EU-bound Croatia faces stagnation

The former Yugoslav republic is not bound for a Greek-style meltdown of public finances, as its public debt is below 50 percent of GDP compared to almost 120 percent in Greece, but nor is it heading for an economic rebound.

“If the government wants to do something, they have until the summer. After that we are effectively entering an election year, when nothing is ever done,” said Ante Babic of the Centre for International Development think-tank.

Regular parliamentary polls are due in late 2011.

The most pressing reforms sought by employers and analysts include urgent cuts in public spending, taxes and subsidies and a start to reforms of the public administration and labour market. The overall aim is to shift the economy from borrowing and spending towards production and exports.

“We are not going to fold like Greece, but without reforms we face a prolonged stagnation,” Babic said.

Vladimir Gligorov of the Vienna Institute for Economic Studies said unemployment, which hit a four-year high of 17.7 percent in January, would rise further without solid growth.

“EU membership will help. It makes available new funds and helps decrease the perceived risk, but it will not solve Croatia’s structural problems,” Gligorov said.

Capital still available
Katarina Ott of the Zagreb-based Institute for Public Finances, said the government could be lulled into inaction by the availability of capital on foreign markets, which it regularly taps to foot the budget deficit bill.

This year’s deficit is set at 2.5 percent of GDP, or roughly 1.2 billion euros.

“I am afraid things can carry on like this for a longer time. There is a lot of capital out there and investors actually like countries like ours, which carry a solid yield.”

Croatia’s credit default swaps are currently at 199.5 basis points, above fellow EU candidate Turkey at 163, but level with those of EU members Bulgaria and Hungary.

Zagreb is well ahead of other Balkan countries in terms of EU prospects but its socialist-era industry has collapsed and exports have dwindled, with the only major revenue boost coming from summer tourism on its pristine Adriatic coast.

“Another problem is that Croatia has little export potential apart from tourism, so even if external demand picks up, it may not help considerably,” Gligorov said.

The former Yugoslav republic, which hopes to join the EU in 2012, is unlikely to attract huge foreign investment in the next few years as its tax burden and labour costs are relatively high and incentives for investors are few.

Velimir Sonje of Arhivanalitika consultancy said the economy was set to return to growth in 2011, after a 5.8 percent decline in 2009 and a milder fall this year, but lack of reforms means that, even with EU membership in hand, growth will be lower.

“It will be much slower than in the past decade, when we had cheap capital and a huge construction and tourism boom, all of which is exhausted now. There will be no major green field investments and growth can only be driven by small and medium-sized firms,” he said.

Although conservative Prime Minister Jadranka Kosor announced recently that the government would “initiate one new measure to boost the economy every week”, analysts doubt the cabinet had the courage to tackle key reforms soon.

“There is not enough political will to have a go at structural reforms. The key here is reform of the public sector which spends way too much because all governments have pampered it to win votes,” said union leader Ozren Matijasevic.

However, he said large-scale social unrest was unlikely, judging by the farmers’ protests which took place at the start of March. Hundreds of farmers blocked roads with tractors in protest at plans to cut subsidies but eventually reached a compromise with the government.

Damir Kustrak of the national employers’ association (HUP) said HUP had impressed upon Kosor the need for urgent reforms.

“Now is our ‘to be or not to be’. The autumn is the end of story. That’s why we’re putting huge pressure [on Kosor] now.”