy."

Directors welcomed the passage of the Fiscal Responsibility Law, and encouraged the authorities to enact the Budget Act which would integrate the analysis of contingent liabilities as part of the budget process and facilitate medium-term planning.

The IMF highlights "the need to improve the business environment by further reducing administrative and tax burdens, and welcomed recent initiatives to reduce parafiscal fees."

The IMF directors advise "rationalizing the state-owned enterprise sector, divesting under-utilized state assets, and improving the efficiency of legislative and judicial processes."

According to the press release, "directors called for more ambitious restructuring of public administration including by reducing high public employment outlays and reducing the fragmentation in sub-national levels of government."

While welcoming the passage of pension reform, as well as recent measures to improve the efficiency of the healthcare system, they underscored that the elimination of the healthcare system’s arrears as well as ensuring long-term sustainability of the pension system would require further reforms," reads the assessment made by the IMF directors.

More news on Croatia’s economy can be found in the Business section.

ZAGREB, February 12, 2019 - Environment and Energy Minister Tomislav Ćorić said on Tuesday that Croatia was not at risk of recession and that Croatia's economy would grow significantly more than 2% while the negative impact of other economies slowing down on Croatia's tourism could be buffered by raising the quality in that sector.

Ćorić was replying to reporters outside Government House ahead of a meeting of coalition partners when asked about theories that another recession could occur on the global level in 2020 and whether Croatia should be concerned.

He said that although there are some indications of a recession in some countries, primarily in Germany and Italy, he believes that based on estimates over the past few weeks, Croatia's economy would grow significantly more than 2% and that the government hopes that certain investment cycles could further boost that growth.

The European Commission downgraded Croatia's growth forecast for this year to 2.7% from an earlier forecast of 2.8% because it expects a slowing down in the growth of exports due to weakening economies in the European Union, which are Croatia's most important trade partners.

Analysts from the Economic Institute in Zagreb (EIZ), however, on Monday estimated that the real GDP growth in Croatia in Q4 could be 2.3%, significantly lower than had been expected based on data for October and November and an annual GDP increase of 2.6%.

"In that context, I don't see that Croatia is at risk of recession," Ćorić claimed.

He noted that the slowing down in economic activity in some other countries will impact the very important economic segment of tourism however, regardless of that, he was certain that raising the quality in the tourism sector "would somehow buffer that problem."

Economy, Entrepreneurship and Crafts Minister Darko Horvat said the EC and all relevant institutions forecast Croatia's economic growth would be between 2.7% and 2.9% and that there is no indication that something drastic would change in 2020 either.

More news on Croatia’s economy can be found in the Business section.

ZAGREB, February 7, 2019 - The European Commission has revised down its GDP growth forecast for the Croatian economy for this year, from 2.8 percent to 2.7 percent, expecting a slowdown in exports growth due to the weakening of EU economies, Croatia's most important trading partners.

In its interim winter economic forecast, published on Thursday, the Commission projected the Croatian GDP growth rate at 2.8 percent for 2018 and at 2.6 percent for 2020. These two projections remained unchanged from its autumn forecast, released in November 2018, whereas the growth forecast for 2019 was lowered from 2.8 to 2.7 percent.

The growth of 2.8 percent in 2018 would mark a slight slowdown from 2017 when GDP grew by 2.9 percent.

In the first three quarters of 2018, the Croatian economy grew by 2.7 percent compared with the corresponding period of 2017. The Croatian Bureau of Statistics (DZS) is due to release data for the fourth quarter of last year later this month.

The European Commission noted that last year's growth was increasingly driven by private consumption, while exports slowed somewhat, particularly to non-EU neighbouring countries in the second half of the year.

"Private consumption is expected to remain the main driver of growth, supported by improving labour market conditions, positive consumer sentiment, low interest rates and subdued inflation. Administrative data at end-2018 suggest that dynamic employment growth continues to drive a steady fall in the unemployment rate. Private investment is expected to continue its modest growth, as companies continue to enjoy favourable financing conditions. The projected pick-up in disbursements from EU funds should provide a boost to public investment, which will nevertheless stay well below pre-recession levels," the report says.

The Commission predicts a slight slowdown in GDP growth for this year. "In view of the anticipated slowdown in Croatia’s main trading partners in the EU, goods exports are likely to grow more slowly than in recent years. Service exports are expected to continue performing well on account of an increasingly extended tourist season and sizeable investment in higher-end hotels in recent years. Bolstered by high domestic demand, imports of goods are set to remain strong, slowing only slightly over the forecast horizon and driving the goods trade balance increasingly negative," it said.

"Inflation has remained relatively low despite higher disposable income and recent spikes in energy prices. Wage pressures are expected to strengthen as unemployment continues to shrink further. However, inflationary pressures are projected to remain subdued thanks to the VAT rate reduction on several unprocessed food products this, and the 1 pp. reduction of the standard VAT rate next year, as well as stabilising commodity prices. In all, headline inflation is forecast at 1.4% in both 2019 and 2020," it added.

The European Commission's projections are similar to those by other analysts. Eight economic analysts recently polled by Hina expect that the Croatian economy will grow at an average rate of 2.7 percent this year, their projections ranging from 2.5 to 3.0 percent.

The Croatian National Bank has forecast a growth of 2.7 percent. The World Bank has estimated the growth rate for Croatia for this year at 2.8 percent, the International Monetary Fund at 2.6 percent and the European Bank for Reconstruction and Development at 2.5 percent.

The Croatian government based its budget for 2019 on a GDP growth projection of 2.9 percent.

More news on the Croatia’s economy can be found in the Business section.

ZAGREB, February 4, 2019 - Croatia's public debt at the end of October 2018 was 280.3 billion kuna, which is 3.1 billion or 1.1 percent less than at the same time in the previous year, and could stay below 75 percent at the end of 2018, Raiffeisenbank Austria (RBA) said in an analysis of central bank data on Monday.

Compared with September 2018, public debt shrank by 1.5 billion kuna or 0.5 percent, figures from the Croatian National Bank (HNB) showed.

The annual decrease was due to a fall in both the external and the internal component of public debt. At the end of October 2018, compared with October 2017, the external component declined by 1.9 billion kuna or 1.8 percent to 103.2 billion kuna, while the internal component dropped by 1.1 billion kuna or 0.6 percent to 177.1 billion kuna.

General government guarantees issued on the domestic market reached 6.4 million kuna, of which 2 billion kuna accounted for guarantees for loans issued by the Croatian Bank for Reconstruction and Development (HBOR), while general government guarantees issued on foreign markets stood at 5.3 billion kuna.

On the last day of 2018, enforced state guarantees in the amount of 2.5 billion kuna were paid for Uljanik, which will result in the deterioration of the general government budget balance and affect public debt dynamics, RBA analysts said.

Ultimately, the amount of guarantees settled will be higher given that only a portion of the principal has been paid so far, while interest is yet to be paid. However, trends in fiscal statistics will remain relatively favourable, RBA said.

RBA predicts the public debt to GDP ratio will stay below 75 percent at the end of 2018, down about nine percentage points from its highest level recorded at the end of 2013.

At the end of September 2018, Croatia's public debt amounted to 281.8 billion kuna or 74.5 percent of GDP.

More news on the Croatian economy can be found in the Business section.

Italy has sunk into a recession, which has been confirmed by the latest statistics on the economic trends of Croatia’s largest export partner. In the last three months of 2018, the economy sank 0.2 percent, while the quarter earlier it dropped 0.1 percent over the same period of 2017. Although it might seem to be a mild recession, the Italian government expects the deepening of the crisis later this year. The recession in Italy will negatively affect Croatian exports and is undoubtedly a source of risk for Croatian economy that should not be ignored, reports Večernji List on February 3, 2019.

Italian economists say that the decline of the GDP was a consequence of a fall in agriculture, forestry, fisheries and industry, but that so far there is no indication of a reduction in consumption by citizens, which is crucial for Croatia. The latest figures from Italy in December even gave a hint that the economy might accelerate, but the decline in production and orders was too significant for the recession in Italy to be avoided.

From January to October 2018, Croatian entrepreneurs exported to Italy 12.9 billion kuna worth of goods, increasing the value of exports to the country by 10 percent. At the same time, Croatia imported 19.5 billion kuna worth of products, which was also an increase of 10 percent compared to the previous year.

The recession in Italy has not yet spilled over to Croatia, but if the Italian government's expectations come true, the orders could fall this year.

Another issue is that the German Ministry of Economy has revised its growth forecasts for 2019, from 1.8 percent to just 1 percent. That is the lowest growth rate of Germany in the last six years, but also a very conservative forecast inspired by the fear of the consequences of Brexit. For the time being, everything is stable in Germany, so the country has again recorded exceptionally low unemployment. What is essential for Croatia is that the Germans expect growth of imports as well as of the consumption of citizens, so it is possible that the slowdown in Germany could pass without significant consequences for Croatia.

Croatia’s exports to Germany grew by about 13 percent last year, but the trade balance is still unfavorable since Croatia exports just 12 billion kuna while at the same time importing 22.5 billion kuna worth of goods and services from Germany.

The trends in Germany and Italy should be a warning sign for Croatia, especially concerning public finance planning. Since the slowdown of growth is noticeable at a global level as well, this is the time for savings and cuts, and not for brisk spending, given that external and internal risks threaten to derail Croatia’s 2.8 percent growth plans for this year.

Translated from Večernji List (reported by Marina Šunjerga).

More news on Croatia’s economy can be found in the Business section.