ZAGREB (Croatia), June 10 (SeeNews) – Croatia’s political uncertainty is not expected to cloud its economic recovery since the private sector has a more important role in generating the current growth momentum than the public sector, a Zagreb-based analyst said.
Short-term political instability does not necessarily entail major adverse effects on the country’s economy, therefore Erste is maintaining its 2016 economic growth forecast at 1.5%, the head economist at Croatia’s unit of Erste Bank, Alen Kovac, told SeeNews in an email.
Kovac, however, warned that if the crisis were to stretch over a longer period of time it would impact the implementation of structural reforms, the business environment and the perception of risk by foreign investors.
Croatia is currently facing two scenarios - a government reshuffle or a snap vote with both the prime minister, Tihomir Oreskovic, and his deputy, the leader of the ruling HDZ party Tomislav Karamarko, up for a no-confidence vote as early as next week.
The political crisis escalated last month when ministers of the smaller coalition partner, MOST, voted in support of a motion launched by the opposition Social Democrats (SDP) for a no-confidence vote against Karamarko over alleged corporate interests. Following the vote, second deputy and Most leader, Bozo Petrov called for Karamarko's resignation, pushing the PM to react and demand that both deputies step down. Most has since backed the PM and demanded Karamarko's resignation or a snap vote, however the latter claims his party still has time to muster a new majority.
On the sidelines of the political turmoil, Croatia’s finance ministry announced recently it is postponing a planned Eurobond issue until the crisis has settled.
"Following a roadshow in Germany and London and despite positive feedback, a decision has been brought to issue the Eurobond once the political situation has calmed down," the ministry said at the time.
Commenting on the delay, Kovac said it was a prudent decision because political factors have overshadowed the positive momentum of economic growth and fiscal consolidation.
“Currently foreign investors are not showing great concern for the political situation. However, long-term political instability would have a less favorable impact, it would raise the credit rating issue which, combined with global factors such as Brexit or a Fed rate hike, could change the investors' attitude,” he explained.
He noted that political instability is an integral part of a democratic process, hence investors will eventually shift their focus to the reform potential of a government and its ability to provide a stimulating and stable framework for doing business.
In terms of budget performance being at risk of the Eurobond delay, Kovac said there are no current threats with sufficient room for maneuver on the financing side and the possibility of issuing a bond on the domestic market. However, he reiterated, that if the political environment doesn't stabilise, budget financing will be exposed to higher risks.
Kovac also noted that significant investor reactions, induced by the crisis, have no yet been felt on the Zagreb Stock Exchange. However, possible future risks could be a result of delayed structural reforms and potential credit rating changes.
In general elections last year, the HDZ-led Patriotic Coalition garnered 59 MP seats, while the Croatia is Growing alliance, led by SDP, secured 56 seats. MOST, a relative newcomer to the political scene, got 19 MPs and formed a government with the Patriotic Coalition, appointing businessman Tihomir Oreskovic as prime minister.