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Croatia: 1Q08 BoP

Tue, Jul 1 2008, 13:03 GMT
by Alen Kovac

Erste Bank der oesterreichischen Sparkassen AG

The 1Q current account deficit amounted to EUR 2,488mn, widening on an annual basis by 23% and coming in slightly above our expectation (EUR 2.4bn). As the trade balance suggested, the pressure came from the merchandise account, as the deficit hit a new high of EUR 2.55bn, thus increasing by 18.2% y/y. Exports recorded only +8.7% y/y in nominal terms, while imports added 13.6% y/y. The service account was practically flat y/y, posting a EUR 100mn surplus. As expected, it failed to have an offsetting effect on the merchandise account deficit increase in 1Q. The income account posted an approx. EUR 260mn deficit (+23.6% y/y), surprising marginally on the upside and confirming pressures on the outflow side, as it increased by 13.1% to EUR 590mn. Current transfers confirmed their moderating trend, as the surplus amounted to EUR 224mn, down 9.6% y/y.

The financing side offered the expected developments, as FDI inflows – after a strong performance in 1Q07 – halved, recording a EUR 688mn inflow, in line with the expectations that a lower proportion of the C/A deficit would be covered by FDI inflows in 2008. Portfolio investments accounted for EUR 477mn, while financing via other investments accelerated to EUR 1,686mn, thus showing increasing dependence on debt-creating financing.

The 1Q08 C/A figures confirmed a continuing deterioration of the external balance, supporting a widening of the C/A deficit in 2008; currently, we see the C/A deficit in the 9+% of GDP zone. Merchandise account trends are expected to remain negative, as, besides the solid import growth in real terms, the nominal figures should be negatively influenced by the upsurge of energy and food prices. The income account is expected to put additional pressure on the C/A performance. The service account should moderate the pressures to some extent, but fail to offset the rising imbalances on the merchandise account. On the financing side, we expect solid FDI inflows, still significantly below the robust 2007 level. Nevertheless, we do not expect problems on the financing side or more severe pressures on the exchange rate.

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Published on  Tue, Jul 1 2008, 13:10 GMT