Economic outlook deteriorates amid slashed public investments and more bleak private consumption expectations – GDP seen as contracting 0.8% in 2013. C/A reverted to positive region and expected to remain balanced. Key external risks remain deleveraging potentially gaining pace and fiscal discipline. Fiscal risks remain alive despite deficit target revision to 3.4% of GDP.
- After a 2% contraction in 2012, the economy is expected to maintain its negative zone in 2013, as the domestic demand outlook worsened courtesy of the government’s more modest investment in the labor market, putting additional pressure on consumption spending. Net exports are anticipated to maintain their positive tone. GDP has therefore been revised downwards to -0.8% (from 0%), delaying the expected modest recovery for 2014.
- Supportive tourism and solid-looking trade balance performance triggered additional C/A adjustment and marginal surplus on the FY12 level; similar performance is also anticipated in 2013-14. The financing side shows subdued FDI inflows and gradual deleveraging from the private sector side, while government debt issuance is working in the opposite direction. The funding mix therefore remains sensitive to market jitters and fiscal discipline
- The CNB maintained its accommodative stance, supporting hefty HRK liquidity and low MM rates – the steady exchange rate pattern has been supportive in that respect. We continue to see risks of significant tightening as limited in the near term, as we are expecting the exchange rate to maintain stability on seasonal pattern.
- After the S&P and Moody’s rating cuts, the government opted for a quick budget revision and a 0.5% of GDP slashed deficit target (3.4% of GDP). We see fiscal risks steaming from revenues side underperformance amid a more adverse economic environment and challenging expenditures target, i.e. we continue to see the deficit at 4.5% of GDP. Financing risks were mitigated by USD1.5bn sold on US market, with 2H13 expected to bring a test of market sentiment and policy creditworthiness.
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