Croatia

Politics:

• Analysis

  Croatia politics: EU entry will give a temporary boost to the ruling SDP

  The EU's Enlargement Commissioner, Stefan Füle, gave the green light for Croatia to become the 28th EU member when he presented the European Commission's final Progress Report in Zagreb on March 26th. The five EU member states that have not yet ratified the accession agreement will now speed up the process. Following a recent agreement with Slovenia that resolved the assets of Ljubljanska Banka, there are no more obstacles to Croatia's membership, which will begin on July 1st. EU membership will boost the ruling Social Democratic Party (SDP), but it will create new problems for the governing coalition, which has already been struggling with a long recession.

  The report noted that Croatia had made progress on ten key priority actions noted in the previous report, including restructuring of the shipbuilding industry, the introduction of border controls, the fight against corruption, minority rights, refugee return and continued reform of the judiciary. Although the report continues to note areas of concern, it appears that-unlike Bulgaria and Romania, when they joined in January 2007-Croatia will not be subject to any specific monitoring measures upon membership, over and above those applied to all member states. However, recent developments in Hungary, which has made constitutional changes that probably breach EU treaties, and the economic meltdown in Cyprus might lead to a last-minute change in the Commission's approach.

  Impact on the ruling SDP

  A relaxed approach by the EU would be good news for the SDP-led government, which, in the midst of a deep economic crisis, has been struggling to maintain unity within the ruling coalition. This came to a head with the resignation on March 9th of the tourism minister, Veljko Ostojic, of the Istrian Democratic Party (IDS). Mr Ostojic, while denying allegations of dubious land dealings, claimed that the controversy no longer allowed him to do his job. Mr Ostojic is the fourth minister to resign from the government since it was elected in December 2011.

  The prime minister, Zoran Milanovic, appealed publicly for the IDS leader, Ivan Jakovcic, to become the new tourism minister, but this call was rejected by the IDS, which has ambitions in elections to the European Parliament (on April 14th) and local elections (on May 19th, with a second round two weeks later). Eventually, the IDS named Darko Lorencin as the new minister. Mr Milanovic could now face challenges from within the coalition, including from within his own party. The economic crisis is likely to see the SDP do badly in the forthcoming elections, particularly in the mayoral elections for Zagreb, where a populist former SDP mayor, Milan Bandic, is favourite to beat the SDP candidate, health minister Rajko Ostojic.

  Following the resignation of the deputy prime minister, Radimir Cacic, who was sentenced to a jail term in November 2012 for causing death by dangerous driving in Hungary, the Minister of Foreign and European Affairs, Vesna Pusic, has taken over the leadership of the second-largest coalition partner, the Croatian People's Party (HNS). Although Ms Pusic is hard-working, she is not as close to Mr Milanovic as Mr Cacic was, and also is less likely to deflect criticism away from the prime minister. Another problem facing Mr Milanovic is that some of his most trusted senior colleagues within SDP have one eye on lucrative positions in Brussels once Croatia joins the EU. In addition, the former environment minister, Mirela Holy, has openly suggested that she may leave the SDP if pre-election promises on the environment and other matters are not kept.

  The opposition HDZ remains very unpopular

  Meanwhile, the leading opposition party, the Croatian Democratic Union (HDZ), remains very unpopular owing to corruption scandals and a recent clash in which the former party leader and prime minister, Jadranka Kosor, was dismissed from the HDZ on March 1st by her successor, Tomislav Karamarko, whom she had invited back into the party fold in October 2011. Mr Karamarko, who is attempting to move the HDZ further to the right, appears even less popular than Mr Milanovic. The latest opinion polls, by IPSOS-PULS, show the SDP with 27% support, compared with 20% for the HDZ. The Croatia Labourists-Labour Party is in third place, with support of just under 10%.

  Given the continued lack of support for the opposition, we expect the coalition government to survive in some shape until the next elections, due in December 2015. Whether it will have the support to pass much-needed reforms, and whether it will gain much of a boost from EU membership, seem rather questionable, however. One potential scenario for the forthcoming elections, in addition to a low turnout, is an increase in support for parties and individuals outside the political mainstream.

  March 27, 2013

• Background

  Croatia: Key figures

  Ivo Josipovic

  The president has surprised even his more fervent supporters since taking office in February 2010. The law professor and former member of the Social Democratic Party (SDP) won with 60% of the vote, ahead of the more populist and right-wing Milan Bandic. Since coming to office, Mr Josipovic has been eager to emphasise the principles of justice and fairness, and a need for regional reconciliation. He has a close working relationship with the new SDP-led government, leading to accusations that the neutrality of the office is being eroded. His authority and popularity have risen since taking office. He will continue to be a positive influence on regional relations.

  Zoran Milanovic

  Considered by many as inexperienced but charismatic, Mr Milanovic assumed the leadership of the largest opposition party, the SDP, in 2007, and became prime minister in 2011 following his party's victory at the polls. In advance of the 2011 election, he focused on building a coalition by forming alliances with the Croatian People's Party (HNS), the Istrian Democratic Assembly (IDS) and the Croatian Pensioners' Party (HSU). Since coming to power Mr Milanovic has asserted his authority, sometimes creating tensions within the coalition with his policy decisions. He has also been accused of implementing double standards towards his cabinet depending on which party they represent.

  Radimir Cacic

  The head of the HNS and deputy prime minister in charge of the economy, Mr Cacic is a key figure in the coalition government. Mr Cacic has been a member of parliament since 1995, leading the HNS into a coalition with the SDP in 2000-03. He has attempted to put his own stamp on the coalition, often making policy announcements before the prime minister. Mr Cacic is a controversial politician, who has been engulfed in scandal on several occasions. In 2010, the Constitutional Court upheld a conflict of interest verdict against him over infrastructure tenders awarded while he was the public works minister in 2000-03. In 2012, a Hungarian court found him guilty of causing the death of two people in a car accident in 2010. Despite opposition calls for his resignation, he has retained the support of Mr Milanovic although some members of the HNS have expressed reservations about his leadership.

  Tomislav Karamarko

  Following a lengthy build-up and voting session, Mr Karamarko was elected leader of the main opposition Croatian Democratic Union (HDZ) in May 2012, replacing the ousted prime minister, Jadranka Kosor. Mr Karamarko is a former head of the Security and Intelligence Agency and a former interior minister. His election marks a shift within the HDZ back to its more nationalist roots. Mr Karamarko has pledged his commitment to the stamping out of corruption within the HDZ, as well as emphasising a need for unity within the party. Mr Karamarko's first electoral challenge will come in 2013, in the form of local elections. Before this, he is likely to seek to consolidate his position by embracing more populist policies and promoting younger officials in order to distance the HDZ from the corruption scandals that have plagued the high-ranking old guard.

  August 07, 2012

• Structure

  Croatia: Political structure

  Official name

  Republic of Croatia

  Form of state

  Democratic republic

  Legal system

  Based on constitution of December 1990, amended in 1992, 2000 and 2001

  National legislature

  Parliament (Hrvatski Sabor) is unicameral and comprises 151 deputies. Both the Chamber of Representatives and the Chamber of Counties were abolished when their mandate expired in April 2001

  National elections

  January 2010 (presidential), December 2011 (parliamentary). Next elections: February 2015 (presidential); December 2015 (parliamentary)

  Head of state

  President of the republic, currently Ivo Josipovic, who was sworn in on February 18th 2010

  National government

  Appointed by the president and confirmed by parliament. A majority government, led by the centre-left Social Democratic Party and supported by the Croatian People's Party, the Istrian Democratic Assembly and the Croatian Pensioners' Party, and minority representatives, was appointed in December 2011

  Main political parties

  Social Democratic Party (SDP), Croatian Democratic Union (HDZ), Croatian People's Party (HNS), Istrian Democratic Assembly (IDS), Croatian Pensioners' Party (HSU), Croatia Labourists-Labour Party, Croatian Democratic Assembly of Slavonia and Baranja (HDSSB), Croatian Citizens Party (HGS), Democratic Centre (DC), Croatian Peasants' Party (HSS), Croatian Pure Party of Rights (HCSP), Independent Democratic Serbian Party (SDSS)

  Leading members of the government

  Prime minister: Zoran Milanovic (SDP)

  Deputy prime minister for foreign affairs: Vesna Pusic (HNS)

  Deputy prime minister for welfare & youth affairs: Milanka Opacic (SDP)

  Deputy prime minister for regional development & EU funds: Branko Grcic (SDP)

  Deputy prime minister for home, foreign & European affairs: Neven Mimica (SDP)

  Key ministers

  Administration: Arsen Bauk (SDP)

  Agriculture, fisheries & rural development: Tihomir Jakovina (SDP)

  Construction & spatial planning: Ana Mrak Taritas (HNS)

  Culture: Andrea Zlatar (HNS)

  Defence: Ante Kotromanovic (SDP)

  Economy: Ivan Vrdoljak (HNS)

  Enterprise: Gordan Maras (SDP)

  Environment: Mihael Zmajlovic (SDP)

  Finance: Slavko Linic (SDP)

  Health: Rajko Ostojic (SDP)

  Internal affairs: Ranko Ostojic (SDP)

  Justice: Orsat Miljenic (independent)

  Labour & pension system: Mirando Mrsic (SDP)

  Maritime affairs, transport & infrastructure: Sinisa Hajdas Doncic (SDP)

  Science, education & sports: Zeljko Jovanovic (SDP)

  Tourism: Veljko Ostojic (IDS)

  Veterans' affairs: Predrag Matic (independent)

  Central bank governor

  Boris Vujcic

  March 13, 2013

• Outlook

  Croatia: Key developments

  Outlook for 2013-17

  • The coalition led by Zoran Milanovic of the Social Democratic Party (SDP), which includes the Croatian People's Party (HNS), the Istrian Democratic Assembly (IDS) and the Croatian Pensioners' Party (HSU), is fairly stable.
  • All the leading political parties support EU membership, and Croatia is set to accede to the EU in July 2013.
  • The next general election is not due until December 2015. If growth remains elusive, voters could switch allegiance back to the Croatian Democratic Union (HDZ), which in 2011 suffered its second only election defeat since 1991.
  • Given fiscal consolidation, high unemployment and tight credit conditions, Croatia is expected to remain in recession in 2013, with a real GDP fall of 0.4%. Growth is forecast to return in 2014 and to average 2% in 2014-17.
  • The Economist Intelligence Unit expects fiscal consolidation to take place in a piecemeal fashion throughout the forecast period. We believe that the deficit will fall only slightly to 3.8% of GDP by 2014.
  • Maintaining the stability of the kuna against the euro will be the priority of the Croatian National Bank (CNB, the central bank), which will intervene to counter appreciation or depreciation pressure.
  • The current-account deficit is estimated to have recorded a small surplus in 2012. It is forecast to return to a deficit from 2013, averaging 1.5% of GDP during 2013-17.

  Review

  • According to the most recent data from the central bank, private-sector loans decreased by 7.1% year on year during 2012, while broad money growth accelerated by 3.3%.
  • Real GDP growth contracted by 2.3% year on year during the fourth quarter according to the flash estimate, marking its steepest contraction in two and a half years.
  • Government debt breached the psychologically important Maastricht threshold of 60% of GDP for a second consecutive year in 2012, based on data to November.
  • We estimate that government debt including guarantees reached HKR229.2bn (EUR30.5bn) or an estimated 67.7% of GDP.

  March 13, 2013

Economy:

• Background

  Croatia: Country fact sheet

  Fact sheet

  Annual data	2012a	Historical averages (%)	2008-12
  Population (m)	4.4	Population growth	-0.2
  GDP (US$ m; market exchange rate)	57,855.9	Real GDP growth	-1.7
  GDP (US$ m; purchasing power parity)	78,437	Real domestic demand growth	-2.6
  GDP per head (US$; market exchange rate)	13,205	Inflation	3.0
  GDP per head (US$; purchasing power parity)	17,903	Current-account balance (% of GDP)	-3.1
  Exchange rate (av) HRK:US$	5.85b	FDI inflows (% of GDP)	3.7
  a The Economist Intelligence Unit estimates. b Actual.

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  Background: Croatia declared independence from Yugoslavia on June 25th 1991. The president at the time was Franjo Tudjman, the founder of the hardline nationalist Croatian Democratic Union (HDZ). Mr Tudjman's authoritarian rule left Croatia shunned by the international community until his death in 1999. The centre-left coalition that took power in 2000 worked to undo the excesses of the Tudjman regime, but was only partly successful. Divisions within the coalition widened, and in the general election in November 2003 it was defeated by a reformed HDZ under the leadership of Ivo Sanader. After some delay, the HDZ-led government was able to resolve the country's problems with the International Criminal Tribunal for the former Yugoslavia (ICTY) in The Hague, and successfully pursued EU membership, signing an accession treaty in December 2011. Membership is scheduled for July 2013. The HDZ was ousted in December 2011 by a centre-left coalition, led by the Social Democratic Party (SDP).

  Political structure: The upper house of parliament was abolished in 2001, and the unicameral parliament (Sabor) has a maximum of 160 members (with 151 in the current Sabor). If asked by the government, the president can dissolve parliament-in the event that the government loses a confidence vote or parliament fails to pass a budget within 120 days of receiving the bill-but otherwise the head of state is largely a figurehead.

  Policy issues: Post-independence governments maintained loose fiscal policies, despite pressure from the IMF. Along with a boom in consumer credit following bank restructuring and privatisation, this expanded the current-account deficit to an annual average of around 7% of GDP in 2004-08. Following the economic crisis, fiscal consolidation and structural reforms are topping the agenda. The Croatian National Bank (the central bank) targets exchange-rate stability of the kuna to the euro, given the high proportion of euro-denominated consumer loans.

  Taxation: Personal income is taxed at three rates: 12%, 25% and 40%. There are three rates for value-added tax (VAT): zero (on bread, milk, books and educational materials), 10% (on tourist services) and, otherwise, 25% (since March 2012). In some cases, the zero and 10% VAT rates are potentially incompatible with EU rules. The corporate tax rate is set at 20%.

  Foreign trade: The current-account deficit narrowed from a trough of 8.7% of GDP in 2008 to 0.7% of GDP in 2011. Tourism receipts covered nearly the entire merchandise trade deficit.

  Major exports 2011	% of total	Major imports 2011	% of total
  Machines & transport equipment	29.6	Machines & transport equipment	22.2
  Mineral fuels & lubricants	12.1	Chemical products	13.8
  Chemical products	11.4	Mineral fuels & lubricants	21.7
  Food, live animals, beverages & tobacco	10.7	Food, live animals, beverages & tobacco	10.3
  Leading markets 2011	% of total	Leading suppliers 2011	% of total
  Italy	14.6	Italy	14.3
  Bosnia & Hercegovina	11.1	Germany	11.3
  Germany	9.2	Russia	6.3
  Austria	5.1	Austria	3.9

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  March 13, 2013

• Structure

  Croatia: Economic structure

  Data and charts: Annual trends charts

  
  

  

  March 13, 2013

• Outlook

  Croatia: Country outlook

  Croatia: Country outlook

  FROM THE ECONOMIST INTELLIGENCE UNIT

  POLITICAL STABILITY: The ruling coalition led by Zoran Milanovic of the Social Democratic Party (SDP), which includes the Croatian People's Party (HNS), the Istrian Democratic Assembly (IDS) and the Croatian Pensioners' Party (HSU), is fairly stable and all the leading parties support EU membership due in July 2013. Alongside EU mandated reform, the SDP is focusing on fiscal consolidation and a clampdown on corruption.

  ELECTION WATCH: The next general election is not due until December 2015. If economic growth remains elusive, voters could switch allegiance back to the Croatian Democratic Union (HDZ), which in December 2011 suffered only its second election defeat since 1991. However, it took just 23.8% of the vote in 2011, therefore much will depend on the ability of Tomislav Karamarko, who was elected HDZ president in May 2012, to rebuild voter loyalty and internal unity. Another broad coalition is not out of the question. The 2011 election underlined the growing polarisation of voters, with the left-wing populist Croatia Labourists-Labour Party and the right-wing regional Croatian Democratic Assembly of Slavonia and Baranja--founded by Branimir Glavas, a convicted war criminal--winning six seats each. The ruling SDP-led coalition currently holds 80 seats in the 151-member parliament, while the HDZ group has 47, thanks to a last-minute deal with the Croatian Citizens Party (HGS) and Democratic Centre (DC) as well as three seats voted for by the Croatian diaspora.

  INTERNATIONAL RELATIONS: As in many new member states, support for EU membership could wane once Croatia joins the EU and the hoped-for benefits do not immediately materialise. The referendum on EU membership in January 2012 was supported by the main political parties and more than 60% of those who voted.

  POLICY TRENDS: The government will continue to adhere to an agenda of EU-mandated reforms. Since coming to power, the government has pursued fiscal consolidation, which has included the privatisation of state-owned companies. Provided that the government implements fiscal discipline, it should be able to finance the fiscal deficit on international markets throughout the forecast period, although the cost could increase as the debt stock rises. Narrowing the deficit will remain a government priority, owing to the increased importance of budget sustainability for the EU; however, it is likely to prove difficult in the short term, owing to the dominance of social transfers in expenditure and the added pressure of Croatia's contribution to the EU budget after it becomes a member. Political consensus exists on the need to attract more investment and to boost economic competitiveness. Reforms to simplify tax regulation, improve government institutions and reduce the role of the state will take time to yield results.

  ECONOMIC GROWTH: After contractions of 6.9% in 2009 and 1.4% in 2010, the economy stagnated in 2011, with zero growth. On the basis of the flash estimate for the fourth quarter, real GDP is estimated to have contracted by 2% in 2012, as exports of goods, domestic demand and investment tumbled. We expect the economy of the euro zone, Croatia's main export market, to stagnate in 2013 after an estimated fall of 0.4% in 2011 and to grow slowly thereafter. However, conditions at home will remain difficult. Given the fiscal consolidation needed, high unemployment and tight credit conditions, the Economist Intelligence Unit expects Croatia to remain in recession during 2013, with a contraction of 0.4%. We expect growth to return in 2014 and to average 2% in 2014-17--well below the pre-crisis level of 4.2% in 2004-08.

  INFLATION: Consumer price inflation rose to 3.4% in 2012 from 2.3% in 2011, largely owing to the VAT rate increase in March 2012 and a rise in regulated gas and electricity prices in May, which boosted inflationary pressures. From 2013, energy companies will be allowed to set gas and electricity prices, which is likely to increase inflationary pressures in the short term. Nonetheless, we expect a tight wage policy and limited liquidity to contain inflationary pressures and we forecast that the annual average inflation rate will fall to 3% in 2013 and 2.9% in 2013-17. External pressures on prices will be mild. We expect global oil prices to remain within a range of US$100-115/barrel and we believe that global food and beverages prices should fall during the early part of the forecast period.

  EXCHANGE RATES: The kuna appreciated mildly to an average of HRK7.52:EUR1 in 2012, from HRK7.44EUR1 in 2011. We expect the average exchange rate to remain broadly stable throughout the forecast period, within a band of HRK7.3-7.5:EUR1. The CNB will continue to intervene in the currency market to minimise volatility; it has a substantial stock of foreign reserves at its disposal to counteract depreciation pressures. We expect the CNB to remain committed to this exchange-rate policy in 2013-17, given Croatia's large net foreign-currency exposure and its medium-term aim of joining the EU's exchange-rate mechanism (ERM2). However, there is unlikely to be any rush to euro adoption, given the turmoil facing the euro zone and Croatia's likely inability to meet its criteria for fiscal deficits. A risk remains of significant depreciation pressure if the budget deficit were to widen, or if there were problems in accessing external finance.

  EXTERNAL SECTOR: On the basis of a larger than usual current-account surplus during the third quarter, we have revised our current-account estimate for 2012 to a small surplus. It is likely that the trade deficit shrank owing to weak demand and the services surplus increased thanks to a strong tourism season. Although we expect the current account to return to deficit from 2013, the combination of weak domestic demand and a resilient tourism sector that could be boosted by EU membership will keep it lower than during the previous decade, when it reached a peak at 8.7% of GDP in 2008. We forecast annual deficits equivalent to an average of 1.5% of GDP in 2013-17.

  March 05, 2013

• Forecast

  Croatia: Country forecast summary

  Country forecast overview: Highlights

  • The four-party coalition led by the Social Democratic Party (SDP) that came to power in December 2011 is fairly stable, with 80 of the 151 seats in parliament. However, the need to pursue fiscal consolidation will strain relationships. Public confidence in the political elite will remain low, owing to several high-profile corruption scandals.
  • A general election is not due until December 2015. If economic growth remains elusive, voters could switch allegiance back to the Croatian Democratic Union (HDZ), which has suffered only two election defeats since 1991.
  • The consensus between the main parties on EU-related reforms will continue, although public support for EU membership will probably start to fall after membership, which is due in July 2013. Bilateral disputes with Slovenia are unlikely to delay accession.
  • The government will continue pursuing fiscal consolidation and privatisation. However, perceptions of foot-dragging have led two credit-rating agencies to downgrade government debt to speculative ("junk") status.
  • The government should continue to be able to finance the fiscal deficit on international markets throughout the forecast period, although the cost could increase as the debt stock rises.
  • Real GDP is forecast to contract for a fifth consecutive year in 2013, falling by 0.4% amid a second year of decline or stagnation in the euro zone. We forecast a return to growth in 2014 and annual average growth of 2% in 2014-17.
  • Private consumption is forecast to continue falling in 2013, owing to unfavourable labour market conditions, tight credit, government austerity, the erosion of disposable income and sluggish wage growth. Growth in consumer spending is forecast to return in 2014 as unemployment falls and EU membership makes EUR2bn (US$2.8bn) in bloc funds available to Croatia.
  • Imported inflationary pressures will be offset by subdued domestic demand, moderate wage growth and kuna stability. Consumer price inflation is forecast to average 2.9% in 2013-17.
  • The current account is estimated to have posted a small surplus in 2012, of 0.1%, amid subdued domestic demand. It is forecast to return to deficit from 2014 and widen to around 2.6% of GDP by 2017 as import demand strengthens.

  Country forecast overview: Key indicators

  Key indicators	2012	2013	2014	2015	2016	2017
  Real GDP growth (%)	-2.0	-0.4	1.3	2.0	2.3	2.5
  Consumer price inflation (av; %)	3.4	3.0	2.8	2.9	3.1	2.9
  Budget balance (% of GDP)	-4.0	-4.0	-3.8	-3.6	-3.2	-3.0
  Current-account balance (% of GDP)	0.1	-0.1	-0.7	-1.6	-2.2	-2.6
  Exchange rate HRK:US$ (av)	5.85	5.58	5.63	5.81	5.85	5.84
  Exchange rate HRK:€ (av)	7.52	7.43	7.39	7.38	7.37	7.37

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  March 13, 2013

View detailed map

Country Briefing

Population

4.49m (2008)

From the 2001 census:

 City of Zagreb: 779,145

 County of Split-Dalmatia: 463,676

 County of Osijek-Baranja: 330,506

 County of Primorje-Gorski kotar: 305,505

 County of Istria: 206,344

 County of Vukovar-Sirmium: 204,768

Climate

Mediterranean on the coast, continental inland

Weather in Zagreb

Hottest month, July, 21.7°C (daily average temperature); coldest month, January, 0.9°C; driest month, November, 45.4 mm rainfall; wettest month, October, 195.8 mm rainfall

Weather in Split

Hottest month, July, 26.9°C (daily average temperature); coldest month, January, 6.4°C; driest month, July, 0.5mm rainfall; wettest month, December, 235.5 mm rainfall

Language

Croatian

Measures

Metric system

Currency

Croatian kuna (HRK), subdivided into 100 lipas

Time

One hour ahead of GMT in winter; two hours ahead in summer

Fiscal year

Calendar year

Public holidays

January 1st; January 6th (Epiphany); April 9th (Easter Monday); May 1st (Labour Day), June 7th (Corpus Christi); June 22nd (Day of Anti-fascist Struggle); June 25th (Croatian National Day); August 5th (National Thanksgiving Day); August 15th (Assumption); October 8th (Independence Day); November 1st (All Saints' Day); December 25th (Christmas Day); December 26th (St Stephen's Day)

January 01, 2013