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Croatia: 1Q C/A deficit narrows 29% y/y

Wed, Jul 1 2009, 15:02 GMT
by Alen Kovac

Erste Bank der oesterreichischen Sparkassen AG

• The 1Q C/A deficit landed in the expected region at EUR 1.8bn, declining a robust 29% y/y and bringing the 4Q MA current account deficit down from 9.4% in 4Q08 to 8% in 1Q09. As the trade balance figures suggested, the adjustment occurred, given the narrowing of the merchandise account deficit by 33% y/y to EUR 1.7bn. Imports were heavily hit by depleting domestic demand (-24% y/y), while exports performed somewhat better (-14% y/y). The service account, of secondary importance in 1Q, recorded a slightly higher surplus (ca. EUR 130mn), while tourism related inflows recorded a relatively mild 6% decrease in 1Q. On the other hand, the income account showed more negative trends, with the deficit widening by 34% y/y to EUR 418mn, as a result of the higher cost of debt repayment and stronger profit repatriation in the present environment. Current transfers also offered relatively little surprise, recording a 10% y/y lower surplus at EUR 200mn.
• On the financing side, net FDI moderated significantly (-64% y/y), thus covering just above 20% of the 1Q C/A deficit, while 4Q MA coverage declined from 72% to 67% in 1Q. The portfolio investments account recorded almost a EUR 0.5bn deficit, mainly as a result of the repayment of a government Eurobond in 1Q. On the other hand, other investments recorded a significant surplus (EUR 1.7bn), as a result of the modified bank FA/FL coverage ratio, allowing banks to withdraw a significant proportion of foreign assets.
• Overall, 1Q C/A met our expectations; thus, we continue to expect the C/A deficit in the region around 6% of GDP, in line with the real economy outlook and expected 4.5% GDP decline. The merchandise account should remain supportive in the coming quarters, given the continuing weakness in domestic demand, and with the lower commodity prices, should support the figures in nominal terms. While financing needs remain high, the so far stable refinancing and declining C/A deficit support a stable FX outlook, but still largely dependent on the external environment and budget performance. With risks related to the fiscal side and the CNB remaining clearly focused on a stable exchange rate, room for any monetary policy relaxation is very thin and unlikely.

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Published on  Wed, Jul 1 2009, 15:10 GMT