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FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT MAY 2005 ZAGREB STOCK EXCHANGE ECONOMIC AND POLITICAL DEVELOPMENTS Politic and Economic Environment: Croatia's location on the Adriatic links the interior of eastern and southern Europe with the Mediterranean. The country possesses great tourist assets - notably a scenic coastline rich in historically significant sites, especially the old city of Dubrovnik. In terms of sector distribution, services account for nearly two-thirds of economic activity, supplemented by substantial contributions from agriculture (including forestry and fishing) and industry. Only in the last year has the economy begun to show the kind of performance its people and infrastructure should be able to deliver. Privatization of state-owned banks, the oil company and the electricity industry all remain to be completed. In February 2003, Croatia submitted its formal application for membership in the European Union. For its part, the European Union was to issue a response to Croatia's request to join the regional body over the course of the next year. Domestic politics dominated the landscape in late 2003. On Oct. 17, 2003, the Parliament (Sabor) was dissolved, thus Key Information Contacts Croatian Securities Commission www.crosec.hr Ministry of Finance www.mfin.hr Croatian Government www.vlada.hr ECONOMIC RATIOS Domestic savings PAGE 138 Croatia Lower-middle-income group Trade Indebtedness Investment ending its four-year term and paving the way for elections. Three days later on Oct. 20, 2003, President Stipe Mesic announced that parliamentary elections would take place on November 23. The main issues centering the election included the economy, particularly the shift from a centrally- planned economy to a market system. The final results showed that the opposition HDZ had secured a clear victory with approximately 34% of the votes and 66 out of 152 seats. Then, on Dec. 23, 2003, the parliament approved a minority government headed by Prime Minister Sanader. Apart from economic reconstruction, the reform process, and European Union accession, the other main issue facing the new government included Croatian cooperation with the United Nations war crimes tribunal and the right of return for thousands of Serb refugees. Economic Performance: In 2003, GDP recorded growth of approximately 4.7%, after spurting to 5.2% in 2002 as weak export markets in Europe were overcome by strong capital investment in roadways. A tight monetary policy and maintenance of high real interest rates succeeded admirably in containing inflation during the 1995-2002 period. Over the past GROWTH OF INVESTMENT AND GDP (%) 40 20 0 -20 97 GDI GDP five years (1999-2003), consumer prices rose by an average of just under 5%, but that included energy price and restructuringrelated increases in 2000 that were transitory. In 2003, consumer price inflation was just 2%. The other side of this coin, however, is the kuna's overvaluation on foreign exchange markets, which has reduced Croatia’s export competitiveness. Government officials announced the objective of raising Croatia's share of Mediterranean-region tourist receipts from the present 3% to 10% and expects to have more than seven million tourist arrivals annually over the next several years. The banking crisis of 1998-1999 has been overcome with higher capitalization and improved public confidence reflected in higher deposit rates. Monetary policy has succeeded not only in keeping inflation reasonably low, but also in stabilizing the international value of the kuna. In 2002 and 2003, like most European currencies, the kuna appreciated significantly against the U.S. dollar. 1 1 Economic and Political Overview, County Watch Incorporated, 2005 98 99 00 01 02 03 * World Bank reports
FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT MAY 2005 ZAGREB STOCK EXCHANGE CROATIA GDP/EMPLOYMENT BY SECTOR OF ORIGIN Sector % GDP % Employment Agriculture 12.5 13.0 Industry 30.7 42.3 Services 56.8 44.7 CROATIA MONEY SUPPLY, INTEREST RATES AND FOREIGN EXCHANGE RESERVES GROWTH OF EXPORTS AND IMPORTS (%) 25 20 15 10 5 0 -5 EXPORT AND IMPORT LEVELS (US$ Millions) 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 97 98 99 00 01 02 03 INFLATION (%) Exports Imports GDP deflator CPI Exports 97 Imports 98 99 00 01 02 03 1998 1999 2000 2001 2002 Money Supply M1 (kuna-billions) 14 14 18 24 31 Money Supply M2 (kuna-billions) 57 56 73 106 116 Growth Rate M1 -1.4% 1.8% 30.1% 31.5% 30.2% Growth Rate M2 13.0% -1.8% 29.1% 45.7% 9.6% Interest Rates deposit rate 5.9% 7.9% 5.9% 5.9% 4.5% lending rate 15.8% 14.9% 12.1% 9.6% 12.8% Foreign Exchange Reserves (US$ millions) 2,816 3,025 3,524 4,703 5,885 Exchange Rate Period Average (kuna/US$) 6.3623 7.1124 8.2766 8.3400 7.8690 Annual % Growth 4.29 11.79 16.37 0.77 -5.65 8 6 4 2 0 CURRENT ACCOUNT BALANCE TO GDP (%) 10 5 0 -5 -10 -15 97 97 98 99 00 01 02 03 98 99 00 01 02 03 * Economic Overview, Country Watch Incorporated, 2005 * World Bank reports PAGE 139
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