The political situation in Croatia is expected to remain stable during 2019. Recent polls have shown the ruling Croatian Democratic Union (HDZ) to be the most popular party in the country, with support standing at around 26%-27%.
There could, however, be a rejigging of the ruling coalition, should the controversial Zagreb mayor, Milan Bandic, manage to enlarge his parliamentary group. Currently, the HDZ benefits from Bandic’ support in parliament. Local media has been speculating that a government reshuffle is possible, as Bandic has now expanded his parliamentary group to the extent that it is only one MP short of forming a parliamentary majority with the HDZ without its present junior coalition partner, the Croatian People’s Party (HNS). The speculation was denied by HDZ’ secretary general.
On the other hand, tensions within the main opposition party, the Social Democratic Party (SDP), might lead to a further deterioration of the support for the party in 2019 and the possible removal of party leader Davor Bernadic. Several SDP MPs left the party in 2018, blaming Bernadic for the decline in the ratings.
The European Parliament elections scheduled to take place in May 2019 will clearly indicate where support for Croatia’s main parties stands.
The Croatian economy is expected to continue its expansion in 2019, with household consumption remaining the main driver of growth, thanks to the increasing disposable income of the population.
Croatia has been posting growth since the last quarter of 2014, following 12 straight quarters of decline, despite the crises at two major companies — first food and retail giant Agrokor and more recently shipbuilder Uljanik — and this summer’s slowdown in the tourism sector.
In the third quarter of 2018, the GDP expanded 2.8% y/y, slowing from a 2.9% expansion in the previous three months, according to data from the statistics office.
The economy is expected to expand 2.9% in 2019, according to the budget estimate passed by the Croatian parliament at the beginning of December. The estimation is, however, more optimistic than those of the International Monetary Fund (IMF) and the European Commission (EC) which expect growth rates of 2.6% and 2.8% respectively. For 2018, the IMF expects a 2.8% expansion, while the EC sees the growth at 2.8%. The European Bank for Reconstruction and Development (EBRD) expects an even slower growth in 2019, of only 2.5%, according to its latest Regional Economic Prospects report.
Household consumption will be supported in 2019 by higher wages, increased employment, a VAT reduction and several changes in taxation that are to come into force as of January. In November, the Croatian parliament approved a VAT cut to 13% from 24% for fresh meat and fish, fruit, vegetables, eggs and nappies. Additionally, the 24% income tax bracket would be expanded to include all salaries up to HRK30,000 (€4,042). Previously it was applied to salaries up to HRK17,500. All income above HRK30,000 per month will be taxed at the 36% rate.
The purchasing power of the population is expected to be supported by subdued inflation thanks to low interest rates and the VAT reduction. According to the IMF’s latest World Economic Outlook, consumer prices are expected to rise 1.5% in 2019, slowing down from a forecast 1.6% rise in 2018. The EC sees HICP slowing to 1.5% in 2019 from 1.6% in 2018.
Tourism will remain an important source of revenue for the country. However, exports of tourism services are expected to slow down in 2019 after the country had benefitted from boosted tourism inflows due to security risks in some competitor markets such as Turkey and Egypt.
This is problematic for Croatia, which is one of the world’s most tourism dependent countries. On top of this, the sector faces growing difficulties in finding enough workers for the peak summer season.
Wage pressures are expected to grow stronger in 2019 and 2020 due to increasing employment and higher demand for workforce in some sectors. Croatia is already experiencing labour shortages in the tourism and construction sectors. To cope with the lack of workforce in the tourism sector, Croatia has raised foreign worker quotas and is expected to continue welcoming foreign workers in order to fill in the empty jobs, mostly during the summer season.
Overall, the unemployment rate is set to continue falling. The EC sees it down at 7.6% in 2019 from an expected 9.1% in 2018. The IMF sees the unemployment rate falling from 12.4% in 2017 to 12% in 2018 and to 11.2% in 2019.
After recording a first-ever surplus (0.9% of GDP in 2017), Croatia’s public finances are expected to remain in good shape. The country made a successful return to international markets in June 2018, issuing a 10-year €750mn Eurobond to strong demand. The Eurobond, which matures in 2028, was issued to refinance an earlier offering.
The budget for next year envisages a general government deficit of 0.4% of GDP. However, the EC said in its Autumn Forecast that the Adriatic country should post a general government surplus equal to 0.4% of its GDP. The surplus should fall again to just above balance in 2020, largely on account of public investment growth.
Fitch Ratings, which on December 7, affirmed Croatia's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BB+', expects Croatia’s general government budget to remain broadly balanced in 2019 and 2020.
Croatia sees its general government deficit equaling 0.3% of GDP in 2020, while in 2021 it plans a surplus equal to o.3% of GDP.
Thanks to GDP growth and good public finances, Croatia’s high public debt is expected to continue its decline. The country expects to reduce debt to 71.6% of GDP in 2019, 68.8% of GDP in 2020 and 65.6% of GDP in 2021.
One of the challenges Croatia will have to deal with in 2019 is the situation at financially troubled shipbuilder Uljanik, which owns the Uljanik shipyard in Pula and the 3. Maj shipyard in Rijeka. The country is currently holding talks with investors interested in investing in the company, which saw its accounts frozen several times in 2018 and lost many shipbuilding contracts.
Finding an investor for Uljanik is critical for Zagreb; S&P Global Ratings warned in September that resolving the situation at the company could cost the government up to 1% of GDP. Croatian Economy Minister Darko Horvat said in November that there were two serious strategic partners interested in the troubled shipbuilder: Ukraine’s Smart Holding Group and Italy’s Fincantieri.
Meanwhile, the situation at food and retail giant Agrokor, which almost collapsed in 2017 due to a debt crisis, seems to have normalised after creditors approved a debt-for-equity settlement deal in July 2018, making Russia’s Sberbank its main shareholder. However, Sberbank might decide to give up its share in the Croatian group. The bank has received proposals to sell its stake in Agrokor and is currently studying the offers, a bank representative told Reuters in December.
In 2019, Croatia could also decide on a possible buyout of Hungary oil major MOL’s 49% stake in Croatian oil and gas group INA. Croatia has expressed its intention to buy out MOL’s stake in INA several times. In April 2018, Croatia picked a consortium led by Morgan Stanley to advise it in the process of buying back the stake. The Croatian government and MOL have been locked in a lengthy legal battle over INA, but MOL has reportedly withdrawn its lawsuit against Croatia filed with a Washington district court.
Also in the energy sector, the project to build a liquefied natural gas (LNG) terminal on the island of Krk is moving gradually forward. LNG Hrvatska, the company developing the project, said in November it has selected Golar Power Limited to deliver a floating storage and regasification unit (FSRU) for the project. Krk LNG terminal is intended to play an important role in the diversification of natural gas supply as well as ensuring security of natural gas supply for Central and Southeast Europe – it is part of Croatia's plans to become an energy hub for the region. However, the launch of construction has been delayed several times.
Meanwhile, further investments are planned in Croatia’s large tourism sector, despite somewhat disappointing numbers in summer 2018. Croatian tourism group Plava Laguna reportedly plans investments worth around HRK300mn in 2019, while Croatia's largest tourism company Valamar Riviera concluded an agreement with Erste & Steiermarkische bank to borrow €10mn for long-term investments.