Macro: COVID-19 Update Croatia: COVID-19 will take a huge toll

Corona containment measures: The government announced a two-week suspension of classes in schools and universities throughout Croatia. Public gatherings and sporting events are prohibited, work in restaurants and shops other than food and pharmacies is suspended. . A temporary ban on the movement of persons across border crossings is also in force. All Croatian citizens that come from abroad will be informed with the obligatory measure of staying quarantined for 14 days before entering Croatia. Growth outlook/sectoral impact: The spread of the virus has profound effects on the Croatian economy, particularly due to the high dependence on tourism, resulting in a strong negative impact on the pre-season with possible extension into the peak of tourist season, as the direct share of tourism in GDP is more than 11%. There is a direct impact on lower disposable income, consumer optimism and lower household consumption. Stopped seasonal employment will result in increased unemployment. The most affected sectors are accommodation, food and beverage services, recreation and entertainment, transportation and travel services. In addition, core industries (chemical, paper, textile, wood etc.) will suffer due to the demand and supply shock. Croatias main export markets are EU countries, particularly Italy and Germany (13% and 10% of total exports, respectively), so a strong decline in export of goods is inevitable at least in Q2. Demand shocks caused by the fear of infection will adversely affect the already weak manufacturing sector. Even if the recovery starts at the end of Q3, the losses from Q2 and Q3 will be hard to recover. Therefore, in our view, the economy will face a strong decline close to 5% yoy in real terms. Inflation and rates/monetary policy: Inflation will remain subdued widely under the influence of the drop of energy prices. Inflation will slow down comparing to 2019. High uncertainty has resulted in an extremely high volatility in the financial markets and an increase in FCY demand. The central bank intervened on the FX market in order to preserve the FX stability. The total amount of euros sold through four interventions between 8 March and 16 March reached EUR 1.6 bn. The central bank has announced structural operations for a five-year term and has also started purchasing HRK and EUR-linked sovereign bonds in order to boost liquidity/preserve market functioning and control refinancing costs. Government bond purchases show the severity of the current crisis. Fiscal policy: Significantly lower inflows into the budget will put pressure on the revenue side of budget with a huge package of fiscal policies and measures on the expenditure side of the budget. A general budget deficit and rising public debt are inevitable. On March 17, the government of the Republic of Croatia decided to implement the first phase of measures to assist the economy in the wake of the coronavirus epidemic. State budget will finance 100% of the cost of the net minimum wage for employment protection, covering around 400,000 jobs with impact of around HRK 4bn (1% of GDP). There will be a delay and/or instalment repayment of taxes and social security contributions, estimated at HRK 9-12 bn (2.3-3.0% of GDP).
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.