The focus of the week was absolutely on the new Government that was confirmed by 91 MP’s votes in favour (out of 151) thus implying that Croatia has finally entered a more stable political environment. The presented Government plan for the next four years offers a comprehensive tax reform (with main focus on reducing the tax burden), institutional improvements to improve the business environment, and a public sector reform through greater fiscal responsibility and better utilization of EU funds. Therefore, we will not be surprised by a mighty positive response from the investment community and markets. On the other side, experience has showed that well-prepared programs do not necessarily mean successful implementation of reform measures. Therefore, Croatia’s risk premium will remain above the CEE region peers, thus clearly indicating that winning back the confidence of investors strongly depends on the Government‘s plan execution. Still, the above-the-expected economic recovery and improved fiscal metrics represent a good starting point towards a stronger implementation of reforms already in the first year of the Government mandate, said in Raiffeisen Weekly Report
Deleted from registrated unemployment
Sources: HZZ, Economic RESEARCH/RBA
The latter could be confirmed by the upcoming fiscal data for Q2 2016, which will be published by Eurostat in accordance with the ESA2010 methodology. Besides the favourable revenues in H1, the record high tourist season also brought a positive spill-over effect on the rest of economy, thus the upcoming registered unemployment rate for September might stay at the level of 13%. The latter is indicated by a further reduction of the number of unemployed persons in September. Also, gross and net wages for August are set to be released next week so we expect that the positive real growth of average wages could continue due to negative inflation rates on annual level.
Registrated unemployment rate
Sources: CES, Economic RESEARCH/RBA
As for the FX market, EUR/HRK remained stable hovering around 7.51 kuna per euro. Calm days with seasonal mild depreciation pressures on the domestic currency is expected to continue during the week ahead. Coming closer to the end of the year, EUR/HRK should face a slight upward movement supported by import activity. Still, we see some risks that the forecasted level of 7.60 might fall short. Namely, HRK continues to find support in FCY inflows from the prolonged tourist season, demand for HRK loans, solid performance in fiscal and C/A outcome, and eventually in the banks’ net positive international position. Regarding local bonds, the investors’ focus remained on the pure kuna issues where the most trading took place on the longer end of the curve. As of Croatian Eurobonds, overall the outcome of the elections brought a fairly positive reaction in the markets. Croatia’s sovereign risk, as measured by its USD Eurobond spread, fell down from almost 340bp at the end of June to just 214bp early October. Similarly, a spread between Croatia’s EUR and Portugal 5-year sovereign zero-coupon yields narrowed down from 100bp to 50bp during July-September period. Croatia sovereign Eurobonds managed to outperform nearly all CEE peers with a +3.3% price return in the USD segment. However, strong market performance might indicate a positive risk praemia reduction. On the other hand, the positive dynamic of economic growth and small steps towards debt reduction could help in winning back the confidence of rating agencies and investors.
Consolidated General Government (ESA 2010)
Sources: CNB, CBS, Economic RESEARCH/RBA