Croatia: Risk Assessment
Country Risk Rating
Business Climate Rating
- 35% of electricity from renewable sources, 40% imported
- Long coastline
- Oil and gas potential
- The country joined ERM II in 2020
- Support from EU funds
- High-quality infrastructure
- Dependence on tourism (25% of GDP), which has strongly suffered from the pandemic
- Private and public debt still high
- Institutional gaps: inefficient administration, health and justice, overlapping administrative levels, corruption
- Time-consuming and inefficient business insolvency procedure
- Low industrial diversification / lack of competitiveness
- High youth unemployment (24% in September 2020), low participation of women
- Emigration is taking away skilled labour, population is declining
Recovery lies ahead, but 2021 will not offset the pandemic’s impact
The Croatian economy will rebound in 2021 after a significant contraction recorded in 2020. Nevertheless, it is still strongly dependent on the tourism sector (25% of GDP), which is not likely to fully recover in 2021. Last year, Croatia had already suffered from a much lower inflow of visitors because of contracted demand for tourism services and restrictions in international travel. Despite the lifting of restrictions and a higher number of tourists in the summer months, the total number of tourist arrivals decreased by 63.4% in January-September 2020 compared with the same period of the previous year. Foreign tourists accounted for 82% of all tourist arrivals, so it was hard to compensate for those effects on the back of domestic travelers. Still, low demand for tourist services this year compared to a pre-pandemic period entails negative consequences for not only the sector’s employees but also for other sectors that cooperate with it, including agri-food, transport, and retail. Once the measures implemented to support the labor market (to the equivalent of about 3% of GDP) will fade out, households are likely to suffer from higher unemployment rates, especially among the young population that represents a bulk of the seasonal workforce. Furthermore, wage growth is expected to be modest in 2021. Growth of investments, which was already impacted by COVID-19, will recover sluggishly. This applies to both domestic and foreign investments, while public ones are set to increase thanks to infrastructure projects co-financed by the EU. Moreover, the World Bank facilitated a USD 200 million loans, and the EU dedicated EUR 684 million from its Solidarity Fund aimed at rebuilding Zagreb’s infrastructure after the March 2020 earthquake.
Public finances go in deficit
After recording budget surpluses in 2017-2019, Croatia’s public finances deteriorated significantly in 2020 due to the impact of a pandemic, with a strong economic contraction, lower proceeds from tourism (affecting VAT revenues), and measures aimed at protecting employment and businesses. The support measures included wage subsidies, tax deferrals or tax exemptions, access to financing, and the establishment of a short-time work scheme, totaling about 9% of GDP. In 2021, tax revenues are expected to increase thanks to recovering household consumption and will be driven by VAT proceedings as well as rebounding social contributions. Moreover, revenues will be boosted by the usage of EU funds. Simultaneously, public debt should decrease after the surge recorded in 2020, which was largely due to a sizeable drop in GDP.
In 2020, the current account balance, which had been in a surplus exceeding 2% of GDP in the last six years, was affected by a drop in services exports and a trade deficit in goods, leading it into a negative balance. Rebounding exports will result in the improvement of the current account balance, but growing imports and the slow recovery of tourism will maintain it in deficit in 2021.
Political stabilization and strained relations with neighbors
The Croatian Democratic Union (HDZ) won the July 2020 parliamentary election. It formed a government coalition with two liberal parties, namely the Croatian People's Party (HNS) and the Reformists, and with the support of eight ethnic minority members of parliament. The coalition has a majority by only one seat in the 151-seat Hrvatski Sabor (parliament). Before that, in the latest presidential election of January 2020, former prime minister and center-left candidate Zoran Milanovic defeated the conservative incumbent Kolinda Grabar-Kitarovic, by winning 52.7% of the vote. The opposition Social Democratic Party (SDP) backed Mr. Milanovic. At the international level, relations are strained with Bosnia and Herzegovina due to a number of political and geostrategic issues, such as the Peljesac bridge. Work on the latter, which will span Bosnia's maritime access in order to provide a road connection between the north and south of the Croatian coastline, is continuing with the objective to deliver in 2022. Nevertheless, economic ties between the two nations remain strong with high trade volumes, as Croatia is the second-largest foreign investor in Bosnia and Herzegovina.