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Croatia
Summary
Moody’s Ba2 / S&P BB / Fitch BB1
Economy: Agriculture 5%, Industry 26%, Services 69%
Croatia emerged from a six-year recession in 2015, although the economic recovery is tepid due to competitiveness problems, including a labor market with high nominal wages and low participation. Croatia
is also struggling to improve its public finances. Years of low growth have curbed government revenues
while an inefficient public sector has hindered attempts to reduce expenditures. As a result, fiscal deficits
remain large, contributing to rising government debt. Public debt amounted to about 87% of GDP
in 2015 and debt is expected to decline only gradually. However, liquidity and rollover risk are limited
given that most public debt is local currency denominated, with a captive local investor base in banks
and the pension system. Other strengths include a strong external position and EU membership, which
should provide a policy anchor. Political gridlock has threatened Croatia’s reform program, but recent
elections returned a technocratic government to power, boding well for policy continuity and reforms.
Economic Indicators
2012
2013
2014
2015
2016F
4.3
4.3
4.2
4.2
4.2
4.2
13,231
13,569
13,463
11,590
11,520
11,988
Nominal GDP (USD Billions)
56.5
57.7
57.1
48.7
48.4
50.2
Real GDP (%)
-2.2
-1.1
-0.4
1.6
2.5
2.5
Year-End CPI (%)
4.6
0.3
-0.5
-0.6
-1.2
1.0
Fiscal Balance (% of GDP)
-5.3
-5.3
-5.5
-3.2
-2.4
-2.5
Population (Millions)
GDP per Capita (USD)
2017F
Interest (% of Revenues)
8.2
8.2
8.2
8.2
7.9
8.0
FC Debt/Public Debt (%)
41.5
42.3
41.6
40.9
39.0
41.0
Government Debt (% of GDP)
70.7
82.2
86.5
86.7
84.4
85.0
169.4
193.5
203.0
198.2
190.9
194.0
Current Account (% of GDP)
-0.1
1.0
2.1
5.1
2.8
2.3
FDI (% of GDP)
2.8
1.9
1.9
0.4
1.9
2.0
103.0
105.6
108.4
103.7
97.5
96.9
Foreign Reserves/External Debt (%)
24.8
28.1
27.2
30.1
32.5
34.6
Foreign Reserves (Mo. of imports)
7.5
8.3
8.0
7.9
7.7
7.7
25.6
29.7
29.5
31.2
31.6
33.5
Government Debt (% of Revenue)
External Debt (% of GDP)
Foreign Reserves (% of GDP)
As of November 2016
Forecasted or estimated results do not represent a promise or guarantee of future results and are subject
to change.
Source: Croatian National Bank, Croatian Bureau of Statistics, IMF, Bloomberg, Lazard
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Rating History
Below is a history of the country’s foreign and local currency ratings by the major agencies
dating back to 2000. We have also included a chart of the country’s hard currency external
debt spread and the JP Morgan EMBI Global Diversified Index spread for comparison.
Rating History
Hard Currency
Local Currency
BBB+
ABBB+
BBB
BBB
BBB-
BBBBB+
BB+
BB
BB
BB-
2000
2008
Moody’s
2016
S&P
Fitch
BB-
2000
2008
Moody’s
S&P
2016
Fitch
As of December 2016
Performance represents past performance. Past performance is not a reliable indicator of future results.
Source: Fitch, Moody’s, Standard and Poor’s, Bloomberg
Bond Spreads
1000
800
600
400
200
0
2008
Croatia
2010
2012
2014
2016
EMBIGD
As of December 2016
Performance represents past performance. Past
performance is not a reliable indicator of future
results.
Source: JP Morgan
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Croatia
Strengths
EU Accession
Croatia joined the EU in July 2013, unlocking financial assistance and monitoring that
could strengthen the country’s institutions and generate new investor interest and foreign
direct investment (FDI). Accession is seen as an opportunity to rebalance the economy from
a consumption-oriented model financed by external debt to one based on net exports and
investment. Under the EU’s Partnership Agreement, Croatia is eligible to receive €8.6 billion in structural funds between 2014 and 2020.3 The authorities are hoping this assistance
will ultimately help diversify Croatia’s narrow goods export base, which is currently limited
to shipbuilding and refined oil. However, in the short term, EU accession is unlikely to
generate the same economic dividends for Croatia as experienced by countries in previous
EU enlargement rounds, owing to the country’s low export competitiveness, which is due
to high labor costs and a large public sector. In addition, the country’s membership in the
Central European Free Trade Area (CEFTA), which encompasses the countries of the western Balkans outside the EU and is a major export market for Croatian goods, came to an end
upon accession to the EU. Croatian goods now face the same tariffs as other EU goods in the
CEFTA area. Finally, even though Croatia is eligible to receive large sums of EU funds, the
ability of the Croatian authorities—particularly at the local level—to absorb and administer
these funds is limited. Moreover, Croatia’s expenditures are likely to grow in the short term
due to the country’s financial obligations pertaining to EU membership.
External liquidity
The current account balance has registered a major improvement, going from a deficit equal
to 10% of GDP in 2008 to a surplus of more than 5% of GDP in 2015. This current account
surplus is projected to diminish but remain positive over the forecast horizon.4 The turnaround has been driven largely by increased tourism revenues and reduced profit remittances
due to lower profitability of foreign-owned firms. However, the merchandise trade deficit has
deteriorated, notwithstanding depressed domestic demand, because of weak exports due to
the drop in Italian activity, which accounts for 15% of exports, as well as an ongoing
deterioration of cost competitiveness and loss of EU market share.
Croatia’s high gross external debt burden, which currently amounts to more than 100%
of GDP, is offset by foreign currency reserve coverage equal to about one-third of the total
external debt stock. Approximately 62% of the external debt is owed by corporates and
banks, with around 13% in intra-company and lending.5 The relatively low sovereign portion
of external debt, about 38% of GDP, partly offsets a key vulnerability for Croatia: a very high
euroization ratio of 70% to 75% for both loans and deposits, hence the need to limit currency volatility.6 Exchange-rate vulnerability became more pronounced in early 2015, when
the Swiss monetary authorities abruptly allowed the franc to appreciate, exposing Croatian
borrowers to heightened currency risk since franc-denominated loans amounted to more than
7% of GDP. The government responded by temporarily freezing the exchange rate applied
to these loans before ordering banks in September 2015 to retroactively convert their clients’
franc-denominated loans to euros. The cost to banks amounted to about 2% of GDP, and
the subsequent decline in profit remittances from foreign banks operating in Croatia contributed to the country’s large current account surplus that year.
Low Rollover Risk
About 60% of Croatia’s public debt is denominated in local currency, with a captive local funding source in its banks, insurance companies, and pension system. There is ample liquidity in
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the financial system. These factors have enabled the government to issue large amounts of local
currency- and euro-denominated debt at low rates, and the government is able to meet more
than 80% of its funding needs in local markets. Foreign investors are not active in Croatia’s
domestic currency market, reducing the risk of rapid outflows or currency fluctuations.
Weaknesses
Poor Growth Prospects
Croatia’s growth fundamentals are poor, owing to a large and inefficient public sector that
has weighed on activity and discourages foreign investment. Persistent fiscal deficits also
limit the government’s ability to stimulate economic activity. Monetary policy flexibility is
also constrained by the Croatian kuna’s peg to the euro as well as the high euroization rate
of Croatia’s financial system. The country’s nominal GDP has only recently recovered to the
level of those prior to the 2008–2009 financial crisis.7 This prolonged economic contraction
can be traced to a lack of an industrial base because Croatia’s main industry—shipyards—is
considered a sunset industry. In addition, Croatia is burdened by low competitiveness relative to peers; a poor business environment; widespread corruption; an inefficient public
sector; and an inflexible labor market. The International Monetary Fund (IMF) estimates
long-term potential growth of less than 2%.8 Exports have been hurt by the ongoing restructuring of the shipbuilding sector, and by the economic slowdown in neighboring European
countries, in particular, Italy, which is Croatia’s largest trading partner. In addition, Croatia
is not integrated into the Eurozone manufacturing chain and faces steep competition to its
manufactured base. Croatia’s poor competitiveness is reflected in its loss of world export
market share compared to its peers, both before and after the 2008–2009 financial collapse.
However, a bright spot is the focus on non-tradeables, the most promising of which is tourism, whose total contribution to the economy amounts to more than 23% of GDP.9 Croatia
also has among the highest tax burdens in the world and ranks poorly on several fronts in
terms of its business environment, based on the World Bank Ease of Doing Business and
the World Economic Forum Global Competitiveness Report. Generous benefits and the highest
nominal wages in the region have resulted in one of the lowest labor participation rates in
emerging markets and the lowest participation rate for countries with similar levels of GDP
per capita. Such a low labor participation rate has consequences not only for medium-term
potential GDP growth, but also for fiscal dynamics and for the external debt position.
Unemployment is easing, but is still high at 13.1%.10
Negative Debt Dynamics
Croatia’s public debt has risen sharply from below 40% of GDP in 2008 to 85% currently.11
About 61% of public sector debt is internal, and as mentioned previously, the government is
able to roll over this debt without difficulty due to the captive local funding base. The government also faces contingent liabilities associated with the central government’s guarantees of
Croatia’s many unprofitable state-owned enterprises, some of which have foreign-currencydenominated debt. Public debt levels are unlikely to decline in the near term due to low real
GDP growth of about 2% in a best-case scenario, negligible inflation, an average interest
rate on government debt of 4% to 5%, fiscal deficits of about 3% of GDP over the forecast
horizon, and the risk of external shocks such as a sharp slowdown in European growth or
rising global borrowing costs.12 In 2014, Croatia came under the EU’s Excessive Deficit and
Macroeconomic Imbalances Procedures (EDP and MIP, respectively), which subjected the
country to close EU guidance and monitoring to reduce the country’s imbalances. However,
the country may exit the EDP now that the fiscal deficit has dropped below 3%, and the
enforced fiscal discipline of recent years may be lost.
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Croatia
Country Background
Size
56,594 KM2 (127th)
Capital
Zagreb
Population
4.3 Million
Ethnic Groups
Croats 90.4%, Serbs 4.4%, Other 4.4%
Religion
Roman Catholic 86.3%, Orthodox 4.4%, Other/None 9.3%
Median Age
42.7 Years
Literacy Rate
99.3%
Independence
June 1991
Political System
Parliamentary Democracy
President/PM
President Kolinda Grabar-Kitarovic / PM Andrej Plenkovic
Legislative Election
2020
Legislative Branch
151 Seats
Economy
Agriculture 4.3%, Industry 26.2%, Service 69.5%
Labor Force
Agriculture 1.9%, Industry 27.6%, Service 70.4%
Merchandise Exports
Transport Equipment, Machinery, Textiles, Chemicals,
Foodstuffs, Fuels
Export Partners
Italy 13.4%, Slovenia 12.5%, Germany 11.4%, Bosnia and
Herzegovina 9.9%, Austria 6.6%, Serbia 4.9%
Currency
Croatian Kuna (HRK)
As of November 2016
Source: CIA
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Country Timeline
Right wins
2003
December—Ivo Sanader of the right-wing Croatian Democratic Union (HDZ) becomes prime
minister in a minority government following his party's success in elections the previous
month.
2004
June—Wartime Croatian Serb leader Milan Babic jailed for 13 years by Hague tribunal for his
part in war crimes against non-Serbs in self-proclaimed Krajina Serb republic where he was
leader in the early 1990s.
2004
December—EU agrees to start accession talks with Croatia in March 2005.
2005
January—Incumbent President Stjepan Mesic wins second term.
2005
March—EU delays talks on Croatia's membership because of failure to arrest Gen Ante
Gotovina, who is wanted by the Hague tribunal on war crimes charges.
EU talks
2005
October—Green light given for EU accession talks to go ahead again even though Gen
Gotovina remains at large. Croatia calls for international mediation after Slovene parliament
declares ecological zone in the Adriatic with rights to protect and use
sea bed.
2005
December—Fugitive Croatian General Ante Gotovina, sought by the Hague tribunal on war
crimes charges, is arrested in Spain.
2006
November—European Commission publishes report critical of Croatia's progress towards
EU membership. It says more needs to be done to tackle corruption and intolerance of nonCroats.
2007
October—Work begins on coastal Peljesac bridge which will allow motorists to skirt Bosnian
territory, drawing criticism from Bosnia.
2007
November—Parliamentary elections. Ruling Croatian Democratic Union (HDZ) wins the most
seats but needs coalition partners to secure a majority.
2008
January—Parliament approves Prime Minister Ivo Sanader's new HDZ-led coalition government. Includes first Serb in key position: deputy PM Slobodan Uzelac.
Generals on trial
2008
March—Croatian ex-generals Ante Gotovina, Ivan Cermak and Mladen Markac go on trial
at Hague war crimes tribunal on charges of killing Croatian Serbs in 1990s. They deny the
charges.
2008
April—NATO summit in Bucharest invites Croatia to join alliance. Final status expected in
2009.
2008
October—Government announces major drive against organised crime following a series of
killings linked to the mafia.
2008
November—European Commission says Croatia is likely to end accession talks by 2009 and
become a member by 2011, but demands tougher action against corruption and organised
crime.
2009
February—Slovenia threatens to block neighbouring Croatia from joining the EU in a continuing dispute over borders.
NATO membership
2009
April—Croatia officially joins NATO.
2009
June—The European Union cancels the next round of EU membership talks with Croatia,
citing a lack of progress in resolving a long-standing border row with neighbouring Slovenia.
2009
July—In a surprise move, Prime Minister Ivo Sanader announces that he will resign and
withdraw from active politics. Parliament approves Mr Sanader's deputy, Jadranka Kosor, as
prime minister.
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Croatia
2009
November—Slovenia lifts block on Croatia's EU membership talks after the two countries
sign deal allowing international mediators to resolve their border dispute. Croatian EU membership talks resume.
2010
January—Ivo Josipovic of the opposition Social Democrats wins presidential election.
2010
June—Slovenia votes in a referendum to back international arbitration on the border dispute.
Thaw
2010
July—Visit of President Josipovic to Belgrade signals thawing of relations with Serbia.
2010
November—Zagreb court convicts six men for mafia-style murder of investigative journalist Ivo Pukanic in October 2010. In what is seen as significant act of reconciliation between
Croatia and Serbia, Serbian President Boris Tadic visits Vukovar, where he apologises for
1991 massacre of 260 Croat civilians by Serb forces.
2011
April—Two senior Croatian generals—Ante Gotovina and Mladen Markac—are convicted for
war crimes against Serbs in 1995 by the UN War Crimes Tribunal in
the Hague.
2011
May—Croatia and Slovenia officially submit their Piran Bay border dispute to UN arbitration.
2011
June—Croatia successfully completes EU accession negotiations, putting it on track to
become the 28th member state in mid-2013.
2011
July—Goran Hadzic, commander of Serb rebel forces during Croatia's 1999–1995 civil war,
goes on trial on war crimes charges at The Hague.
2011
November—Trial of former Prime Minister Ivo Sanader on charges of corruption begins in
Zagreb. Mr Sanader denies the charges against him.
2011
December—Parliamentary elections. Centre-left opposition bloc led by Social Democrats
ousts the Croatian Democratic Union (HDZ), which has been in power since 2003. Croatia
signs EU accession treaty paving the way for it to achieve full membership on 1 July 2013.
EU referendum
2012
January—Croatian voters back joining the European Union in a referendum by a margin of
two to one, albeit on a low turnout of about 44%.
2012
June—Serbian court imprisons 14 former soldiers and paramilitaries over the killing of 70
Croat civilians in the eastern village of Lovas in 1991.
2012
November—Last year's convictions of Generals Ante Gotovina and Mladen Markac for war
crimes are overturned by an appeals court in the Hague. A court in Croatia sentences former
prime minister Ivo Sanader to 10 years in prison for taking bribes. Croatia is under pressure
from the European Union to tackle widespread corruption.
2013
March—The European Commission gives Croatia the green light to join the EU as the 28th
member state. However, the Commission says that Croatia still needs to continue its efforts
to curb corruption and tackle organised crime.
2013
April—Croatia elects its first members of the European Parliament in anticipation of the country joining the EU on 1 July.
EU Membership
2013
July—Croatia takes its place as the 28th member of the EU.
2014
January—EU finance ministers launch proceedings to force Croatia to halve its budget deficit
and bring it under the bloc's permitted limit.
2014
March—A Croatian court sentences Ivo Sanader to nine years in jail for siphoning millions in
state money, in his second corruption conviction. His former governing and current opposition Croatian Democratic Union (HDZ) party is also found guilty in the case.
2014
April—Croatia extradites former Yugoslav spy chief Zdravko Mustac to Germany, where he
faces charge for the 1983 killing of a dissident.
2015
January—Moderate conservative Kolinda Grabar-Kiratovic is elected Croatia's first female
president.
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2015
May—Parliament passes a law to compensate victims of sexual violence during the war of
independence in the 1990s
2015
November—General election fails to produce outright winner. Following protracted talks, the
non-partisan technocrat Tihomir Oreskovic becomes prime minister in January 2016.
2016
June—The government falls when Mr Oreskovic and his cabinet fail to win a confidence vote,
following a quarrel between the main coalition partners.
2016
July—Parliament is dissolved and fresh elections are called for September.
Source: BBC
Notes
1 As of December 2016.
2 Corina Creţu, “Helping Croatia make the most out of EU Structural Funds,” European Commission, Blog
Post, January 30, 2015, accessed on October 29, 2015, https://ec.europa.eu/commission/2014-2019/cretu/
blog/helping-croatia-make-most-out-eu-structural-funds_en.
3 “Croatia: 2016 Article IV Consultation,” IMF Country Report No. 16/187, IMF, June 2016, https://www.imf.
org/external/pubs/ft/scr/2016/cr16187.pdf.
4 As of June 30, 2016. Source: Croatian National Bank.
5 Euroization refers to the process of a country adopting the euro as its primary currency or linking its currency
to the euro.
6 As of December 2015. Source: Croatian National Bank.
7 “Croatia: 2016 Article IV Consultation,” IMF Country Report No. 16/187, IMF, June 2016, https://www.imf.
org/external/pubs/ft/scr/2016/cr16187.pdf.
8 As of December 2015. Source: “Economic Impact 2016: Croatia,” World Travel and Tourism Council, http://
www.wttc.org/-/media/files/reports/economic-impact-research/countries-2016/croatia2016.pdf.
9 As of August 2016. Source: Croatian Bureau of Statistics.
10As of June 2016. Source: Croatian National Bank.
11As of October 2016. Source: IMF, Croatian National Bank, and Lazard.
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Published on 24 February 2017.
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