Croatia declared independence in 1991 from Yugoslavia and within one month, the nation was at war where upwards of 20,000 Croatians were killed in the following nine months during the Serb-Croat conflict. By 1994, Croatia’s first currency imploded in value as the cost of fighting the war destroyed the currency only after 3 short years in existence. The decade of the 1990’s was a time of great pain for Croatia’s 4.5 million citizens. From 1991 to 1995, Croatia was in the midst of a bloody Independence War with its former country, Yugoslavia (Serbia) against President Milosevic’s forces coupled with an ugly ethnic civil war between Serbs and Croats. The 1995 Dayton Peace Accord ended Croatia’s military conflict with Yugoslavia but Croatia was left with large infrastructure damage and a relatively new currency, the kuna. From 1989 to 1993, economic output in Croatia collapsed by 40 percent. Later in the 1990’s, the neighbouring Kosovo War greatly impacted the Croatian economy as the region was tarnished by foreign investors as a whole and Croatia fell back into recession in 1999 after three consecutive years of economic growth.
POLITICS: former President Tudjman died in December 1999 who was the architect of Croatia’s independence and democracy. After strongman ruler Tudjman’s time in power where he has been long accused of corruption, restricting free media and essentially governing with an authoritarian rule and an ideology of anti-West. Tudjman supported a protectionist platform as he mistrusted the European Union and the United States. In February 2000, the sea winds of change came to reality with the election of President Stipe Mesic representing the Social Democrats (SDP), a centre-left vision for Croatia with a leaning towards pro-Europe policies with access to larger markets for both capital and Croatian exports. On July 5, 2002, Prime Minister Racan in a political tactical move resigned triggering the collapse of the government although reappointed by President Mesic. The government has launched several economic and political reforms with the intention of moving Croatia closer to the European Union particularly after garnering NATO acceptance in May 2002. Next elections are scheduled for 2004.
ECONOMY: the economy is industrialized and it is only been since year 2000 that economic growth has returned after a decade of contraction. The government has privatization plans for several industy segments which will increase foreign investment. Remittances from Croatians living abroad are worth $100 million USD/year. Croatia home to an exquisite mainland ocean coastline of 1780 kilometres results in a big tourism beneficiary to the national treasury as Croatia is a popular sailing destination for many in Europe. Tourism started to show a strong rebound in year 2000 five years after the war, year 2001 tourism value estimated at $3.7 billion USD as tourism is a growing industry segment accounting for 16 percent of GDP. Major trading partners include Italy and Germany. Key Croatian industries include aluminum, chemicals & plastics, machine tools, metals, electronics, paper, shipbuilding and tourism. Previous high levels of defense spending during the 1990’s at an unsustainable 5 percent of GDP are declining thus easing up on budgetary constraints.
Economic Statistics
GDP as measured by purchasing power parity is at $36.1 billion USD (2001) or equivalent to $8,300 USD/capita. GDP as measured by expenditure market prices have the figure at $19.54 billion USD (2001) or GDP/capita at $4,403 USD. GDP growth 2003 is estimated at 4.2 percent, a modest improvement from 2002 at 4.0 percent and 2001 at 3.8 percent. The budget deficit is forecasted to fall to 5 percent of GDP for 2003, year 2002 at 6.2 percent down modestly from 2001 at 6.8 percent. Inflation for 2003 estimated at 3 percent, year 2002 recorded inflation at 2.2 percent and 2001 at 4.9 percent. The Croatian authorities have a goal of keeping inflation below 3.5 percent in order to maintain economic and currency stability. The current account is in deficit, year 2003 estimated at 3.2 percent, a slight improvement from 2002 at 3.6 percent, 2001 at 3.8 percent. However, the overall balance of payments is in surplus due to strong foreign direct investment ‘FDI’ levels and a surplus in the capital account in thanks to strong tourism numbers. Year-end 2002 debt to GDP is at 58 percent in thanks due to privatization receipts but the figure is increasing. Croatia has structural unemployment quite high at 23 percent.
POSITIVES: IMF approved stand by credit in the amount of $146 million USD in February 2003, buoyant domestic demand, high literacy rates, advanced telecommunication systems. CONCERN: increasing national debt levels, land mines scattered throughout the countryside, brain drain - many young well educated have left Croatia for better opportunities abroad.
BANKING SYSTEM: now mostly foreigned owned with extensive German investment within Croatian banks which has helped to increase confidence in the banking system. In addition, bank reform with industry privatization since 1999 has further stabilized the banking system since the domestic banking crisis of 1998-99 resulting from turbulence in the neighbouring Kosovo conflict with NATO and the Russian financial crisis at that time as well. During the 1990’s, upwards of $9 billion USD was stolen out of Croatia and ended up in capital flight with the monies sent abroad. Many Croatian political insiders were rewarded for buying and then bankrupting newly privatized Croatian companies. Gross official reserves at $5.7 billion USD (2002) representing a healthy 5 months of import coverage, this reserve position is projected to climb to $6.2 billion USD for 2003. Liquidity in the banking system is good, market interest rates are low at 1.5 percent. Monetary expansion is slowing in 2003 estimated at 5 percent.
REGIONAL: Serbia, Bosnia and Herzegovina, European Union ‘EU’, Russia
History of conflict in the Balkans region (Serbia, Kosovo, etc.) even including area countries of Albania and Macedonia. Immediate regional risk remains high due to deep divisions and ethnic divide coupled with border disputes. Criminal networks are in place within Croatia and Bosnia where many of former President Tudjman’s party loyalists now reside. Croatia as a World Trade Organization ‘WTO’ member since 2000 and is currently seeking EU membership. Croatia is a net energy importer with Russia as a major supplier of oil and natural gas.
KNOWLEDGE: the uncertain peace in the Balkans, still a question, held back economic growth within Croatia particularly during the war in the 1990’s and the region as a whole. Potential liability for Croatia includes monetary compensation for 250,000 ethnic Serbs who left the country during the war. In BI.C’s view of the future Balkan region, each of the former Yugoslav republics will see gradual normalization where democratic governments of each independent state will work together to increase trade and GDP growth for the region. Although ethnic risks remain, BI.C believes that this will not be enough of a downdraft to bring the region back to instability as witnessed in the early 1990’s where hyperinflation destroyed Croatia’s first currency within 3 years of inception. The region does a history of hyperinflations, Croatia in the 1990’s and 1980’s are recent examples although stability in the region is slowly increasing. Further regional instability and ethnic risk is limited, but it cannot be ignored.
CURRENCY: ISO symbol ‘HRK’, Croatian kuna. At time of review on February 22, 2003, the kuna had an exchange value of 7.99 HRK to 1 USD. As measured by purchasing power parity, the kuna is undervalued in the approximate amount of 15 to 20 percent versus the declining US-dollar (‘USD’), that is over the long term, the kuna will appreciate reaching an equilibrium value with the USD. The kuna follows that of a floating currency exchange rate regime. Since year 2000, the kuna has stabilized reflecting in Croatia’s strong economic performance from the end of the Kosovo conflict and the return of tourism.
CURRENCY HISTORY: the kuna was introduced in 1994. Previously, Croatia’s first currency in use since independence in 1991 was the Croatian dinar which imploded in value with the corresponding hyperinflation in 1993-94 at 1,500 percent resulting from the war. Historical valuations for the kuna include January 2002 at 8.45 HRK to 1 USD, year 2001 at 8.34, year 2000 at 8.27, 1999 at 7.11, 1998 at 6.36, 1997 at 6.1, 1996 at 5.43, 1995 at 5.23, 1994 at 5.99.
CURRENCY FORECAST: the kuna is stable and is forecasted to appreciate modestly versus the USD. By year 2007, there is a very good chance that Croatia will be admitted to the European Union and the Euroland euro will then replace the kuna as new national currency for Croatia. In order for this to happen, the EU is adivisng Croatia to clean up its corruption and money laundering difficulties that mostly arose during the 1990’s in order to be qualifed for EU accession. UPDATED: February 22, 2003
