ZAGREB, 1 Jan 2021 - The rebound from the corona crisis, the country's improved credit rating as well as a rise in inflation marked the economic trends in Croatia in 2021.

After 2020, which will be remembered for efforts to curb the COVID-19 pandemic and for the devastating quakes that hit the capital city of Zagreb on 22 March and Sisak-Moslavina County on 28 and 29 December, the outgoing year has been marked by a high growth rate.

In 2020, the economy contracted by 8% and it is set to have rebounded at a rate of 8.1% in 2021, according to the European Commission's forecasts, while the Fitch rating agency forecasts Croatia's recovery at a rate of 8.9% in 2021.

In mid-December, analysts of four major commercial banks presented projections of Croatia's growth at a rate of 9.5%, and the Croatian National Bank projects a 10.8% recovery.

Croatia's credit rating reaches a record high

On 13 November, Fitch upgraded Croatia's rating from BBB- to BBB, the best in Croatia's history, with a positive outlook.

Fitch expects "Croatia to be in a position to join the euro in January 2023 due to its significant progress in meeting convergence and structural reform criteria, despite the pandemic shock, and political support at the wider eurozone level for Croatia's membership."

The euro adoption will support Croatia's rating, "as it would provide the sovereign with reserve currency status, reduce transaction costs and limit exchange rate risk to corporate and household balance sheets."

Commenting on this improvement, Finance Minister Zdravko Marić recalled that the credit rating is important for the price of borrowing for the state, businesses, and citizens as its upgrade lowers the risk premium, which has a favorable effect on the price of capital.

Increasing inflation

Last year was marked by an acceleration in inflation rates.

At the beginning of 2021, inflation was moderate, however, it stepped up in the autumn and November saw 4.8%, a record high rate since February 2013, with analysts projecting that the inflation rate in December is set to have exceeded 5%.

In the EU, record-high inflation rates of 9.3%, 8.6%, and 7.5% were registered in Lithuania, Estonia, and Hungary, respectively, in November.

In Croatia, November's inflation rate was fueled by a 12.9% rise in transport prices, which was spurred by a 26.6% annual increase in fuel prices.

In mid-November, Marić said that that effect was not surprising given all the circumstances, primarily on the global level. However, the overall inflation rate in Croatia is not deviating from the EU average, which is good, he added.

According to Eurostat, the European Union's statistical office, the EU inflation in November reached 5.2% and the euro area registered a 4.9% inflation.

The Maastricht criteria concerning price stability envisage that a euro-area aspirant's inflation rate cannot be higher than 1.5 percentage points above the rate of the three best-performing member states.

The Andrej Plenković cabinet forecast an inflation rate of 2.5% both in 2021 and 2022.

Tourist trade again pulls the economy from the lows

In 2021, the pandemic-hit economy bounced back thanks to trends in the tourism sector.

Both the financial and physical indicators hint at a successful season.

From 1 January to 20 December 2021, tourist turnover was equivalent to 77% of the tourist trade in the pre-pandemic 2019.

Fiscalised receipts in this sector reached 85% of the value registered in the corresponding period in 2019.

Rimac takes over Bugatti

In July, Rimac Automobili, the Croatian carmaker based in Sveta Nedelja west of Zagreb, acquired Bugatti.

The Rimac Automobili company has decided to combine forces with the automotive brand Bugatti Automobiles "to create a new automotive and technological powerhouse" called Bugatti Rimac d.o.o. (in English – LLC), the Croatian company reported on 5 July.

As part of the deal, the newly-formed Rimac Group has become the majority shareholder with a 55% stake.

Croatia's National Recovery and Resilience Plan

The government drafted Croatia's National Recovery and Resilience Plan (NRRP) which consists of 77 reforms and 152 investment plans. Croatia's 2021-2026 NRRP was formally adopted by the EU in July.

Under the EU Recovery and Resilience Facility (RRF), Croatia has €6.3 billion in grants and 3.6 billion in favorable loans at its disposal.

Croatia plans to set aside 40.3% of that money for climate targets and 20.4% for digital transformation. A large part will go for post-earthquake reconstruction.

On 28 September, the European Commission disbursed €818 million to Croatia in a pre-financing payment under the RRF, and that was equivalent to 13% of the country's total financial allocation under the RRF.

The pre-financing payment will help to kick-start the implementation of crucial investment and reform measures outlined in Croatia's NRRP.

The implementation of the NRRP is expected to contribute 1.4 percentage points to Croatia's GDP growth in 2022 and as much in 2023.

Pelješac Bridge built

In late July, Pelješac Bridge was fully joined together, with the installation of the last, 165th segment of its steel span, and it now stretches from Komarna on the coast to Brijesta on the peninsula of Pelješac.

The 2,440-metre bridge has 13 spans, of which the five central spans are each 285 meters long, six 33-meter-high centrally installed pylons made of reinforced concrete, and two lanes, plus a hard shoulder for bridge maintenance.

The navigation profile under the bridge is 200 by 55 meters.

The bridge was designed by Marjan Pipenbaher and built by the China Road and Bridge Corporation. The Chinese company was awarded the job in 2018, offering a price of HRK 2.081 billion, not including VAT, and a completion deadline of 36 months.

Work on the bridge officially started on 31 July 2018.

The bridge and its access roads are expected to be opened to traffic in June 2022, before the start of the peak tourist season.

The decision on financing the project was made by the government in 2017.

LNG terminal off Krk starts operating

The floating terminal for liquefied natural gas (LNG) on the island of Krk began commercial operations on 1 January when the first LNG tanker, the Tristar Ruby, carrying 143,000 cubic meters of liquefied natural gas arrived at Omišalj, marking the launch of the terminal's commercial operations

The terminal's annual capacity is 2.6 billion cubic meters of gas. All of the terminal's capacity has been leased for the next three years, 80% of its capacity until 2027 and around 50% until 2035.

The floating LNG terminal in Omišalj and the Zlobin-Omišalj pipeline which will deliver LNG to Croatia's gas transport system and consumers was formally inaugurated at a ceremony in late January.

The LNG Croatia project is worth €234 million. In 2017, Croatia signed with the European Commission a grant agreement totaling €101.4 million for the construction of the terminal.

Gas transport operator Plinacro said the terminal and the Zlobin-Omišalj pipeline gave Croatia a new supply route that guaranteed energy stability and gas supply.

A compressor station was built in January 2020 to allow for a two-way flow of gas between Croatia and Hungary. With the reconstruction of the Rogatec-Zabok gas pipeline between Slovenia and Croatia, all requirements were met for delivering gas from the LNG terminal to Central and Eastern Europe and Croatia's gas transport system was integrated into European supply routes.

The LNG Croatia company invested HRK 1.7 billion in the project, while Plinacro invested HRK 430 million.

The 16.7-kilometre-long Zlobin-Omišalj pipeline, completed in mid-November 2020, is worth HRK 430 million, with €16.4 million coming from EU funds.

For more, check out our dedicated business section.

May the 8th, 2021 - The plan for many different Croatian reforms and investments, packaged as the Croatian Recovery and Resilience Plan, is on its way to the European Commission's door in the Belgian capital.

As Poslovni Dnevnik/Ana Blaskovic writes, the Croatian Recovery and Resilience Plan, the key to an enormous 49 billion kuna intervention injection, has been completed and it is time to send it to Brussels, with a final agreement set to take another ten days. The more than 1,100 pages list 77 Croatian reforms and 152 investments that the Government, with the practical absence of public debate, envisioned as a springboard for recovery from the ongoing coronavirus crisis and the transformation of the domestic economy.

Finance Minister Zdravko Maric stated that the focus was on grants and that the core of the document was Croatian reforms and both public and private investments. The plan is designed for five components and one initiative - 26.2 billion of the total amount (54 percent) should be poured into the economy, 4.36 billion (10 percent) into public administration, judiciary and state property, education, science and research should get an injection of 7 .5 billion (15 percent). Then, for the labour market and social protection, another 2.09 billion (4 percent), for the healthcare system 2.56 billion (5 percent of the amount). A large amount of these funds, 5.95 million, is intended for building renovation initiatives.

GDP growth

The effect of this Croatian plan this year should be reflected in 5.2 percent of real GDP growth, which would have stopped at 4.9 percent without it. Next year, growth is expected to reach 6.6 percent instead of what would have been 5.2 percent without such a plan, in 2023 it should reach 4.1 percent instead of 2.7 percent. In 2024, Croatia's GDP should grow by 3.4 percent instead of 2.5 percent, and in 2025 by 2.7 percent instead of 2.5. It should be noted that the predictions of the acceleration of the economic momentum are based on the (rather optimistic) assumption of a successful withdrawal of this money, although Croatia has so far withdrawn less than half of the total funds available to it.

Brussels has already warned that payments will be conditional on the fulfillment of very specific goals, if a member state fails there is a (theoretical) possibility of payment at the discretion of the EC, which, despite the offer, should not be counted on.

About two thirds of the funds will go directly to investments, and one third to desperately needed Croatian reforms. What the funds won't and cannot be used for is "patching up any holes", such as resolving debts in the healthcare sector. The government has begun work on a rebalance in that regard which is planned for early June.

"The purpose of implementing Croatian reforms is to influence the better use of factors of production, those that create added value," Maric added. In particular, education reform would improve the quality of human capital by including children in occupations where there are needs in the labour market. In the judiciary system, reforms will be aimed at greater efficiency and the faster resolution of cases in order to improve the business climate. Referring to the segment of state property, Maric pointed out that many companies are owned by the state. From his words, one can read the good news for the stock market is because “activation can directly contribute to the revival of the capital market”.

Looking ahead...

After the European Commission gives its consent over the next two months, the draft plan will be sent to the European Council, and by the autumn, Croatia could receive a six billion kuna advance (13 percent). Implementation begins at the end of the year.

Commenting on the criticism that insufficient funds are directed to the private sector, which should be the engine of recovery and job creation, Maric reiterated: ''There's no need to divide investments into the public and private sectors because public investments also mean the participation of the private sector. The greatest value of the document is looking ahead, as resilience in the long run means implementing 77 Croatian reforms.''

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May the 1st, 2021 - How can the Croatian recovery plan add to the country's GDP by the year 2026? With the ongoing coronavirus dealing blow after blow, help from the European Union's special mechanism could be the rescue package the Croatian economy needs.

As Poslovni Dnevnik/Jadranka Dozan writes, in order to use the 47 billion kuna in grants from the EU's Recovery and Resilience Mechanism over the next five or six years, the Croatian Government prepared a National Recovery and Resilience Plan (NPO) for final consultations with the European Commission with 152 investment projects and 77 reforms on the table.

Prime Minister Andrej Plenkovic repeatedly emphasised recently that this is a proposal for the Croatian recovery plan, which means that through the process of intensive consultations over the coming weeks, certain modifications are possible and even likely to an extent. This large document, containing more than 1,100 pages, explains the planned reforms and investment projects for which the intention is to obtain 6.4 billion euros in so-called grants. The Prime Minister describes this as key to Croatian economic recovery, increasing resilience to future crises, and overall development in the coming years.

In addition to the positive effects of such investment incentives for domestic economic growth, the reforms required of EU member states under this particular EU instrument should result in the strengthening of institutions and competitiveness. In a year or two, Croatia can go with projects for which it would seek favourable loans as part of the second component of the EU Resilience Fund, and for which Croatia has an additional 3.6 billion euros or about 27 billion kuna at its disposal. All of that is currently sitting on the shelf and is very much in the background at the moment, however.

In addition to the proposal for the Croatian recovery plan, the government will forward the Convergence Programme to the European Commission in a package, which is usually sent to Brussels at this time of year as part of the European Semester. That document also has a strong NPOO stamp. Since the first 6.1 billion kuna is expected to be pre-financed under the Croatian recovery plan at the beginning of autumn, the government estimates that its first effects on economic growth will be seen in Croatia's growth rate in 2021, and much more in the coming years.

Namely, according to new macroeconomic projections, domestic GDP growth of 5.2 percent is expected this year, with 0.3 percentage points of growth attributed directly to the effect of the Croatian recovery plan. Over the next two years, this effect should be around 1.4 percentage points of growth, meaning that next year it is expected to grow by 6.6 percent instead of 5.2 percent.

The Ministry of Finance has calculated that by 2025, compared to 2020, the implementation of the Croatian recovery plan will cumulatively increase GDP by an additional 4.2 percent when compared to the scenario without the use of the Croatian recovery plan. Finally, in 2026, as the last year of the implementation of the plan, Croatian GDP should be 17 billion kuna higher than it would have been without the Croatian recovery plan in place.

For more, follow our dedicated politics section.