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FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT OCTOBER 2006
ZAGREB STOCK EXCHANGE
ECONOMIC AND POLITICAL DEVELOPMENTS
Politic and Economic Environment
Croatia's coalition government, led by the
centre-right HDZ, is currently under no
significant threat from the parliamentary
opposition, although it faces a challenging
year ahead of the general election expected
in late 2007. The EU's October 2005
decision to start membership negotiations
with Croatia means that the HDZ will have to
turn its attentions to a range of difficult
political and economic reforms that are
required as part of the accession process.
These include the liberalization of
agriculture, the upgrading of environmental
protection and the strengthening of
competition policy (which will entail
politically sensitive cuts in state aid). By the
time campaigning for the 2007 general
election gets under way, the government's
management of this process, and its
approach to economic reform more broadly
(which has been somewhat mixed), will take
centre-stage.
The EU's intention to look more closely at
"fundamental rights", including the treatment
of minorities and the way that war crimes
are addressed, is likely to make some
elements of the negotiations more difficult.
Significant progress will need to be made in
strengthening the judiciary and improving
administrative capacity, and the latter in
particular will necessitate the creation of a
number of new government agencies at a
time when the coalition is under pressure
from the IMF to exercise fiscal restraint.
At the same time, the European
Commission will monitor the implementation
of reforms much more closely in Croatia
than it did in the countries that joined in the
previous round of enlargement, which will
also prolong the negotiations.
On March 29th the IMF's executive board
completed the second review of Croatia's
SDR97m (US$143m) stand-by arrangement,
and approved the extension of the
agreement until November 15th 2006.
The government is working through a series
of reforms to the healthcare system that will
see a greater role for the private sector in
health insurance and a reduction in payment
exemptions. The completion of healthcare
reform is not expected before 2007. The IMF
is also pressing for more rapid restructuring
of two of the largest recipients of state
subsidies, the country's shipyards and the
railway system (state aid in Croatia as a
percentage of GDP is well above both the
EU average and the average within the EU's
new member states). Over the medium
term, the reforms required to complete EU
negotiations and the targets of the
government's Pre-accession Economic
Programme (PEP) will increasingly take
precedence in the economic policy agenda.
Especially with an election in prospect, it
appears that the government will not seek
another IMF programme following the
completion of the current stand-by
arrangement.
Economic Performance
Real GDP growth in 2005 was higher than
expected, at 4.3%. Public consumption
will be constrained in 2006 by pressure to
reduce the general government deficit.
The one-off income effect of the
government's decision to pay out pension
arrears in 2006 will support healthy growth
in private consumption, despite the central
bank's attempts to limit the rate of credit
growth this year.
The Croatian National Bank (CNB, the
central bank) is committed to maintaining
the nominal stability of the kuna against the
euro, which has helped to counteract
upward pressure on inflation stemming from
high oil prices. The CNB estimates that the
primary and secondary effects of high oil
prices contributed as much as 1 percentage
point to the growth of the consumer price
index in 2005. The government moved to
cap increases in fuel prices by INA, the
partly state-held oil and gas concern, in
April, but we continue to expect average
annual inflation to remain above 3% this
year. Consumer price inflation in the twelve
months to March 2006 was 3.4%. In 2007
falling oil prices will attenuate a significant
source of inflationary pressure.
The CNB intervenes regularly in the localcurrency
market, mostly purchasing foreign
currency in order to ease upward pressure
on the kuna. The introduction of regular
repurchase agreement auctions by the
central bank has improved management of
liquidity and reduced interest rate volatility,
helping the CNB to counter pressures on the
Croatian currency from investment- and
tourism-related foreign exchange inflows.
In the first three months of 2006 the
kuna strengthened to an average of
HRK7.34:[euro]1, compared with a firstquarter
average of HRK7.51:[euro]1 in 2005.
With the US dollar set to weaken against the
euro in 2007, and inflation in Croatia still
running above price growth in the euro
zone, we forecast a mild real effective
appreciation of the kuna in 2006-07.*
* Economic Intelligence Unit Ltd., May 2006
Key Information Contacts
Croatian Agency for Supervision of Financial Services www.crosec.hr
Ministry of Finance www.mfin.hr
Croatian Government www.vlada.hr
2005-ORIGIN OF GROSS DOMESTIC PRODUCT (%)
2005-COMPONENTS OF GROSS DOMESTIC PRODUCT (%)
Manufacturing & mining Public services Transport & trade
Private consumption General government consumption Gross fixed investment
Agriculture, forestry & fishing Construction Other services Change in stocks Exports of goods & services Imports of goods & services
20.1
10.2
7.0
60
50
57.0
47.1
55.8
24.2
6.6
40
30
28.6
32.0
20
10
0
20.4
2.7
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