COMMENT: Croatia's ruling HDZ best placed to form coalition govt

By bne IntelliNews November 27, 2007

Raiffeisenbank in Zagreb -

Preliminary results:

According to preliminary results released by the State Election Commission (DIP), the ruling HDZ has won 61 seats, followed by the SDP with 56 seats. The HSS-HSLS coalition won eight seats, the HNS seven seats, the HDSSB three, the IDS three, the HSP and the HSU one seat each. Based on incomplete and still unofficial results, parliamentary minority lists will have eight seats in parliament, making them as crucial as the HSS-HSLS coalition for forming a coalition.

Preliminary counts show that almost 82% of the electorate residing outside of Croatia voted for the HDZ, followed by the independent candidate Jerko Ivankovic Lijanovic (10%) and the HSP (4.3%). Based on this count, it is almost certain that at least five seats in the Croatian parliament will go to the Croatian diaspora, at least four of them to HDZ if not all. Therefore, 153 seats in the parliament would be taken.

Despite the likely HDZ win, it is still debatable which party will support HDZ or SDP, since only HNS and IDS revealed clear commitments for a coalition with the SDP. This will not be sufficient for the parliamentary majority of 77 seats. Other potential coalition partners are still awaiting the final results. However, the HDZ is in a better position to form a coalition with one of the smaller parties. Finals results will be available after more than 99.9% of the votes have been counted, expected 48 hours after the election, which was held on Sunday, November 25. There are some announcements that the vote count will be repeated in some smaller communities, but this should not affect the final outcome.

Expectations:

As expected, the two key rivals (HDZ and SDP) both fell short of ensuring the 77 deputies required for a parliamentary majority. Thus, the winner will depend on post-election deals as both major parties announced they will try to form a government. However, due to the fact that the ruling HDZ is once again the strongest individual party, they have the clear advantage and strongest chance of forming a new "old" government with Ivo Sanader as PM again. The most "surprising" election results were the sharp decline in support for the HSP (this right-wing party lost 4 seats) and HSU (pensioners) - during the campaign most of the polls showed their popularity rising. The fact the new ruling party has to please smaller parties might affect public finances (eg. HDZ lost an attractive coalition partner due to the weakness of HSU).

Outlook:

No significant change in economic policy, the relations with EU and in the stance towards foreign investors is expected. We believe that most of the reforms that should support and improve the business climate and economic growth are defined by the unquestioned EU path that Croatia is taking.

Our basic economic scenario points at continued strong growth, around 6% in 2007. The new government has to think about how to create incentives for more private investment and how to replace growth based on consumption with growth based on investment. Any stall in structural reforms that will slow down the public enterprise reform agenda and finalization of privatization could harm investment, economic growth as well as EU entry prospects.

Macroeconomic stability (reflected in low and stable inflation as well as declining exchange rate volatility) has been one the most striking aspects since 2000 and especially in the last four years. Additional inflationary pressure might arise out of liberalization of still-administered prices (electricity, gas and utility services) and harmonization with European excise taxes. One has to keep in mind that the major driver working for reforms and containment of external indebtedness is the de facto fully-independent Croatian National Bank, so one might expect further monetary tightening in the future leading to the stabilization of the current-account deficit and foreign debt as a share of GDP around current levels.

The free-floating but tightly managed kuna should not feel any impact from the latest elections at all and in the medium-term appreciation pressures might remain dominant as Croatia progresses towards EU membership.

Our medium-term outlook for the Croatian equity market remains fairly positive despite its current modest correction and a high Price/Earnings ratio compared to the rest of the region.

An unfavourable, albeit unlikely, impact might arise from a longer period of discussion for forming government that could eventually bring some uncertainty in the market for foreign investors.


Hrvoje Dolenec, Zdeslav Santic, Zrinka Zivkovic-Matijevic and Denis Dolinar are analysts for Raiffeisenbank in Zagreb

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