BMI View: Croatia will gently move out of recession in 2015 with a paltry 0.4% real GDP growth amid an environment of fiscal initiatives and public sector cuts aimed at reducing the yawning budget deficit, all ahead of an increasingly likely EU/IMF bailout in the near future. The investment environment is being impacted by the poor economic scenario and the only real hope for infrastructure is in the form of large funds available through EU facilities, of which, fortunately, there are many. The railways and energy infrastructure sub - sectors are forecast to benefit in the near term from extensive European integration and modernisation projects. However, the residential and non-residential building subsectors will continue to stagnate, as they miss out on EU focus and lose out to a lack of foreign direct investment (FDI).
Contributions To The Forecast I nclude:
The recession has laid the construction industry low by limiting government investment and weakening domestic demand. FDI is being hampered by an uncompetitive business environment in need of structural reforms aimed at lowering labour costs and shrinking bureaucracy. At the same time, Croatian banks will struggle in the corporate loan market, with both internal and external demand remaining low, as businesses put projects on hold or seek alternative funding.
Croatian infrastructure will rely heavily on EU funding, with the country set to benefit from two particular project financing vehicles: the EUR64.3bn Cohesion Fund and EUR14.9bn Connecting Europe Facility (CEF). These will support the funding of the TEN-T transport corridors and TEN-E energy networks, which have a heavy weighting towards the less developed networks in Eastern and Central. The transport sector likely to benefit most from the CEF is railways, as the EU looks to develop and modernise the Rhine-Danube, Orient-East Med and Baltic-Adriatic corridors to boost regional business and tourism ties.
Providing downside risk to our forecasts, the intended privatisation of 1,024km of motorway network suffered a setback after the government announced in October 2014 that it was considering rolling back the tender process, originally issued in October 2013. The government will not make a decision until it receives offers from potential investors, which are expected to submit bids in late November 2014.
Croatia's economy will remain in the doldrums over the next few years, according to our Country Risk team, as the country slips towards needing an EU/IMF bailout. We expect competitiveness issues to continue to drag on the country's recovery. Exports and inward foreign investment will remain weak, preventing improvements to labour market conditions and household balance sheets.
Croatia's business environment remains a reasonably strong point for the country, placing it ahead of Slovakia and Romania. However, the threat of an EU/IMF bailout in the near future weighs the potential returns available. In the long term, a bailout is believed to support structural change and improvements to the country's competitiveness, which should improve the business environment - yet, to reiterate, this is a little ways off at present. The country now scores only 37.5 out of 100 for Industry Rewards, indicative of the small scale of the industry and limited growth prospects. However, the reforms the country put in place in preparation for its EU accession have bolstered its low risk credentials, which in turn sustain its scores to the middle of the regional table.