Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
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 219 Lazard Emerging Markets Debt 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 220 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 221 Lazard Emerging Markets Debt 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. 222 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 223 Lazard Emerging Markets Debt 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. 224 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. 225 Lazard Emerging Markets Debt 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. 226 Important Information Published on 24 February 2017. Information and opinions presented have been obtained or derived from sources believed by Lazard to be reliable. Lazard makes no representation as to their accuracy or completeness. All opinions expressed herein are as of the published date and are subject to change. Forecasted or estimated results do not represent a promise or guarantee of future results and are subject to change. An investment in bonds carries risk. If interest rates rise, bond prices usually decline. The longer a bond’s maturity, the greater the impact a change in interest rates can have on its price. If you do not hold a bond until maturity, you may experience a gain or loss when you sell. Bonds also carry the risk of default, which is the risk that the issuer is unable to make further income and principal payments. Other risks, including inflation risk, call risk, and pre-payment risk, also apply. High yield securities (also referred to as “junk bonds”) inherently have a higher degree of market risk, default risk, and credit risk. Equity securities will fluctuate in price; the value of your investment will thus fluctuate, and this may result in a loss. Securities in certain non-domestic countries may be less liquid, more volatile, and less subject to governmental supervision than in one’s home market. The values of these securities may be affected by changes in currency rates, application of a country’s specific tax laws, changes in government administration, and economic and monetary policy. Emerging markets securities carry special risks, such as less developed or less efficient trading markets, a lack of company information, and differing auditing and legal standards. The securities markets of emerging markets countries can be extremely volatile; performance can also be influenced by political, social, and economic factors affecting companies in these countries. This material is provided by Lazard Asset Management LLC or its affiliates (“Lazard”). There is no guarantee that any projection, forecast, or opinion in this material will be realized. Past performance does not guarantee future results. This document is for informational purposes only and does not constitute an investment agreement or investment advice. References to specific strategies or securities are provided solely in the context of this document and are not to be considered recommendations by Lazard. Investments in securities and derivatives involve risk, will fluctuate in price, and may result in losses. Certain securities and derivatives in Lazard’s investment strategies, and alternative strategies in particular, can include high degrees of risk and volatility, when compared to other securities or strategies. Similarly, certain securities in Lazard’s investment portfolios may trade in less liquid or efficient markets, which can affect investment performance. Australia: FOR WHOLESALE INVESTORS ONLY. Issued by Lazard Asset Management Pacific Co., ABN 13 064 523 619, AFS License 238432, Level 39 Gateway, 1 Macquarie Place, Sydney NSW 2000. Dubai: Issued and approved by Lazard Gulf Limited, Gate Village 1, Level 2, Dubai International Financial Centre, PO Box 506644, Dubai, United Arab Emirates. Registered in Dubai International Financial Centre 0467. Authorised and regulated by the Dubai Financial Services Authority to deal with Professional Clients only. Germany: Issued by Lazard Asset Management (Deutschland) GmbH, Neue Mainzer Strasse 75, D-60311 Frankfurt am Main. Hong Kong: Issued by Lazard Asset Management (Hong Kong) Limited (AQZ743), Unit 29, Level 8, Two Exchange Square, 8 Connaught Place, Central, Hong Kong. Lazard Asset Management (Hong Kong) Limited is a corporation licensed by the Hong Kong Securities and Futures Commission to conduct Type 1 (dealing in securities) and Type 4 (advising on securities) regulated activities. This document is only for “professional investors” as defined under the Hong Kong Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong) and its subsidiary legislation and may not be distributed or otherwise made available to any other person. Japan: Issued by Lazard Japan Asset Management K.K., ATT Annex 7th Floor, 2-11-7 Akasaka, Minato-ku, Tokyo 107-0052. Korea: Issued by Lazard Korea Asset Management Co. Ltd., 10F Seoul Finance Center, 136 Sejong-daero, Jung-gu, Seoul, 04520. People’s Republic of China: Issued by Lazard Asset Management. Lazard Asset Management does not carry out business in the P.R.C. and is not a licensed investment adviser with the China Securities Regulatory Commission or the China Banking Regulatory Commission. This document is for reference only and for intended recipients only. The information in this document does not constitute any specific investment advice on China capital markets or an offer of securities or investment, tax, legal, or other advice or recommendation or, an offer to sell or an invitation to apply for any product or service of Lazard Asset Management. Singapore: Issued by Lazard Asset Management (Singapore) Pte. Ltd., 1 Raffles Place, #15-02 One Raffles Place Tower 1, Singapore 048616. Company Registration Number 201135005W. This document is for “institutional investors” or “accredited investors” as defined under the Securities and Futures Act, Chapter 289 of Singapore and may not be distributed to any other person. United Kingdom: FOR PROFESSIONAL INVESTORS ONLY. Issued by Lazard Asset Management Ltd., 50 Stratton Street, London W1J 8LL. Registered in England Number 525667. Authorised and regulated by the Financial Conduct Authority (FCA). United States: Issued by Lazard Asset Management LLC, 30 Rockefeller Plaza, New York, NY 10112.