FEAS Yearbook FEAS Yearbook 2009 | Page 144

FEDERATION OF EURO-ASIAN STOCK EXCHANGES ANNUAL REPORT APRIL 2009 ZAGREB STOCK EXCHANGE ECONOMIC AND POLITICAL DEVELOPMENTS Politic and Economic Environment Although the centre-right government led by the Croatian Democratic Union (HDZ) of the prime minister, Ivo Sanader, controls 81 of the 153 seats in parliament, it depends on the support of eight deputies from the alliance of the Croatian Peasants’ Party (HSS) and the Croatian Social Liberal Party (HSLS). There are few significant policy differences between the current administration, elected in November 2007, and its predecessor, which was also headed by the HDZ. However, the HSS’s pro- agrarian stance could bring the government into conflict with the EU as membership talks intensify, with a view to being concluded by the end of 2009. Croatia has opened negotiations on 21 of the 35 chapters of the acquis communautaire (the body of EU law), but has provisionally closed talks on just four. In its latest assessment of Croatian progress towards EU membership, published in early November 2008, the European Commission called for greater efforts in reforming public administration and the judiciary, and in tackling organized crime. The European Parliament’s rapporteur for Croatia, Hannes Swoboda, has warned that unless greater efforts are made by Croatian officials, membership could be delayed until 2012. Given the broad-based support for EU integration among all political parties, we expect the government to continue to adhere to an agenda of EU-mandated reforms, although the pace will be relatively slow in politically sensitive sectors of the economy, such as agriculture, fishing and steel. Control of the main economic ministries has helped the HDZ to avert attempts by the HSS-HSLS alliance to impede reform. To try to reinvigorate the EU accession process, the government will introduce a raft of measures with the aim of completing the technical phase of the negotiations in 2009. stability of the kuna against the Euro as a nominal anchor for monetary policy. This policy has helped to insulate the economy from a large part of the inflationary pressure generated by high commodity prices, especially for oil. Owing to the drop in oil prices and the stability of the kuna, the rise in inflation in 2008 is expected to be temporary. Economic Performance Economic growth in Croatia in 2009-10 will be influenced by reduced demand from the country’s main trading partners in the EU and in south-eastern Europe, which will also have a negative impact on Croatia’s important tourist sector. The crisis on the international financial markets and the slowdown in worldwide economic growth have heightened concerns that greater risk aversion globally would lead to lower asset prices in emerging markets. The value of local equities has fallen by nearly 50% since the beginning of 2008, but the kuna is expected to avoid any potentially destabilizing readjustment. The CNB is likely to continue to intervene regularly in the currency market, generally purchasing foreign currency in order to ease upward pressure on the kuna. The central bank will primarily seek to manage the volatility of the currency. Regular repurchase agreement auctions by the CNB have improved management of liquidity and reduced interest rate volatility. However, they are less likely to be needed in the forecast period, because pressures on the currency from tourism and investment-related foreign- exchange inflows are set to ease. Real GDP growth has come down rapidly, from 5.7% in 2007 to 3.8% in the first half of 2008. The marked deceleration came in response to weak private consumption growth, caused by a decline in consumer confidence. It followed signs in 2007 that real activity in the construction sector, which had supported GDP growth in previous years through its contribution to fixed capital investment, was beginning to lose impetus. The Croatian National Bank (CNB, the central bank) is committed to using the Despite accelerating merchandise export growth, import spending remains too strong to allow for more than a slight reduction in the trade deficit. The 2008 trade deficit is estimated at around 27% of GDP, although the surplus on services should keep the current-account deficit just below 10% of GDP. Net foreign direct investment (FDI) will cover a declining share of the current- account deficit, as privatization revenue is expected to fall.* * Economic Intelligence Unit Ltd. November 2008 Key Information Contacts Croatian Agency for Supervision of Financial Services www.hanfa.hr Ministry of Finance www.mfin.hr Croatian Government www.vlada.hr CROATIA: ECONOMIC BACKGROUND Real gross domestic product by sector (% share of GDP) Agriculture Industry Services The Economist Intelligence Unit. PAGE 142 2003 2004 2005 2006 2007 7.3 30.2 62.5 7.8 31.1 61.1 7.6 31.6 60.8 7.4 31.8 60.8 7.2 31.7 61.2