Croatia back in business

Croatia back in business
Prime Minister Tihomir Oreskovic attends his first cabinet meeting.
By Clare Nuttall January 29, 2016

Croatia’s newly appointed Prime Minister Tihomir Oreskovic, a former pharmaceuticals executive, has already indicated he will take steps to improve the business climate and encourage investment, inspiring hopes that Croatia’s fragile recovery will continue.

Croatia emerged from recession last year, but Oreskovic’s new government still faces the tasks of lowering the worryingly high levels of public debt, imposing fiscal discipline and restoring investor confidence. While the new non-partisan prime minister appears committed to reform, he will have to keep on board a cabinet made up of the Croatian Democratic Union (HDZ) and its new partner the Bridge of Independent Lists (Most).

In his first interviews with local television stations on January 25 - three days after his cabinet was voted in - Oreskovic outlined plans to start tackling public debt by selling off assets and introducing a new property tax.

“I immediately said that the focus is on reducing the public debt,” Oreskovic said, according to Total Croatia News. “This is a positive message to the world and to the European Commission. The money will be found in property that is not being used properly. Whatever is not strategically important will be liquidated and got rid of in order to improve the debt situation.”

Oreskovic, Croatia’s first non-partisan prime minister, is a political outsider. He grew up in Canada and spent most of his career at major pharmaceuticals companies including Eli Lilly and Croatia’s Pliva, which he headed until its takeover by Teva Pharmaceuticals Industries.

Most, which was in kingmaker position after Croatia’s November 8 elections, had been keen to appoint a non-party prime minister despite offers from the HDZ to allow its leader Bozo Petrov to take the position.

“We were pleased to see the new prime minister coming from business,” Vedrana Jelušić Kasic, EBRD director for Croatia, told bne IntelliNews. According to Kasic, Oreskovic’s plans to cut debt and improve Croatia’s credit ratings “are important for both the country and the investment community”.

Gunter Deuber, head of CEE research at Raiffeisen Bank International in Vienna, agreed that, “from a short-term perspective the formation of the government is definitely investor- and credit-positive”.

However, he added that, “2016 will be a litmus test for Croatia and the government”, which needs to carry out “sweeping fiscal consolidation and structural reforms”. While the government is now in its honeymoon period - which could be extended if it successfully initiates fiscal reforms - Deuber warns that Oreskovic will need to “deliver more than a short-term quick fix ... it will be crucial to keep the reforming and consolidation pace even against potential opposition that is likely to build up at a later stage”.

Another key appointment, finance minister Zdravko Maric, also has a business background. He spent the last four years at regional retail and food production giant Agrokor, although he also served as state secretary in a previous HDZ government.

However, Deuber questions the rest of the cabinet’s commitment to reform. “On paper the new government looks reform- and market-friendly, given the fact that the prime minister and finance minister are not per se part of the old elite,” he said. “However, the rest of the government is still originating from previous and less reform-minded elites. Hence, it will be crucial to see how the more reform minded prime minister and finance minister can really succeed in building compromises with the rest of the government.”

Croatia’s economy performed better than expected in 2015, the first year of positive growth after six years of contraction. The economy grew by 2.8% in Q3 2015, and forecasts for 2016 - which are mostly around 1% - could be revised upwards. Growth in 2015 was mainly driven by exports, which increased 11.7% in the first nine months of the year, though the strong tourist season also contributed.

“We see this trend continuing, though growth could slow given the fiscal adjustments Croatia needs to make under the EU excessive deficit procedure [EDP],” Kasic said.

Standard & Poor’s, which affirmed its ‘BB’ long-term and ‘B’ short-term sovereign ratings for Croatia with negative outlook on January 15, also warned that Croatia’s finances were in poor shape. The ratings agency forecast that Croatia would fail to exit the EDP before 2018.

Croatia has extremely high levels of public and private sector debt, resulting in a “totally over-leveraged economy ... with a public debt level around 90% of GDP over the years to come”, says Deuber.

Other challenges pointed out by Kasic include “FDI inflows [that] were relatively small at €290mn in the first nine months of 2015, and in terms of competitiveness, value added is below the EU average in most sectors with the exceptions of agriculture, financial services and tourism.”

Meanwhile, aside from tackling the economy, Oreskovic will also have to make decisions on how Croatia is to handle the inflow of refugees and migrants amid a hardening of the stance of many fellow EU member states. This has already put pressure on Croatia’s relations with its neighbours.