ANALYST VIEW - Croatia's 2008 C/A Gap To Widen To 10%/GDP

Croatia’s current account deficit grew to a preliminary 1.80 billion euro ($2.49 billion) in the second quarter of 2008 from a revised 1.37 billion euro a year earlier, the central bank said on Tuesday. 

Following are analyst comments:

ALEN KOVAC, ERSTE&STEIERMAERKISCHE BANK:

"As expected, the current account maintained its negative trend in Q2 '08, with the deficit reaching 1.8 billion euro, a robust increase of 32% year-on-year."
 
"As usual, the strongest pressure came from the merchandise account, where the deficit widened by 23% year-on-year, supported by the sluggish Q2 monthly trade balance figures. Hence, exports increased by 7% year-on-year, clearly outpaced by the 15% year-on-year import growth rate. The trade balance outlook remains rather poor, as exports will have a hard time overcoming pressures from deteriorating competitiveness and the worsening regional economic prospects. Imports remain under pressure from more expensive energy and food imports and rather robust investment activity."

"The service account, (…), performed well, managing to offset approximately 50% of the trade balance deficit increase and recording a 19% year-on-year higher surplus (1.8 billion euro). Service exports grew by a solid 16%, supported by both tourist sector activity and other sector exports."

"Coming to the income account deficit, the increase of 24% year-on-year (729 million euro) was slightly above expectations, although the deterioration came as no surprise. Outflows increased by 19%, given the higher cost of debt servicing and dividend outflows, while inflows were up 9% year-on-year. The surplus on the current transfers account increased by 5% year-on-year, thus putting a stop to the moderating trend from Q1 '08."

"On the financing side, the FDI [foreign direct investments] performance has been relatively steady, as FDI inflows (934 million) were only 6% year-on-year lower and FDI import coverage stood at around 50%, while the rolling Q4 coverage is 74%. Also, pressure on foreign debt-creating financing continued, as other investment inflows amounted to 1.042 billion euro, hence doubling in the first half of 2008."

"Despite the widening of the C/A deficit, financing remains rather comfortable and we do not anticipate a significant change in this trend. As far as the current account is concerned, 2008 is expected to bring a significant widening of the deficit, which is expected to exceed 10% of GDP."

HRVOJE STOJIC, HYPO ALPE-ADRIA-BANK:

"The Q2 C/A deficit jumped 31.6% year-on-year to 1,809 million euro, pulling the 4-quarter rolling deficit to 10.4% of GDP v[ersu]s 9.6% at end-Q1 '08."

"The deterioration in trade deficit reflects hitherto robust capital goods imports, record commodity prices, but also moderating exports in sympathy with softening EU demand. However, we look for further exports fatigue since the gloomy sentiment shared across most EU economies persists, which in our view alongside unfavourable news in the financial sector (and thus worsened global growth outlook) signals clear downside risks  to foreign demand and access to finance. That said, external imbalances are likewise a function of the record high profit repatriation, which is typically pronounced in an environment of rising global risk aversion and demand for liquidity."

"Although we downgraded the short-term GDP path, now showing growth slowing to 3.7% and 4.1% in 2008 and 2009, apiece, and credit supply will slow substantially relative to H1 '08 and past years, we now see the FY '08 CAD at 11%+ of GDP on greater reliance on energy imports and rising import content of exports. The key upside risks are the [national currency] kuna strength as hitherto main disinflationary channel, rising global risk aversion, profit repatriation and fund managers' diversification abroad."

Last year the economy of the European Union candidate country expended 5.6%.

"On financing, we expect the external debt to hit [some] 90% of GDP by YE '08, which in the face of the [Croatian central bank] CNB's concerns over the structure of domestically-driven GDP growth and vast external imbalances currently does not fundamentally justify any significant monetary easing. However, we believe the CNB will soon take stock of the sharp credit slowdown in a highly leveraged economy, deteriorated growth outlook and ensuing moderation in inflation and thus soften its rhetoric somewhat."

ZDESLAV SANTIC, RAIFFEISENBANK AUSTRIA ZAGREB:

"In line with developments on world markets but also slowing down of domestic demand we expect that the pressure on growth of commodity imports could weaken in the rest of the year. However, exports of goods and services could also get pressured by the currently unfavourable foreign environment and thus the current account deficit could be maintained near the 10%-of-GDP level."

"After the first three months, during the second quarter we again marked lower inflow of foreign direct investments to Croatia on the year. (...) In the rest of the year due to privatisation of [oil and gas company INA] and lower basis from last year we expect to see a growth in these investments."

($ = 0.7234 euro)