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FEDERATION OF EURO-ASIAN STOCK EXCHANGES ANNUAL REPORT APRIL 2011
ZAGREB STOCK EXCHANGE
ECONOMIC AND POLITICAL DEVELOPMENTS
Politic and Economic Environment
Gradual recovery, yet fiscal challenges
remain
After posting one of the worst performances in
CEE/SEE in 2009-2010 (GDP sank about 8%),
Croatia stays a laggard in terms of sustained
growth dynamics. That said the near term
outlook involves what we regard to be the four
key themes in Croatian economics: fiscal
uncertainty, unemployment, foreign demand
and risk appetite. Despite favourable base
effects and electioneering in 2011, we think
fiscal tightening from 2012 onwards (with or
without the IMF) and persistent unemployment
will weigh on local demand. Indeed, not only
that public job cuts and entitlement reforms
are looming, but in the current environment of
weak confidence, credit conditions only
loosened modestly and productivity/
profitability (too) low, demand for labour from
the private sector is more sluggish than
anticipated. With hence still poor consumer
fundamentals, the best we can hope for is a
capex-driven reversal from 2H11 on better
sentiment ahead of the EU entry and the
related structural reforms/improvements in the
business climate.
Slow industrial recovery. Notwithstanding the
weather-bolstered energy output and bigticket
shipbuilding-driven capital goods - industrial
production is still bottoming out on a
trendbasis and strong orders have yet to work
their way through.
Sanguine inflation outlook with risks.
Despite increasingly fundamentally-driven
agricultural price hikes on tighter supply
picture, and the risk of administrative price
adjustments, there should remain a moderate
inflation environment, because consumer
demand is low and the stable kuna will help to
tame the price growth. Rising unemployment,
uncertainty over citizen entitlement reforms
and further households' de-leveraging will in
particular restrain companies' pricing power at
the micro level. If anything we would be
concerned that there may be upside risks to
our inflation projections emanating from long
overdue and also EU-required regulated price
adjustments.
Stable FX, interest rates higher. Firms' deleveraging
towards abroad, rising expectations
of bank profit repatriations and bank risk
provisioning after-effects are largely behind the
recent bout of kuna weakness.
While the likely slight reduction in total foreign
debt service seems supportive, we are slightly
more kuna bearish for 2011 on negative net
trade contribution, income-to-capital outflows,
remaining bank risk provisioning and
continued fiscal challenges.
2011 budget maintains status quo. The
electoral 2011 general government budget can
be seen as a carryover from 2010, with the
official fiscal gap target almost unchanged at
4.3% of GDP and public wages and pensions
still frozen.
Unless fiscal rules are better institutionalized
and fiscal policy is re-tuned (as monetary
sphere is already doing) as to address
potential growth-enhancing structural
changes, it will be almost impossible to lower
the fiscal gap below 6% of GDP over the
medium term.*
*Hypo Alpe-Adria-Bank d.d., Zagreb, Croatia
Economic Research Department
Hrvoje Stojic, Economic Research Director
hypo.economic-research@hypo-alpe-adria.com
Information obtained from the Exchange.
Key Information Contacts
Croatian Agency for Supervision of Financial Services www.hanfa.hr
Ministry of Finance www.mfin.hr
Croatian Government www.vlada.hr
Croatian National Bank: www.hnb.hr
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