After six consecutive
years of annual GDP contraction, the economy returned to growth of +1.6% in
2015, thanks to a moderate recovery in domestic demand. Private consumption
increased by +1.2%, government consumption by +0.6% and fixed investment by +1.6%.
Exports expanded by +9.2%, outpacing imports at +8.6%, so that net exports made
a positive contribution of +0.5pps to growth in 2015. Euler Hermes expects the
recovery to gradually gain momentum, resulting in growth of about +1.8% in 2016
and +2% in 2017. However, the level of annual GDP will remain about -10% below
the peak reached in 2008.
policies need to improve
policy is based on a “managed” exchange rate float which has helped insulate
the economy from overly inflationary pressures in the past. The HRK has faced
frequent downward pressure in recent years but ongoing central bank
intervention in foreign
exchange (FX) markets have kept the HRK/EUR exchange rate fairly
stable, albeit at the expense of broadly stagnating FX reserves. Current FX
reserves cover just
about 62% of the estimated external debt payments falling due in the next 12
months which is below an adequate level of at least 100%. Meanwhile, consumer
price inflation has been in deflationary territory for almost two years owing
to ongoing low global energy prices. Once the latter start rising again, we
expect inflation to pick up as well.
recession has weakened public finances. Despite fiscal consolidation efforts,
fiscal deficits have remained large (about -5% of GDP in 2015) and public debt
has risen rapidly from 34% of GDP in
2007 to 90% or so in 2015. Euler Hermes expects the fiscal deficit to narrow
somewhat in 2016 but unlikely
to meet the less than -3% of GDP target required by the EU's Excessive Deficit Procedure.
However, external financing
conditions have remained manageable thus far as Croatia has been able to issue several international bonds since 2013.
current account has been in surplus since 2013, surging to about +4.5% of GDP
in 2015, and should remain so in 2016-2017. However, total external debt remains
very high (108% of GDP in 2015), a result of the legacy of large current
account deficits in the past. The external debt-service ratio is hefty, forecast
at over 44% in 2016, reflecting huge debt amortisation obligations that are
likely to constrain financing for private investment.