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Croatia: 3Q Balance of Payments

Fri, Jan 2 2009, 14:11 GMT
by Alen Kovac

Erste Bank der oesterreichischen Sparkassen AG

3Q C/A surplus narrowed 11% y/y

Current account surplus in 3Q08 stood at EUR 1.85bn, hence confirming poor balance of payments trends and being 11% y/y lower. As expected merchandise account only confirmed negative monthly trade balance figures with deficit reaching EUR 2.7bn (+18% y/y). Exports accelerated with respect to 2Q growing 13% y/y, while imports maintained rather strong 16% y/y pace therefore imbalanced widened further. Traditionally service account in 3Q recorded strong surplus given the tourist season related inflows, thus surplus amounted for EUR 4.6bn or 6% y/y higher being supported by slightly better than expected inflows side (+8% y/y). Income account performance also expectedly showed signs of deterioration (EUR 262mn deficit) as outflows recorded 21% y/y increase triggered by higher cost of debt repayments and profit repatriation activity. Current transfers remained flat posting EUR 259mn surplus and covering for the income account deficit. 1-3Q08 current account deficit (EUR 2.5bn) widening by 88% y/y confirmed widening external imbalances. 4Q08 is not expected to bring significant changes as we anticipate continuation of pressures on the merchandise account, thus overall we leave our 2008e C/A practically unchanged at 11% of GDP. In 2009 we expect that pressure on the merchandise account would ease given the deteriorating domestic demand and favorable oil prices trends, though exports dynamics would also come under increased pressure given the unfavorable international environment development. Current account deficit narrowing would be to great extent dependant on the services sector performance as at present uncertainties related with tourist sector performance in 2009 remain high. Overall we see C/A deficit hopefully entering single-digit region again.

On the financing side 4Q MA FDI coverage of current account deficit (59%) continued to decline given the 59% y/y FDI inflows decline in 3Q. Debt creating financing also traditionally declined in 3Q by close to EUR 700mn. 4Q balance of payments is expected to bring intensified FDI inflows given the Hungarian MOL acquiring additional stake in national oil company INA. Also given declining deposit base in course of 4Q banking sector debt creating activity intensified thus 4Q financing side would look quite comfortable. Still 2009 brings some uncertainties as FDI inflows are expected to further weaken. Also debt creating financing is expected to be affected by the constrained access of the corporate sector to the international markets and tighter lending policies. Hence financing significant current account gap would be challenging and FX reserves stock would come under pressure with CNB pursuing stable exchange rate target. reserves

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Published on  Fri, Jan 2 2009, 14:13 GMT