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S U P P O R T E D B Y T H E C R O A T I A N C H A M B E R O F E C O N O M Y pv pvinternational international Croatian Business & Finance Weekly Established in 1953 Monday / 19 th December / 2011 Year V / No 0179/0180 www.privredni.hr SURVEY OF CROATIAN BUSINESS EXPECTATIONS 2012 DATA, ANALYSES AND COMENTARIES 2008 2009 2010 2011 Vlado Smud, Darko Buković D uring 2011 the economy revealed its resilience and ability to survive within a framework of increasingly dif- ficult circumstances. Neverthe- less, the situation is becoming dire, illiquidity is increasing, administration stifling and busi- nessmen lack internal energy and reserves to operate. It is the turn of the government – according to businessmen responding to the traditional questionnaire on business expectations conducted by Privredni vjesnik for the next year. 442 companies agreed to par- ticipate in the survey. This figure represents less than 0.5% of the total number of companies that have submitted their final reports for 2010; their share of total in- come accounts for 10.3% and their nett profit is 8.8%, whilst their share of total number of em- ployees is 9.3%. Financial indicators in companies participating in the survey were used as a representative sample for the assessment of answers to certain questions, weighing the financial strength of each com- pany. Companies have been classified into several groups in order to provide a deeper insight into dif- ferent viewpoints –according to size or field of activity, as well as by location (North-West Croatia; Middle Croatia; Eastern (Panno- nian) Croatia; Adriatic Croatia). Companies included in the tra- ditional Top 400 Companies Privredni vjesnik list for 2011 comprised a separate group. Nevertheless the outlook for 2012 is deemed positive Uncertainty is the only certainty Reduction of taxation and mandatory payments and urgent need to deal with illiquidity are the crucial priorities; businessmen need authorities’ assistance 2

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Page 1: PV International 0179/0180

S U P P O R T E D B Y T H E C R O A T I A N C H A M B E R O F E C O N O M Y

pvpvinternationalinternationalCroatian Business & Finance WeeklyEstablished in 1953Monday / 19th December / 2011Year V / No 0179/0180www.privredni.hr

SURVEY OF CROATIAN BUSINESSEXPECTATIONS 2012

DATA, ANALYSES AND COMENTARIES2008 20092010 2011

Vlado Smud, Darko Buković

During 2011 the economy revealed its resilience and ability to survive within a

framework of increasingly dif-ficult circumstances. Neverthe-less, the situation is becoming dire, illiquidity is increasing, administration stifling and busi-nessmen lack internal energy and reserves to operate. It is the turn of the government – according to businessmen responding to

the traditional questionnaire on business expectations conducted by Privredni vjesnik for the next year. 442 companies agreed to par-ticipate in the survey. This figure represents less than 0.5% of the total number of companies that have submitted their final reports for 2010; their share of total in-come accounts for 10.3% and their nett profit is 8.8%, whilst their share of total number of em-ployees is 9.3%.

Financial indicators in companies participating in the survey were used as a representative sample

for the assessment of answers to certain questions, weighing the financial strength of each com-pany.

Companies have been classified into several groups in order to provide a deeper insight into dif-ferent viewpoints –according to size or field of activity, as well as by location (North-West Croatia; Middle Croatia; Eastern (Panno-nian) Croatia; Adriatic Croatia). Companies included in the tra-ditional Top 400 Companies Privredni vjesnik list for 2011 comprised a separate group.

Nevertheless the outlook for 2012 is deemed

positive

Uncertainty is the only certaintyReduction of taxation and mandatory payments and urgent need to deal with illiquidity are the crucial priorities; businessmen need authorities’ assistance

2

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2.31 average evaluationGeneral economic conditions were rated by scores on a scale of 1 (worst) to 5 (best), whilst the final score for the general economic situation has slightly exceeded last year’s results, now standing at 2.31.Small and medium sized com-panies in the services sector have given an average score of below 2, whilst companies situ-ated in Adriatic Croatia opted for the harshest economic rating of 1.7%. According to companies in the construction sector and the processing industry, the general economic situation has been rat-ed at 2, whilst the Top 400 Com-panies assessed it with a score of 2.39. Large companies, North-Western Croatia and the City of Zagreb ranked it below the aver-age score of 2.4 and 2.5, whilst companies in the trade sector assessed the general economic situation with the most positive average score of 2.55.

Economic growth the same as for 2011Business expectations regarding economic growth in 2012 indi-cate a satisfactory awareness of the economic environment and current situation. The contention is that growth will remain on a par with 2011. Zagreb-based

On a scale of 1 -5 how do you evaluate thegeneral state of the economy in 2011?

1 2 3 4 5

9,08

39,28

51,45

0,000,19

Average

2,31

2011 total economic growth whencompared with 2010, will be:-

muchlarger

slightlylarger

approximatelythe same

lightlysmaller

muchsmaller

0,00

42,60

36,61

5,35

15,44

11,23

54,89

30,28

1,54 2,06

The effects of the crisis on yourcompany in 2012 will be:-

easily &successfully

overcome

more or lessovercome

try toovercome

barelyovercome

extremelyhard to

overcome

0,16

38,68 38,78

17,87

4,50

Investment & doing businesscircumstances in 2012:-

muchimproved

slightlyimprovedostati

about thesame

slightlyworse

much worse

32,14

2,79

22,26

35,93

6,88

In 2012, your company will deal withthe crisis:-

increaseproduction/

sales

changeproductionprocesses

reorganisebusinessmethods

reduceexpenditure

reduceoperatingexpenses

1,00

34,39

56,65

6,751,21

Negative influences on your businessin 2012:-

very large remarkable acceptable small minimal

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www.privredni.hrBusiness & Finance Weekly 3

companies, companies in the trade sector, those in services and the Top 400 Companies are con-sidered slightly optimistic, ac-cording to their consideration of the possibility of growth in 2012 to slightly exceed that of 2011.

Adriatic, North-Western and Middle Croatia, as well as me-dium-sized and large companies in the processing industry expect little or no change in economic growth. Only small companies, particularly companies in con-struction, are expecting weaker economic growth, consequently implying the negative trends from 2011 will persist. The larger the construction company, the deeper the level of pessimism.

Recovery attainableBudgetary and fiscal cuts brought about by the crisis and recession are still impacting; the economic environment, particularly in Eu-rope and the Eurozone is becom-ing increasingly complex, yet over half of those responding (55%) suggest that recovery is most probably attainable. They claim they do not have much choice. The most optimistic are those in the processing industry (60.38% with a positive attitude regarding recovery from the cri-sis) and the Top 400 Companies (10.4% will manage to recover successfully, revealing their re-silience and preparedness, whilst 60.2% will recover quite suc-cessfully). 38.6% of construction companies have stated they will face challenges, whilst 35.4% ex-

pect a successful recovery. Nev-ertheless, 20% of companies in construction, employing around 2,000 staff, anticipate recovery will be arduous or extremely ar-duous.

Business conditions probably remain unchangedBusinessmen do not expect con-siderable changes in business conditions, irrespective of the high expectations from the new government and its preliminary moves. 39% of businessmen (employing around 36,500 staff) have pronounced such an opin-ion, whilst 38.7% (with 26,500 employees) believe business con-ditions might slightly improve. 17.8% (employing around 13,600 staff) suggest a slight worsen-ing in investment and business conditions. Merely 8 of 438 (or 0.16%) companies answering this question expect a significant improvement in business condi-tions. Privredni vjesnik hopes their expectations will be ful-filled.28.3% of companies located in Adriatic Croatia expect condi-tions approximating to those in 2011, 28.9% anticipate a slight improvement, whilst 31.1% see a slight worsening of business conditions. 11.5% companies lo-cated in that region anticipate a serious worsening.50.4% companies in construction believe business conditions will remain the same, 24.4% expect a slight worsening, whilst 14.8% believe they will witness a seri-ous worsening. Hence, 40% of construction companies expect a general worsening of conditions.

How companies will overcome the crisis35.9% (with 34,500 employees) of 433 companies answering

this question opted for lowering production costs as a way out of the crisis; 32.1% (with 27,500 employees) will tackle the crisis by increasing market position-ing; 22.2% (with some 20,000 employees) opted for business reorganisation. 6.9% of compa-nies will slash their operating ex-penses as a way out, whilst just 2.8% will resort to alterations in their product range. Similar solutions and similar percentage points were recorded amongst large companies, the City of Za-greb, North-Western Croatia and the Top 400 Companies. Companies in both trade and con-struction gave the least number of answers to this question, stat-ing that it is impossible for them to give an overview of different measures they will need to im-plement to overcome the crisis. Over half of companies in trade are primarily reducing produc-tion process expenditure, whilst 20.1% will resort to business reorganisation, with 18.3% in-creasing their market position-ing. Business reorganisation is the most popular option amongst construction companies as an exit strategy.

Crisis stifling construction companiesIn 2011 most businessmen ex-pected considerably adverse ef-fects of the crisis on their compa-nies and the survey for this year revealed these estimates as accu-rate and a successful method of tackling adverse effects. The re-sults for this year and a slight im-provement should be interpreted consequently. Hence, 56.6% of companies (with 39,400 employ-ees) expect to easily and success-fully overcome any adverse ef-fects, whilst 34.4% (with 30,400 employees) anticipate extreme difficulties in overcoming these

adverse effects. Companies in processing indus-try (57.5%) forecast similar; 34% will find it extremely difficult to overcome the adverse effects of the crisis, whilst the Top 400 Companies (61.8%) will manage to overcome the crisis effects, with 31.4% anticipate having serious difficulties in overcom-ing the crisis. Of 233 small com-panies, 42.1% stated that they expect to successfully overcome the effects of the crisis on their business activity and their em-ployees, whilst 41% suggest they will be faced with difficulties in overcoming the crisis. Unfortunately, the crisis has not loosened its grip on the construc-tion sector thus far and as a result 7,000 employees in this sector anticipate the extremely adverse effects of the crisis to persist.

Taxation and workforce contributions unchangedReducing the level of work and workforce contributions would considerably assist businessmen in exiting the crisis; nevertheless all those responding assessed taxation and workforce contri-butions will remain unaltered. 78.2% of companies responding do not anticipate alterations in tax regulations. Only 9.8% expect a slight increase, whilst 11.2% an-ticipate a slight decrease in taxa-tion and contributions.Over 80% of companies in services sector, Zagreb-based companies, companies in trade, North-western Croatia, the Top 400 Companies, as well as 75% of the Adriatic Croatia-based companies, medium-sized entre-preneurs, the processing industry and the construction sector sup-port the supposition that taxation policy will remain unaltered.

0,299,84

78,27

11,200,40

Your views on tax and contribution in 2012 will be:

much higher

slightly higher

same little less much less

0,876,46

76,26

11,914,50

Your corporate liquidity in 2012 will be:

much better slightly better

about the same

little worse much worse

Construction industry in 2012 will face more arduous circumstances than 2011

4

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4 Privredni vjesnikYear V No 0179/0180

Stagnating liquidity againThe assessment of liquidity for the forth-coming year shows little change. 76.2% of companies assume there will be no altera-tion, whilst 11.9% forecast a slightly more turbulent situation, with 6.4% anticipating a slight improvement. Expectations in other groups reveal a remarkable similarity.Adriatic Croatia-based companies revealed a slight level of pessimism in their expecta-

tions where 60.3% (with 9,500 employees) perceive the situation to remain unchanged. 18.7% (with 3,500 employees) expect a slight worsening, whilst 11.9% companies employing 900 staff opine liquidity will be much lower than in 2011. Companies in the construction sector anticipate a much more

arduous situation. 38.8% do not expect any changes, as opposed to 22.5% anticipat-ing slightly negative changes and 24.8% forecasting a considerably lower level of li-quidity. Regarding business expectations in specific areas of operation, there has been a significant increase in the number of compa-nies not expecting changes (currently 74.9% employing nearly 60,000 staff) whilst over 16.9% anticipate a slight worsening. 6.3% of companies with 5,800 employees anticipate a slight improvement. Similar expectations regarding specific areas of operation have been recorded in other respondent groups but with several exceptions. In addition to 53.1% of companies expecting no sig-nificant changes, the number of companies expecting a slight worsening now stands at 42%; in Adriatic Croatia it has risen slightly. In addition to 63.4% of construction compa-nies expecting no alterations, some 32.7% of companies consider the construction indus-try is about to see a slight worsening through 2012. 66.1% of companies based in Middle

One half of companies and exporters anticipating increased

exports

3,65

37,27 35,86

20,38

2,84

NUMBER OF EMPLOYEES

muchhigher

slightlyhigher

about thesame

slightlyless

much less

2,77

59,30

14,41

22,31

1,21

NETT PROFIT

muchhigher

slightlyhigher

about thesame

slightlyless

much less

12,46

54,62

23,61

8,70

0,60

TOTAL INCOME

muchhigher

slightlyhigher

about thesame

slightlyless

much less

4,66

53,15

36,64

5,170,38

EXPORTS

muchhigher

slightlyhigher

about thesame

slightlyless

much less

0,78

43,4047,86

7,160,80

IMPORTS

muchhigher

slightlyhigher

about thesame

slightlyless

much less

In 2012 your company plans toachieve:-

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www.privredni.hrBusiness & Finance Weekly 5

and Eastern (Pannonian) Croatia expect a similar situation, whilst 29.8% forecast a slight worsening.

Exporters persistence340 of the 442 participating indicated their export-import ratio for 2011 over 2010. A lowly 1.1% of companies (with 1,200 em-ployees) revealed a significant increase in imports, whilst 24.1% with 16,300 employ-ees expect a slight increase in imports. Simi-lar results have been announced by 67.3% companies employing 42,200 staff. A slight drop in imports will be achieved by 3.6% of companies (4,500 employees), whilst 2.7% of companies (3,000 employees) anticipate a considerable decrease in imports. 4.6% of companies anticipate a significant increase in exports in 2011; 36.1% (24,800 employees) expect a slight rise in exports, whilst 44.8% (26,100 employees) forecast exports to be on par with 2010. 11.7% of companies (6,900 employees) anticipate exports will decline slightly, whilst 2.6% (2,400 staff) expect

a significant decrease in exports. 2.9% of companies are planning considerably higher export-import coverage, 27.4% anticipate merely a slight increase, whilst 52.7 % are expecting approximately similar proportions of exports-imports. A slightly worse situation is expected by 14.8% companies, whilst 2% forecast significantly lower exports-imports. Export revenue is expected to be on a par with 2010 in 46.2% of companies, whilst 34.8% perceive a slight increase. 55.1% of companies in the processing industry expect approximately similar levels of imports with 37.4% anticipating a slight increase. In paral-lel, 66.25% expect a slight increase in exports for 2011, whilst 6.5% anticipate significantly superior results. 17% of companies expect approximately similar exports levels, whilst 8.7% expect a slight drop. Export-import coverage is deemed positive, since 49.5% of companies are announcing improvements, whilst 31.9% anticipate approximately simi-lar proportions as for 2010.

R&D

muchhigher

slightlyhigher

about thesame

slightlyless

much less

4,79

40,2344,28

7,353,35

Your estimation of company investmentin 2012 compared with 2011UPGRADING CAPACITIES

muchhigher

slightlyhigher

about thesame

slightlyless

much less

16,98

43,22

26,33

10,06

3,40

6

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63.1% of companies are an-ticipating an increase in export revenue, whilst 20.3% are aim-ing for results on par with 2010. Middle and Eastern (Pannonian) Croatia also pronounced a posi-tive export-import outlook. 60.3% of companies are planning simi-lar levels of imports as for 2010, 15.8% are anticipating slightly lower levels, whilst 9% perceive significantly lower imports. Con-currently, 21.4% are planning a soar in exports, 37.65 a slight in-crease, whilst 24.4% are expect-ing approximately similar exports. A slight decrease in exports is ex-pected by 13.6% of regional com-panies. These results should result in an improved export-import

ratio. Significantly higher export revenue has been announced by 19.5% of companies (2,200 em-ployees), slightly improved reve-nue by 36.4% (3,100 employees), whilst approximately similar ex-port revenue level is expected by 30.7% companies (2,500 employ-ees). A slight decrease is expected by 10.5% of companies (900 employees). Companies in the services sector are also anticipat-ing slight positive results. 87.8% believe they will achieve approxi-mately similar imports, 56% are anticipating similar exports, with 36.7% expecting more favour-able exports results with 43.6% are announcing an increase in export revenue. Trade is expected

to achieve approximately similar (76.6% companies) or slightly higher (20.1%) imports, remain-ing the same (81.5%) or slightly lower (13.5%) level of exports. Subsequently, the export-import ratio is not expected to signifi-cantly differ from 2010. Hence, according to 80.4% respondents, export revenue is expected to be approximately similar to 2010.66.6% of companies in the con-struction industry anticipate im-ports similar to last year, with 8.6% expecting slightly lower and 20.2% planning to reduce their imports significantly. 20.3% of construction companies have announced a considerable slump in exports in 2011, with 22.6% of companies facing slightly lower exports. 32.3% of construction companies are expecting a slight increase in exports, whilst the ex-port-import ratio is deemed to be slightly optimistic according to 38.6% of company expectations. Nevertheless, it is currently diffi-cult to speculate on final results in the construction sector over 2010 regarding expected export revenue. 21.1% of companies are expecting significantly lower ex-port revenue, 20.8% slightly low-er, 19.3% approximately similar, 31.8% slightly higher and 6.8% significantly higher.

In 2011 most businessmen expected considerably adverse effects of the crisis on their companies and the survey for this year revealed these estimates as accurate

Priority ranking of decisions imperative for solvingthe crisis in 2012

11,33

15,18

21,92 21,36

13,10

17,10

cheaper lendingto entrepreneurs

significantreduction

in stateadministration

reduced taxationand mandatory

payments

improveliquidity

more rapidliquidationprocesses

attract foreigninvestment

Businessmen have clearly ranked economic prio-rities to assist the ailing economy in exiting the crisis. Nevertheless, it is not a landmark event as they have stated similarly several times, surpri-singly without government assistance. 436 com-panies of 442 participants in our business expec-tations survey ranked the priorities in exiting the crisis as follows:Lower taxation and mandatory payments

(21.9%)Tackle illiquidity (21.7%)Attract foreign investment (17.1%)Significant reduction in state administration

(15.1%)Make the decision on determining the duration

of legal proceedings in bankruptcy (13.1%)Cheaper lending to entrepreneurs (11.3%)

56 companies amongst the Top 400 Compani-es opted for a similar percentage ranking. Accor-

ding to the analysis, there is a universal attitu-de on the first two crucial priorities on the way to exiting the crisis irrespective of the sector or the group of respondents, subsequently forming two sub-groups to support them as crucial prio-rities: lower taxation and mandatory payments and tackling illiquidity. Tackling illiquidity is the critical priority in Middle and Eastern (Pannoni-an) Croatia (24.5%), small businesses (24.5%), companies in the services sector (24.1%), medi-um-sized companies (23.4%) and Adriatic Croa-tia (21.7%).On the other hand, lower taxation and mandatory payments are a priority for trade (23.5%), City of Zagreb-based companies (23.1%), large compa-nies (22.9%), North-Western Croatia (22.7%), the Top 400 Companies (22.5%) and construction companies (19.2%). Nevertheless, a comprehen-sive package of the six priorities would be the op-timum solution for exiting the crisis.

Priorities unchanged – decisions awaited

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Europe, USA and Croatia will certainly not see high economic growth in 2012.

In 2012 we will merely witness a continuation of the current trends, particularly in Croatia. This implies stagnation and con-sequently, a growth rate exceed-ing 3.5% is a requirement for exiting the crisis and reaching sustainable growth considering the current debt burden.Hence, 2012 will not witness sig-nificant changes. Croatian prob-lems are of a structural nature and subsequently they cannot be solved in the course of one year.Nevertheless, the year will not be lost if we use it to develop a sustainable growth plan. Sub-sequently, social consensus on a development strategy is nec-essary. In addition, we need to restore confidence in our own potential, start implementing the indispensable structural reforms and reaffirm our industrial poli-cy, whilst simultaneously harmo-nising monetary and fiscal policy with the goals of that develop-ment policy, focusing on produc-tion, employment and exports. If we also bear in mind the referen-dum on Croatian EU accession, 2012 could be the year of a new beginning.

Declaration of a state of prosperityThe Croatian Chamber of Econ-omy has produced and published the Declaration of Croatian soci-ety and state of prosperity, aiming to use the immense comparative advantage of Croatian society in its geo-strategic position, as well as her natural richness and cul-tural heritage to enhance compre-hensive social advancement based upon freedom, peace and political stability and in accordance with ethical and aesthetic principles.

A willingness to use the unique geographic-economic position of Croatia as a meeting point of multipolar world interests will en-able us simultaneously to pursue and achieve our own interests.Public debt in Croatia and its budget deficit are currently not a matter of primary concern; nev-ertheless the dynamics of a wors-ening situation regarding public debt and the level of gross exter-

nal debt require our full attention instantly. At the start of the world economic crisis, at the time when it was not yet considered a matter of seri-ous concern for Croatia, I warned economists at the Croatian Cham-ber of Economy Assembly to be prepared for several years of arduous business activity. I was consequently referred to as a ‘catastrophist’. Currently, lead-ing world professionals are warn-ing of the imminent danger of the prolongation of the crisis and

long-term stagnation in economic growth. Hence, German Chancel-lor, Angela Merkel stated a com-prehensive recovery from crisis in Europe will take at least 10 years, whilst the IMF Head, Christine Lagarde, warned during her visit to Beijing, that the global econo-my could witness a “lost decade”.

Anaemic demandCroatia is certainly most directly interested in the fate of the Eu-rozone and the European Union, since it trades most of its goods

and services in that area and is to become a full member of the EU. The Croatian economy is about to face anaemic demand for its goods and services from the area in the forthcoming years and during 2012 in particular. In addition, a high loan rate regime will persist, since investors will pay increasing attention to risk assessment.More importantly, we lack a clear long-term vision, a development concept in order to clearly focus on sustainable development and the social state we aim to estab-lish. We lack the awareness of our own responsibility for our person-al prosperity and the prosperity of our country, as well as the belief in our own resources, the strength and the potential to ensure high, stable and sustainable economic growth for the long-term in ac-cordance with world trends. It is extremely difficult to be op-timistic regarding 2012 bearing in mind the current global world trends, sovereign debt crises in the Eurozone and our own struc-tural weaknesses. During the current turbulent times, it is im-perative to persevere and use our depth of knowledge to co-operate and achieve social consensus on the crucial issues regarding our future.

NADAN VIDOŠEVIĆ, PRESIDENT, CROATIAN CHAMBER OF ECONOMY

Perseverance and deep knowledge imperative

Growth rate exceeding 3.5% necessary for exiting the crisis and reaching sustainable

growth considering the current debt burden

An opportunity to reach sustainable growth

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8 Privredni vjesnikYear V No 0179/0180

After three years, dur-ing which the Croatian economy transformed

from recession into stagnation, the general public still feels the crisis is a temporary phenom-enon and that recovery will soon follow when the growth of real GDP will return to 4% or 5% per year. It is believed that the start of the recovery does not require previously implemented reforms in terms of economic structure and that the natural growth

rate of the Croatian economy is a rate of 4%. However, the Croatian economy exceeded 4% in last decade only with the help of external growth generators of limited duration. The world crisis suddenly interrupted the development process of reliance on the importation of capital, which would have finished even without the crisis. Due to de-creasing economic competition, the potential growth rate gradu-ally approached zero level un-der conditions of neutral capital movements. The achieved ‘posi-tive zero’ in 2011 is the real ex-pression of growth based only on internal generating forces since the combined contribution by external influences was neutral. Next year the contribution of ex-ternal generators to the Croatian economy will carry a negative prefix. Economic development in the EU, the largest external market for Croatian goods and services, is slowing again after a short-term recovery, so reces-sion will more likely hit even harder.

Croatia depends upon foreign capital Measures for economic subsidis-ing in the EU were exhausted during the first recessionary wave in 2009 when the crisis in the fi-nancial sector was aided through an increased public deficit. We are now in for a longer period of fiscal consolidation which limits public sector demand, enabling the use of economic policy measures in terms of aggregated demand in addition to the ongoing clearing

process of public sector debt. We can fight the crisis only by increas-ing competitiveness and growth. The slowing of EU economic growth results in investors’ de-creased appetite for risk on finan-cial markets reflected in the trans-fer of capital to safer destinations. Since Croatia does not manage to achieve a level of aggregate saving adequate for covering the local de-mand for capital and repayment of invested capital in the earlier peri-od, it depends on a foreign capital influx. Therefore, foreign investor reluctance to take risk will nega-tively reflect on the availability of capital for the Croatian market. In the past, Croatia did not imple-ment structural reforms in terms of strengthening economic com-petition. Hence the reason why a reduced demand for exports and foreign capital availability will negatively reflect on economic activity. I anticipate a 1% down-turn in GDP with a continuous de-crease in employment and the risk of it declining even lower.

ANTON STARČEVIĆ, SENIOR ECONOMIST RBA

The general public still feels the crisis is a

temporary phenomenon

An anticipated 1% GDP downturn with

continuous decrease in employment and risk

of further decline

A long period of fiscal consolidation to follow

This is the third year in which we may say that Croatia has not managed

to exit the crisis. The main eco-nomic activity, the processing industry, dropped 1.5% during the first ten months of this year. During the same period, total employment also fell by over 2% in relation to the same period in 2010. Trade balance of pay-ments deficit is approximately at the same level as 2010, around €5billion. Croatia is one of the rare European countries that showed negative rates both this year and last. Furthermore, the numbers of those working within the total population, the rate of productivity and the employment rate are amongst the lowest in Europe. Despite these facts, the unemployment rate is amongst the highest. As a result of a long summer, it is expected that tour-ism income will exceed the level from last year. However, agri-cultural production will be down due to a long period of drought. All in all, the economy is left to develop spontaneously.

Invisible economic policyThe influence of the economic policy to remove those obstacles which prevent development of lo-cal production in existing capaci-ties is unnoticeable, and there are no policies which would increase production capacities. Despite all their actions, fiscal and monetary policies remain isolated whilst

trying to achieve their goals de-spite the overall economic result. This year will end on the same level of production as 2010. The overall economic result will be negative due to the high level of external debt, that is, its interest rate and the considerable outflow from a country based on foreign ownership. We should not expect anything better in 2012. Since no active economic policy measures

have been adopted, the Croatian economy will develop spontane-ously in 2012 under the influ-ence of external circumstances. Economic management in these mostly negative circumstances will be missing. A more signifi-cant increase in local demand cannot be expected due to the budget deficit and the deficit of various local funds.

Decreased demand from external marketsIf the new government opts for cuts in order to reduce the deficit, this will also decrease spending and production. Demand from external markets will also de-crease. The global economy is slowing in terms of growth, from

LJUBO JURČIĆ, PRESIDENT, CROATIAN ECONOMISTS ASSO

Economic growth not to be expected next year

Third year of crisis

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www.privredni.hrBusiness & Finance Weekly 9

OCIATION

5.1% in 2010 to 3.7% in 2011, and it will probably hit below 3.3% next year. A similar event is happening in the European Union, our main foreign trade partner. In 2010, the EU achieved economic growth of 1.9%. This year it will probably be 1.6%, and it will probably drop to 1% in 2012. This will influence Croatian economic affairs in three ways. Firstly, instability in the Eurozone will lead to risk and an interest rate increase and con-sequently higher financial costs for Croatia. Secondly, lower glo-bal and European demand will re-duce export demand for Croatian goods. Thirdly, people will spend less on tourism due to an uncer-

tain financial outlook which will result in lower tourism income in 2012. The German economy will stagnate in 2012, and that of Italy will probably decrease by 1%, which is why our prime tourism markets will spend less. We can hope the future will be brighter for agriculture, which could improve our results. Economic growth is not to be expected next year, and a 1% decrease is more probable given the condition that there are no negative phenomena either in the country or abroad.

The general public still feels the crisis is a temporary phenomenon

For the second consecutive year Croatia will achieve an historically low deficit

in its balance of payments. This is crucial, but it has remained un-recorded. The first step towards national economic stabilisation is reflected in the saying “don’t spend more than you earn”. Unfortunately, this balancing is merely collateral; it is not the result of economic management. The crisis has simply stalled pub-lic optimism, diverting it from consumerism, systematically supported through credit policy, towards increased saving. The crisis has caused a reversal about which many pessimists have warned for years. Unfortunately, not all followed the pattern. This especially concerns the state. After the unfortunate budget re-balance of 1998, Croatia institu-tionalised the rights which were impossible to exercise in terms of tax income capacity, total and per capita. In ‘the good old days’, foreign lending and the sale of the ‘family silver’ enabled such a policy. However, what is done is done. There can be no return.

Reduce tax pressureThis is the first step that needs to be made. The expenditure side of the budget for which we are sure IMF would expect, should be cut linearly and selectively in a man-ner to preserve fairness as much as is possible. On the income side, tax pressure should be im-mediately reduced. The saga of the need to decrease contributions is essentially wrong. Unlike tax, contributions entitle the payer to counteract, which means it is pos-sible to a greater extent to publicly control the collection in relation to tax. This is extremely important. Furthermore, if the social aspect of contributions did not exist, ac-tivities covered by contributions might be a private initiative, which should be kept in mind when de-fining the standards of reciprocity. We are always faced the question:

What should be a priority - create or redistribute income?

Saving shipbuilding industryIt is not necessary to point out the present unsustainable ad-ministration. The criterion to be followed is the capacity of lo-

cal administration to discover peoples preferences and to meet them more effectively, and if it is possible, to activate economic re-covery within the framework of the institutional system. This is also important since the method

of solving the existing Eurozone crisis is directed towards regional community, abandoning the clas-sical state approach. The adop-tion of a new industrial policy requires tax, requires caution, generally lacking in this area. The shipbuilding industry should

be saved and it is also unaccept-able to decrease national income on which tourism is based. The likely Eurozone recession will additionally intensify the drama of the Croatian economy. However, changes must be made immediately in order to maintain the current credit rating.

GUSTE SANTINI, INDEPENDENT ANALYST

The crisis has stalled optimism forcing the public to increase savings.

The crisis has caused a reversal about which many pessimists have

warned for years

Changes are vital

What should be the priority - create or redistribute income?

IMPRESSUM:

Privredni vjesnikKačićeva 910000 Zagreb+385 1 [email protected]

www.privredni-vjesnik.hr/subscription

FOR PUBLISHERNikola Baučić+385 1 [email protected]

EDITOR IN CHIEFDarko Buković+385 1 [email protected]

EXECUTIVE EDITORSAndrea Marić[email protected] Antonić[email protected]

IMC MANAGERDea Olup +385 1 [email protected]

TRANSLATIONLučana [email protected] [email protected]

INTERNATIONAL OPERATIONS Ray [email protected]

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Circumstances in world mar-kets will have an increasing impact on trends through

2012. Deep restructuring is im-perative, due to its immense im-pact on internal sources of growth. Nevertheless, it takes time. In ad-dition, fiscal restrictions in the near future are inevitable since we cannot rely on anyone financing our deficit as has been the case in the recent past. Consequently, for-eign demand for Croatian goods and services plus capital inflows are of crucial importance for the Croatian economy. The Chinese economy is witness-ing a slowdown and South Amer-ica is similarly slowing. A similar situation can be seen throughout the entire EU with the exception of Germany and certain other countries (Sweden and Poland), slowing to zero, threatened by a double-dip recession. It is unlike-ly that Germany will maintain its economic growth under such circumstances. The possibility of Germany entering recession dur-ing the first half of 2012 would be an extremely traumatic expe-rience, since it would indicate the appearance of weaknesses in the most stable link in the chain of an unstable Eurozone. It could additionally complicate financial aspects of the Eurozone crisis. Italy, Croatia’s most important export market, is faced with sev-eral arduous years of austerity and restructuring.

Capital inflowsThe region (primarily Bosnia and Herzegovina and Serbia), which has become an important desti-nation of Croatian exports during the last several years is also fac-ing a dead end. Both countries, of crucial importance for Croatia, are seeing political stalemate.

The former due to a non-existent government, the latter due to its standstill on the way towards the EU, turmoil in Kosovo and the possibility of early elections. Risks in the region are much more prominent than growth po-tential given such circumstances. Maintaining the current level of exports of goods and services bearing in mind these circum-stances would be a considerable success.A somewhat negative investment climate and predominant feeling of pessimism under the second wave of the crisis will impact negatively on foreign direct in-vestment. We should be pleased to maintain the current level. Debt financing instruments are limited by the current level of debt which is significantly high,

particularly in the corporate sec-tor. Nevertheless, there is some possibility for further lending al-though limited by the quantity of available funds. European banks will not be able to attract a more significant amount of funding for countries such as Croatia until the Eurozone has consolidated.

Any expectations for slight growth or a static GDP level are optimistic, given the expected impact on foreign demand and capital inflow.

A different worldThere is no mystical mechanism which would enable a significant recovery during the fifth year of the crisis, as we have not yet paid the price for our lack of caution and the persistent postponement of responsible economic behav-iour. High government expendi-ture and fiscal deficit, the post-ponement of structural reforms prior to and throughout the crisis are unfortunate circumstances which have currently resulted in a plethora of internal and exter-nal factors which are merely pro-longing the current situation.

We did not restrain fiscal expendi-ture when fiscal revenue was high. Consequently, we will have to start monitoring them carefully within low revenue. We have not restruc-tured agriculture or shipbuilding when capital was affordable and when investors showed consider-able interest. Consequently, we will have to restructure them now irrespective of expensive capital and with no investors in sight. We have not lowered tax rates and tax bases during economic growth. Hence we will have to increase them now in the midst of econom-ic stagnation or crisis.We have been doing business ineffectively. The fact that many other countries in Europe are do-ing business just as ineffectively is our sole solace. Nevertheless, it is a weak solace. It implies there is no one who could assist us and we have to be pleased if they do not push us down further. However, every cloud has a sil-ver lining. We might finally start believing that we are on our own and have no one else to rely upon. We have full control solely over internal sources of effective-ness and growth with periods of upward and downward trends alternating in the global market. Nevertheless, we will not be able to use our resources in 2012, since they have been abandoned and forgotten for a long time. If we persist, we might succeed in using in the later future.

VELIMIR ŠONJE, ARHIVANALITIKA DIRECTOR

Comprehensive impact solely on internal sources

of effectiveness and growth

Any expectations of slight growth or static GDP are optimistic given the expected impact on

foreign demand and capital inflows

Doing business the wrong way

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www.privredni.hrBusiness & Finance Weekly 11

The impact of 2011 on the Croatian economy has hardly been positive. As

expected, the prime focus has been on political issues. As a result the first half of 2011 saw most activities focusing on the conclusion of EU negotiations, whilst the second half saw politi-cal preparation for parliamentary elections. The absence of neces-sary structural reforms, as well as the lack of fiscal consolida-tion is not surprising considering the circumstances. Thus, 2011 has been a wasted year for the Croatian economy as was clearly indicated by the budget revision in late summer 2010.

Pressures on monetary authorities Whilst at the beginning of 2011 optimism was due to a relatively favourable external environment, a gradual recovery of the global economy and stabilisation of the situation in the financial markets, the second half year resulted in trends changing direction. Con-sequently, the escalation of the Greek insolvency problem re-sulted in political crisis, which could subsequently result in the disintegration of Europe, as well

as push the global economy into a new recession. There is consid-erable uncertainty regarding the solution to the sovereign debt cri-sis. We are certain only of the fact that it would involve long term solutions. Hence, “a lost decade” is an oft-mentioned expression both in Europe and the US, due to years of weak growth and ris-ing unemployment. Hence, pres-sure on monetary authorities to address the issue of fiscal indis-cipline and incompetence using

both conventional and unconven-tional measures are mounting, creating fears of stagflation.The Croatian economy is cur-rently far more vulnerable to external threats than it was some three years ago. Croatia exited from recession in a technical sense in mid-2010. Nevertheless any exit from the economic cri-sis is currently a long way ahead. We consider 2011 to be a year

of stagnation in economic activ-ity, since achieved growth will stand at below 0.5%. In addition, Croatia is significantly lagging behind economies in the CEE and SEE regions, which addition-ally increases risks perceptions of the Croatian economy. The dynamics of double-digit growth in public debt, as well as expend-iture incurred from its servicing, became unsustainable a long time ago. High external debt is to be serviced or refinanced under

extremely unfavourable condi-tions in 2012 and it is an addi-tional risk for the local economy, which also implies an increas-ingly active rôle for the Croatian National Bank (HNB).

Elections as optimism promotersUnfavourable trends in the real economy and public finances generate real risks of a credit rating downgrade of a country, particularly bearing in mind the

current circumstances of lack of confidence in financial markets. Nevertheless, parliamentary elec-tions are usually accompanied by some degree of optimism. The new government will gain support from the general public regarding reforms, including the painful ones and it is an extreme-ly important challenge. 2012 will see stabilisation, primarily in terms of public finance. There are indications that we might see another recession in the Eurozone during the first half of 2012, and a need for a significant fiscal ad-aptation during a short time frame and thus stagnation in economic activity in 2012 is a relatively optimistic scenario. In addition stabilisation, I expect setting dif-ferent guidelines for a new model of economic growth, which will be appropriate considering higher financing rates in all sectors of the local economy, as well as a significantly weakened inflow of foreign capital, irrespective of the forthcoming Croatian EU accession. A successful model of economic recovery must ensure a recovery in employment, address external imbalances and reduce the rôle of the state in economic movements.

ZDESLAV ŠANTIĆ, CHIEF ECONOMIST, SOCIETE GENERALE SPLITSKA BANKA

Next year will be one of stabilisation primarily in terms of public finance

Any parliamentary election is accompanied by a certain level of optimism and the new Any parliamentary election is accompanied by a certain level of optimism and the new government will gain support from the general public regarding reforms, including the government will gain support from the general public regarding reforms, including the painful onespainful ones

2011 – a wasted year2011 – a wasted year

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Much is expected from the new Croatian gov-ernment. It is generally

agreed the existing economic model is exhausted, the structural unbalance is high, the country is in severe debt, exports weak and without great potential and indus-try is no longer the generator of development. The goals for year should include consolidation of the state financial position; solv-ing the problem of illiquidity, its rating, budget deficit and promo-tion of investment and exports. What can the new government do during the forthcoming year and what will its programme include in the future? In order to invig-orate the economy, illiquidity as the most urgent problem should be immediately solved since it

has reached over €5.5 billion. This does not only concern the vast amount of outstanding debt, but also that many enterprises are blocked and cannot operate. Even greater problems concern entrepreneurial fear and lack of trust in terms of new contracts, work or business moves where advance payment is not ensured. New projectsFurthermore, the market must be relieved of insolvency, and this especially concerns chron-ic cases. The legal framework needs to be reorganised and the

system must be topped up with fresh money to activate pay-ment. In this case the banks have a great role to play. Invest-ment into companies or crafts, whether they are state, large, infrastructural or small, should also boost economic activity and thus GDP. The former gov-ernment announced big infra-structural investments (€14-15 billion), most of which were not realised. Under conditions of stagnant public and personal spending,

exports and investment should boost GDP in 2012. Thus why special attention should be paid to exports through a subsidy pro-gramme but even further, meas-ures and efforts to increase our export competitiveness.

Investment in economyGreater attention should be paid to investment in the economy, those numerous new projects or actions for the improvement of business, modernisation of pro-duction and business processes

or boost companies and crafts. This type of investment has been dramatically reduced during the past two years. According to data provided by FINA, investment in fixed assets totalled €12 bil-lion in 2008 and only €5 billion in 2010. The number of entre-preneurs who made investments in 2008 totalled 29,200, and by 2010 the number had fallen to 23,500. There are still no data on investment in 2011, but it will be even lower than for 2010. These numbers point to all the drama of the present economic situation. We must highlight another im-portant prerequisite for boosting GDP and long-term stabilisation of the overall Croatian economy, and that is the future develop-ment programming. According to all elements, 2012 will be a year of consolidation; more pre-cisely, the stabilisation of state finances, budget deficits and il-liquidity reduction and economic boost. In addition to this urgent programme, the programme for long-term development must also be immediately prepared.

ŽARKO PRIMORAC, PHD, INDEPENDENT ECONOMIC ANALYST

Present economic model exhausted Much is expected from the new Croatian government as there are many actions that should immediately be taken to activate positive processes

The most urgent is to solve the problem of

illiquidity, now standing at around €5.5 billion

The following data show how much Croatia is behind in terms of export de-velopment compared with more developed transitional countries: export share of GDP is around 20% in Croatia, 43% in Bulgaria, 65.7% in the Czech Republic, 71.5% in Hungary, 74% in Slovakia and 51.7% in Slovenia. Accor-ding to the same index, Croatia was ahead of all these countries in 1989, with the exception of Slovenia and the Czech Republic. The average share of goods exports of GDP of new EU member countri-es is twice as large as that for Croatia (new EU countries - 47.9%, Croatia - 19.8%). If we realise that the technological level of our goods export has drastically changed since 1985 (share of goods with a high level of tech-nological content in 1985 totalled 65.7%, but today only 28.3%), all the drama of this lagging sector becomes understandable.

Urgent: development of exports