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In anticipation of new Government (2)

17.10.2016 13:04:00 | Autor/Izvor RBA analitičari, Croatia

The week behind us was actually dominated by politics. In line with our expectations, the HDZ leader Mr. Plenkovic was named Croatia’s PM-designate, after he collected 91 supportive signatures of MPs (out of 151). As scheduled, the first session of the new Parliament was held on Friday and during the week ahead we expect the new Croatian Government to be formed and start to work effectively on much needed structural reforms. A stable majority paired with improved macroeconomic indicators certainly represent a favourable start position for continuation of fiscal consolidation and structural changes. In this context we expect that the upcoming EDP report and Q22016 budget data will confirm better-than-expected fiscal outcome, strongly influenced by favourable tourism results as well as the fact that technical government was limited in terms of higher budget spending, said in Raiffeisen Weekly Report.

Consolidated General Government (ESA 2010)

Sources: CNB, CBS, Economic RESEARCH/RBA

Amidst an environment of negative inflation rates (which was confirmed by recent PPI and CPI releases) the positive impact on consumption could be sustained by
alleviating the burden on personal income, thus exerting a positive impact on GDP as well. However, in order to achieve sustainable economic growth, a stable government must play a crucial role in the long run by emphasising reforms and meeting the needs of the private sector.

CPI and PPI, annual changes

Sources: CBS, Economic RESEARCH/RBA

As for financial markets, after the pension pay-outs we saw restoration of HRK liquidity in the system, with daily excess at around HRK 6bn, which is enough for a new period of bank’s reserve requirements to be maintained. Money market interest rates remained at the current low levels (O/N ZIBOR stood at 0.66% while 3-mth and 12-mth interest rates remained at 0.88% and 1.30% respectively). The CNB’s regular weekly repo reverse auction brought some increased bank demand and resulted in the HRK 540mn of accepted bids with unchanged fixed repo rate at 0.30%.

Reverse repo auctions

Sources: CNB, Economic RESEARCH/RBA

On the FX market, a slow upward trend of the EUR/HRK, which dates back to mid-September, has continued. A calm week on the market is expected to continue during the week ahead hence the EUR/HRK could stay within the range 7.50 - 7.53 kuna per euro. However, as the end of year approaches, we anticipate EUR/HRK should face a slight upward movement supported by increased import activity. On the other hand, improved macroeconomic and fiscal performance could be supportive to HRK therefore there is a risk that the forecasted average 2016 level of 7.60 might fall short. Regarding local bonds the low liquidity and lack of papers are still prevail in the domestic bond market trading. Most of domestic bonds recorded only a slight increase in yields on a weekly level; however, we do not expect any significant changes on the market in the week ahead. As expected, Croatian Eurobonds followed regional developments and the week ended with increased yields (approximately by 0.06% - 0.18% on a weekly level). However, the Croatian risk premium measured by 5-y CDS (USD) continued to oscillate slightly above 200bb, positively affected by improved fiscal metrics as well as the more stable political environment.

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