Macro: COVID-19 Update Croatia: A longing called tourism

Ruling HDZ took a strong lead in preliminary election results. The focus of the new cabinet will shift to policies targeting measures to revive the economy.
The complete and/or partial closure of most European borders implies a strong decline in exports and imports of goods and services in Q2. All eyes are on the third quarter and the main tourist season, which will be crucial for the overall economic and budgetary performance. For now, we stick to our 2020 GDP forecast of an 8.5% yoy decline emphasizing that the forecasts are exposed to a significant negative risk. Investments are largely dependent on the ability to withdraw funds from EU funds, whereas government spending will no longer have manoeuvring space for such an expansionary stance.
The monetary policy remained fully committed to the stability of EUR/HRK. The expected and traditional seasonal kuna depreciation should not cross the line of 7.60. Expectations will especially hold true if it is confirmed that Croatia will enter ERM 2 soon. Our expectations are substantiated by positive statements of the ECB officials, based also on the results of the encompassing assessment of five Croatian banks and the last Convergence Report. On the other hand, the fiscal criteria, as we see it, as well as the institutional environment are the biggest challenge and a potential impediment for full introduction of the euro.
Inflation, after having increased in the first two months of the year, slowed down in March, April and May saw a negative value due to the strong impact of the drop in the energy prices

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.