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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 PAGE 130
FEDERATION OF EURO-ASIAN STOCK EXCHANGES ANNUAL REPORT APRIL 2011 ZAGREB STOCK EXCHANGE CROATIA ECONOMIC CHARTS AND TABLES 2007 2008 2009 2010F 2011F 2012F Activity Nominal GDP (HRKbn, current prices) 314.2 342.2 333.1 331.1 345.8 364.7 Nominal GDP (EUR bn) 42.8 47.4 45.4 45.4 47.1 50.2 Nominal GDP (USD bn) 58.6 69.3 63.1 60.2 65.1 71.1 GDP per capita (EUR) 9,656 10,683 10,245 10,262 10,624 11,341 GDP per capita (USD) 13,201 15,638 14,243 13,594 14,705 16,049 Real GDP (constant prices YoY, %) 5.5 2.4 -5.8 -1.5 1.8 2 Private consumption (YoY, %) 6.2 0.8 -8.5 -0.9 1.4 1.7 Fixed investment (YoY, %) 6.5 8.2 -11.8 -11.7 3.7 6.4 Industrial production (YoY, %) 5.7 1.8 -9.2 -1.2 3 3.6 Unemployment rate end-year (ILO, %) 9.6 8.4 9.2 12 12.5 11.8 Prices CPI inflation (average % YoY) 2.9 6.1 2.4 1.1 2.5 3.3 CPI inflation (end-year % YoY) 5.8 2.9 1.9 2 3.1 3.1 PPI inflation (average % YoY) 3.4 9.7 -0.4 4.2 3.2 2.7 PPI inflation (end-year % YoY) 5.8 9.6 1.6 4.5 3.3 3 Net wage rates (% YoY, nominal) 5.2 7 2.6 0.5 1 1.8 Fiscal balance (% of GDP) State budget balance (ESA-95) -2 -1.8 -4.4 -6.6 -7 -5.8 Public debt 41.9 42.3 50.6 60.7 67.8 71.6 External balance Export of goods and services (EUR bn) 18.307 19.905 16.157 17.386 18.004 18.781 Import of goods and services (EUR bn) -21.474 -23.741 -17.868 -17.674 -18.737 -20.301 Merchandise trade balance (EUR bn) -9.829 -11.232 -7.691 -6.287 -6.79 -7.755 Merchandise trade balance (% of GDP) -22.9 -23.7 -16.9 -13.8 -14.4 -15.4 Tourism receipts (EUR bn) 6.753 7.459 6.38 6.247 6.397 6.653 Current account balance (EUR bn) -3.236 -4.338 -2.477 -0.986 -1.579 -2.393 Current account balance (% of GDP) -7.6 -9.2 -5.5 -2.2 -3.4 -4.8 Net FDI (EUR bn) 3.5 3.2 1.2 0.9 1.4 2.3 FDI (% of GDP) 8.1 6.8 2.7 1.9 3.1 4.6 FDI cover (%) 107.2 74.6 48.8 87.7 91.2 96.1 Gross international reserves (EUR bn) 9.307 9.121 10.376 10.736 11.466 12.296 Import cover (months of imports) 5.2 4.6 7 7.3 7.3 7.3 Debt indicators Gross external debt (EUR bn) 32.929 40.316 44.588 46.628 49.218 52.678 Government (EUR bn) 5.372 4.167 5.165 6.045 7.145 8.395 Private (EUR bn) 27.557 36.149 39.423 40.583 42.073 44.283 Gross external debt (% of GDP) 76.9 85.1 98.3 102.6 104.6 104.9 Gross external debt (% of exports) 179.9 202.5 276 268.2 273.4 280.5 Exchange rates and money growth USD/HRK (end-year) 4.99 5.16 5.09 5.63 5.41 5.24 USD/HRK (average) 5.37 4.93 5.28 5.5 5.31 5.13 EUR/HRK (end-year) 7.33 7.32 7.3 7.38 7.3 7.24 EUR/HRK (average) 7.34 7.22 7.34 7.29 7.35 7.26 "*Source: Hypo Alpe-Adria-Bank d.d., Zagreb, Croatia Economic Research Department Hrvoje Stojic, Economic Research Director hypo.economic-research@hypo-alpe-adria.com" PAGE 131
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