COVID-19 Update Croatia: Autumn brings uncertainty - again

COVID-19 development: Since the beginning of July, the number of confirmed COVID-19 cases has begun to rise. Initially due to proximity to Bosnia and Serbia, which were hit hard in July, but also with the relatively high number of tourists in the country. However, part of the reason could be found in a more relaxed attitude of the public. Still, the development and management of the COVID-19 pandemic in Croatia is under control and, at least for now, we do not see a risk of escalation. The healthcare system remains stable and ready for a possible next wave of the pandemic.
Economic development: Following the higher than expected drop of the GDP in Q2 20 (-14.9% qoq, -15.1% yoy) as a direct consequence of the lockdown measures, the summer months brought some bottoming out. Due to the high reliance on tourism (over 20% of GDP) of particular interest were the results of the main tourist season. The preliminary (available) figures for July and the first half of August were solid. Considering the recent COVID-19 developments in many countries and the economic implications, the post-season will face another sharp drop of around 50% yoy. Other activities will gradually bottom out but the recovery, in our view, will be neither quick nor strong. Following the sharp drop in GDP in Q2 20 and increased negative risk we have adjusted our 2020 GDP forecast to -9.4% yoy (from 8.5% yoy), while the 2021 forecast improved to 5.1% yoy.
Fiscal policy implications: According to the national methodology a substantial increase in expenditures and a concurrent decrease in revenues resulted in a negative central government budget balance of HRK 16.7 bn. The Ministry of Finance estimates the impact of COVID-19 on the total budget to have reached HRK 21 bn so far. On the expenditure side the total cost reached HRK 11.2 bn while the revenue side is significantly reduced due to debt write-offs and significantly lower budget revenues.
Euro adoption: In addition to the focus on reviving the national economy, the introduction of the euro remains a strategic priority for the Government, which is set to be realized in 2023. Currently, the central bank and the Government are in the final phase of drafting the national plan for the changeover. The implementation of the plan might start in autumn. Among the economic criteria, the fiscal ones will be the most challenging towards the euro adoption.

This Research was produced and first published by Raiffeisen Bank International AG which is supervised by the Austrian Financial Market Authority and the National Bank of Austria.