FEDERATION OF EURO-ASIAN STOCK EXCHANGES
ANNUAL REPORT APRIL 2009
ZAGREB STOCK EXCHANGE
ECONOMIC AND POLITICAL DEVELOPMENTS
Politic and Economic Environment
Although the centre-right government led by
the Croatian Democratic Union (HDZ) of the
prime minister, Ivo Sanader, controls 81 of
the 153 seats in parliament, it depends on
the support of eight deputies from the
alliance of the Croatian Peasants’ Party
(HSS) and the Croatian Social Liberal Party
(HSLS). There are few significant policy
differences between the current
administration, elected in November 2007,
and its predecessor, which was also headed
by the HDZ. However, the HSS’s pro-
agrarian stance could bring the government
into conflict with the EU as membership
talks intensify, with a view to being
concluded by the end of 2009.
Croatia has opened negotiations on 21 of
the 35 chapters of the acquis
communautaire (the body of EU law), but
has provisionally closed talks on just four. In
its latest assessment of Croatian progress
towards EU membership, published in early
November 2008, the European Commission
called for greater efforts in reforming public
administration and the judiciary, and in
tackling organized crime. The European
Parliament’s rapporteur for Croatia, Hannes
Swoboda, has warned that unless greater
efforts are made by Croatian officials,
membership could be delayed until 2012.
Given the broad-based support for EU
integration among all political parties, we
expect the government to continue to
adhere to an agenda of EU-mandated
reforms, although the pace will be relatively
slow in politically sensitive sectors of the
economy, such as agriculture, fishing and
steel. Control of the main economic
ministries has helped the HDZ to avert
attempts by the HSS-HSLS alliance to
impede reform. To try to reinvigorate the EU
accession process, the government will
introduce a raft of measures with the aim of
completing the technical phase of the
negotiations in 2009. stability of the kuna against the Euro as a
nominal anchor for monetary policy. This
policy has helped to insulate the economy
from a large part of the inflationary pressure
generated by high commodity prices,
especially for oil. Owing to the drop in oil
prices and the stability of the kuna, the rise
in inflation in 2008 is expected to be
temporary.
Economic Performance
Economic growth in Croatia in 2009-10 will
be influenced by reduced demand from the
country’s main trading partners in the EU
and in south-eastern Europe, which will also
have a negative impact on Croatia’s
important tourist sector. The crisis on the
international financial markets and the
slowdown in worldwide economic growth
have heightened concerns that greater risk
aversion globally would lead to lower asset
prices in emerging markets. The value of
local equities has fallen by nearly 50% since
the beginning of 2008, but the kuna is
expected to avoid any potentially
destabilizing readjustment. The CNB is likely to continue to intervene
regularly in the currency market, generally
purchasing foreign currency in order to ease
upward pressure on the kuna. The central
bank will primarily seek to manage the
volatility of the currency. Regular repurchase
agreement auctions by the CNB have
improved management of liquidity and
reduced interest rate volatility. However, they
are less likely to be needed in the forecast
period, because pressures on the currency
from tourism and investment-related foreign-
exchange inflows are set to ease.
Real GDP growth has come down rapidly,
from 5.7% in 2007 to 3.8% in the first half of
2008. The marked deceleration came in
response to weak private consumption
growth, caused by a decline in consumer
confidence. It followed signs in 2007 that
real activity in the construction sector, which
had supported GDP growth in previous
years through its contribution to fixed capital
investment, was beginning to lose impetus.
The Croatian National Bank (CNB, the
central bank) is committed to using the
Despite accelerating merchandise export
growth, import spending remains too strong
to allow for more than a slight reduction in
the trade deficit. The 2008 trade deficit is
estimated at around 27% of GDP, although
the surplus on services should keep the
current-account deficit just below 10% of
GDP. Net foreign direct investment (FDI) will
cover a declining share of the current-
account deficit, as privatization revenue is
expected to fall.*
* Economic Intelligence Unit Ltd. November 2008
Key Information Contacts
Croatian Agency for Supervision of Financial Services www.hanfa.hr
Ministry of Finance www.mfin.hr
Croatian Government www.vlada.hr
CROATIA: ECONOMIC BACKGROUND
Real gross domestic product by sector (% share of GDP)
Agriculture
Industry
Services
The Economist Intelligence Unit.
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2003 2004 2005 2006 2007
7.3
30.2
62.5 7.8
31.1
61.1 7.6
31.6
60.8 7.4
31.8
60.8 7.2
31.7
61.2