Croatia Business Forecast Report Q3 2013 - New Market Report

Boston, MA -- (SBWire) -- 06/15/2013 --We do not expect the recent souring of relations between Croatia and Serbia to threaten long-term international ties between the Balkan nations or regional stability. Rather, in the short term, we expect the Serbian government to use this event to deflect the electorate's attention from domestic issues.

We see the end of Croatia's banking row with Slovenia as an important step in the country's move towards full EU accession. With Slovenia removing its opposition to Croatia's EU membership bid in light of the deal, we reiterate our view that the country will become the 28th member of the union of July 1 2013, but stress that ongoing political instability will keep the country under close scrutiny for the next few years.

We reiterate our view that Croatia's fiscal outlook is negative for 2013, forecasting the deficit to widen to 4.2% of GDP in 2013, from 3.5% in 2012. We expect Croatia to miss its deficit target of 3.8% of GDP for this year, and believe weak revenues and difficulties reigning in government expenditure will weigh on the country's fiscal outlook for the next few quarters.

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The mild rebound in economic growth will be driven primarily by the country's accession to the EU, expected in 2013, as EU funds seep into the economy and investor sentiment improves. However, weak private and government consumption will continue to weigh on the economy's rebound, and we caution that risks to our forecasts are strongly weighted to the downside.

Major Forecast Revisions

We have revised down our forecast for real GDP growth to 0.1% in 2013 from 0.3% previously as a result of weaker than expected household consumption.

With recently released data showing a current account surplus of 0.1% of GDP in 2012, the first positive reading since data became available in 1999, we have revised our forecast for Croatia's current account deficit to be 0.7% of GDP in 2013 and 0.6% in 2014, from 0.8% and 1.0% previously

We expect the country to miss its recently increased deficit target of 3.8% of GDP this year, and have revised our forecast for the fiscal deficit to 4.2% of GDP, from 4.0% previously.

Risks To Outlook

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