ANNUAL REPORT JUNE 2010
FEDERATION OF EURO-ASIAN STOCK EXCHANGES
ZAGREB STOCK EXCHANGE
ECONOMIC AND POLITICAL DEVELOPMENTS
Politic and Economic Environment
The centre-right government led by the HDZ
faces serious challenges in 2010-11. The
unblocking of the stalled EU accession
negotiations is a boost for the government, but it
must now make rapid progress with the required
reforms for accession, get results in the fight
against corruption and organised crime, and
implement policies to help the economy to get
through the current crisis. In addition, the HDZ
faces the challenge of maintaining its direction,
following the surprise resignation as prime
minister of Ivo Sanader, the party's leader since
2000, in July. Jadranka Kosor has assumed the
party leadership and received support from the
HDZ's coalition partners. However, the transition
has given rise to a degree of discord within the
HDZ, and Mrs Kosor's attempts over the coming
months to cement her position and support base
present some risk to the stability of the
government. It is necessary for Mrs Kosor to do
this, as the HDZ lags the Social Democratic Party
(SDP) in the latest opinion polls, and unless the
HDZ can unite and lead an effective government
in 2010-11, the SDP will become the favorite to
gain the most support in the parliamentary
election due in 2011.
Although opinion polls suggest that the Croatian
public remain less than enthusiastic about the
EU, Croatian politicians will pursue EU
membership as their main foreign policy goal.
Croatian accession negotiations were held up
through most of 2009, owing to the border
dispute with Slovenia. However, following a
breakthrough in talks, Slovenia removed its de
facto block on Croatian accession negotiations in
September. Croatia now has a realistic chance of
completing negotiations in the first half of 2010.
Croatia's EU aspirations also received a massive
boost from the Irish "yes" vote to the Lisbon treaty.
However, much ground still needs to be covered
in accession negotiations, and 2011 is the earliest
likely date for EU entry.
Given the broad-based support for EU integration
among political parties, the government will
continue to adhere to an agenda of EU-mandated
reforms. Control of the main economic ministries
has helped the HDZ to avert attempts by the
alliance of the Croatian Peasants' Party (HSS)
and the Croatian Social Liberal Party (HSLS) to
impede reform. The government will aim to
complete the technical phase of the negotiations
by the middle of 2010. Owing to the economic
downturn, the previous and new HDZ
governments have been forced to revise the
2009 budget. The government would still like to
introduce further expenditure cuts in the form of
reduced salaries to employees of state-owned
companies, but is likely to face significant
opposition to this. The vexed privatization of
the shipyards could yet stretch the government
finances further in 2009-10, as well as hold up
EU accession and put the government under
pressure of social unrest.
In January 2010. opposition Social Democrat Ivo
Josipovic, the 52-year-old law professor and
classical music composer, has won Croatia's
presidential election by a wide margin and
succeeds Stipe Mesic after 10 years as president.
Although the presidential function is mainly
ceremonial with limited powers on foreign policy,
defense and the intelligence services, Mr
Josipovic has pledged to lead a fight against
corruption and to help the government complete
EU membership talks this year.
Economic Performance
Euro area GDP is estimated to have contracted
by 4.1% in 2009, and the recovery in 2010 is still
expected to be modest, with world growth picking
up to 3.2% at purchasing power parity (PPP)
exchange rates (previously forecast at 2.9%) and
the euro zone economy growing by just 0.8%
(previously 0.5%). The weakness of demand in
the EU will continue to curtail Croatian exports of
goods and services. We estimate the average
price for dated Brent Blend crude oil to reach
US$62/barrel in 2009, rising to US$74/b in 2010,
before slipping to US$70/b in 2011, when we
expect US growth to dip slightly. We forecast that
the US dollar will depreciate mildly in 2010 as risk
aversion diminishes.
Real GDP contracted by 6.3% year on year in
the second quarter of 2009, after a first-quarter
drop of 6.7%. Although this may signal that the
recession has stabilised for now, it does not
suggest that a speedy recovery is likely. In August
and September, data for retail sales and industrial
output did not indicate a clear recovery, and
credit growth remained minimal. Reflecting a
combination of depressed consumption, reduced
investment activity and gloomy trading conditions
affecting Croatian exports and tourism, we estimate
real GDP to have contracted by 5.4% in 2009.
Owing to the drop in international oil prices
and the moderation of food prices, together with
the sharp contraction in domestic demand, we
estimate that average annual inflation is declining
to an average of 2.5% in 2009 from 6.1% in 2008.
We forecast that inflation will remain low in 2010-
11, at an average of 2.5%, as domestic demand
remains subdued, wage growth remains limited
and oil prices grow only slowly. The Croatian
National Bank (CNB, the central bank) is
committed to using a stable exchange rate as a
nominal anchor for monetary policy. Although the
kuna is likely to depreciate slightly against the
euro and the US dollar in the final quarter after
the end of the tourism season, the currency will
not weaken so much as to make imported
inflation a significant problem.
If necessary, the CNB will continue to intervene
in the currency market to minimize the volatility
of the kuna. The slow recovery in domestic
demand in Croatia will allow the current account
to continue to correct, owing to limited import
growth and stronger tourism revenue. The
current-account deficit is expected to moderate
to an average of 5.1% in 2010-11.*
* The Economist Intelligence Unit Limited, November 2009
Key Information Contacts
Croatian Agency for Supervision of Financial Services www.hanfa.hr
Ministry of Finance www.mfin.hr
Croatian Government www.vlada.hr
REAL GDP
(HRK millions)
CONSUMER PRICES (% CHANGE PA; AV)
(%)
250
6.5
6.0
200
5.5
5.0
150
4.5
4.0
100
3.5
3.0
50
2.5
0
2.0
2005
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