macroeconomic outlook croatia: tale of a slowing economy zagreb, 3 rd march, 2008

Hypo Group Alpe Adria | Hypo Alpe-Adria-Bank d.d. | 22.04.23 | 1

MACROECONOMIC OUTLOOK

CROATIA: TALE OF A SLOWING ECONOMY

Zagreb, 3rd March, 2008

Hrvoje Stojić, Head of Economic Research


Contents:

GDP

Inflation

Balance of payments

External debt

Money market

Monetary aggregates

Budget

Equity market


Economic growth After the expected 5.9% yoy growth in 2007, GDP to

shrink to 4.6% in 2008 (closer to potential):

Weaker post-election fiscal stimulus

Slower personal consumption growth

(Slightly) tighter credit conditions

‘Above trend' GDP growth in 2009:

Re-acceleration in external demand

Easier credit conditions

Reduction of industrial output growth towards 5.0% in 2008 due to weaker external demand, slower growth of the real disposable income and less favourable unit labour costs

Inflation pressures, declining purchase power and negative ‘financial wealth effects’ → private consumption growth to slow down to 3.0-3.3% in 1H08; recovery in 2H08 towards 4.5%

CONTRIBUTION TO GDP GROWTH (%)

-8

-6

-4

-2

0

2

4

6

8

10

12

2002 2003 2004 2005 2006 2007E 2008F 2009F

Source: CBS, HAAB Research

0

1

2

3

4

5

6

7

DOMESTIC DEMAND NET EXPORT

REAL GDP

Trend growth: 4.3%

GFCF, CONSUMER SPENDING AND CREDIT (% YoY)

-10

-5

0

5

10

15

20

25

30

2Q00 4Q00 2Q01 4Q01 2Q02 4Q02 2Q03 4Q03 2Q04 4Q04 2Q05 4Q05 2Q06 4Q06 2Q07 4Q07

Source: CBS, HAAB Research

0

1

2

3

4

5

6

7

8

9

TOTAL NON-FIN. LENDING (ls)

INVESTMENT (2Q average), 6M LAG (ls)

CONSUMER SPENDING (2Q average), 6M LAG (rs)

2008E


Inflation Due to a 16% rise in CRB Food commodity index

since early December last year, the food CPI will continue its upward trend in 2008; better weather conditions may provide respite in 2H08

2008 average CPI at 5.6%:

2007 high overshoot

Post-election communal tariff hikes

Higher wage growth than productivity gains

Accelerating PPI

Controlling inflation scare through tighter fiscal policies, deregulation and competition fostering

Medium-term risks: EU-related deregulations of utilities and service sectors (e.g. education, health)

CONSUMER PRICE INDEX (% YoY)

98

100

102

104

106

108

110

112

Jan.04 Jul.04 Jan.05 Jul.05 Jan.06 Jul.06 Jan.07 Jul.07 Jan.08

Source: CBSConsumer prices Food

Services Basic inflation

PRODUCER PRICE INDEX (% YoY)

92

96

100

104

108

112

Jan.03 Jan.04 Jan.05 Jan.06 Jan.07 Jan.08

Source: CBS

96

98

100

102

104

106

Intermediary goods Capital goodsConsumer goods Intermed./cons.


Trade deficit

Trade deficit to grow from 25.8% of GDP in 2006 to 26.4% in 2007 as a reflection of a 10% yoy growth of non-oil imports, stong manufacturing output, investment and tourism activity

Slowdown in exports to a 7.5% pace in 2008 due to euro-area activity slowdown and NEER rise

Despite weaker personal consumption, FY08 trade gap to rise from EUR9.8bn in 2007 to EUR10.8bn (26% of GDP), under the influence of:

Persistent capital goods imports – prerequisite of capex

Solid tourism activity

Greater reliance on imported energy

Rising import content of exports

Kuna appreciation, especially in view of less favourable labour unit cost dynamics

IFO AND ITBCI BUSINESS CLIMATE INDICES AND CROATIAN EXPORT

80

85

90

95

100

105

110

115

1999 2000 2001 2002 2003 2004 2005 2006 2007

Source: CBS; Bloomberg

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

ITBCI IFO EXPORT IN HRK (6mma)

TRADE DEFICIT (% YoY)

-5

0

5

10

15

20

25

30

Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07

Source: CBS, HAAB ResearchEXPORT EX. SHIPS AND OIL IMPORT EX. SHIPS AND OIL


Balance of payments

Temporary C/A deficit fall from 2007’s 8.5% of GDP to 7.8% in 2008, based on sluggish consumption, weaker post-election fiscal stimulus and higher transfers

Over EUR1.5bn in bank capital increases and FDIs in tourism and oil sectors ensure a 96% cover of the C/A deficit

5% tourism revenue growth profile for the next several years comprises EUR2bn+ investments, hoteliers’ restructuring and active destination management

Greenfield investments in tradeable sectors key for repairing external imbalances

In the environment of rising global risk aversion and in the absence of proper demand management policies → the medium-term C/A deficit climb towards 10% of GDP justifies CNB’s more restrictive monetary policy

BoP (% of GDP)

-35

-25

-15

-5

5

15

25

2001 2002 2003 2004 2005 2006 2007f 2008f 2009f

Source: CNB, HAAB Research

Trade balance Services IncomeTransfers Balance of payment FDI

NET FDI / BoP RATIO (%)

0

50

100

150

200

250

1999 2000 2001 2002 2003 2004 2005 2006 2007f 2008f 2009f



External debt

Gross foreign debt climbed to EUR32.6bn (87.8% of GDP) at YE07, with a temporary stabilization in the foreign debt vs. exports at (still high) 170% solely thanks to EUR1.5bn+ in banks’ capital hikes

Intensified substitution of lending to local companies with external credit at a monthly pace of EUR400m (compared to EUR220m in 2006).

Restrictive monetary policy in 2008 will cause corporates to drive external indebtedness to offset the lack of domestic credit

Core scenario of external debt staying above 88% of GDP in 2008 is due to the 8% of GDP C/A deficit and a 2Q08 EUR750m+ eurobond issue.

EXTERNAL DEBT (in mil. EUR)

19,000

21,000

23,000

25,000

27,000

29,000

31,000

33,000

Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07

Source: CNB

8

13

18

23

28

33

Debt amount Growth rate (YoY)

FOR. DEBT STRUCTURE (%)

20

25

30

35

40

45

50

Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08

Source: CNBState Banks Corporate


Money market Factors working in favour of a strong kuna are: CNB’s anti-inflation monetary setup with a more

restrictive liquidity policy and a FX cap at 7.35 Banks’ preference for stable or lower FX rate to

enable an over 1% growth Banks’ capital hikes of about EUR1.0bn Direct external corporate indebtedness at

EUR400m+ mom Stabilizing factors: Investment funds’ diversification abroad Higher profit repatriation

We expect short-term interbank rates to stay in a broader 5-9% region (increased volatility)

MinFin’s plan to satisfy most of its financing needs (ca. HRK11bn) in 2008 abroad positive for kuna bond market; dampening factors are ongoing negative (or around zero) real interest rates and greater attractiveness of similar FX-linked debt.

REAL 1Y INTEREST RATE (%)

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Oct-02 Apr-03 Oct-03 Apr-04 Oct-04 Apr-05 Oct-05 Apr-06 Oct-06 Apr-07 Oct-07 Apr-08 Oct-08

Source: MinFin, CBS, HAAB Research

Basic balance and EURHRK exchange rate

-4

-3

-2

-1

0

1

2002 2003 2004 2005 2006 2007f 2008f 2009f

Source: CNB; HAAB Research

7,2

7.3

7.4

7.5

7.6

C/A+FDI (% of GDP)EUR/HRK (rs)


Monetary aggregates

An 18.0% yoy M4 monetary aggregate growth at YE07 reflects a strong kuna and foreign currency term deposit activity

Retail credit growth (+18% yoy) again exceeds corporate lending, since firms increasingly rely on foreign debt

Domestic retail credit still supported by:

Solid labour market prospects

Expected 8% minimum wage hike

Pension corrections

Strong kuna profile

Corporate financing supported by expectedly strong investment activity, and increasingly better corporate governance in medium-term

With double the inflation this year restricting potential for real credit growth, sluggish economy and lower C/A deficit, we do not expect monetary policy to sharpen any further in the near term

CREDITS VS. DEPOSITS (%)

-20

0

20

40

60

80

100

Jul-96 Jul-97 Jul-98 Jul-99 Jul-00 Jul-01 Jul-02 Jul-03 Jul-04 Jul-05

Source: CNB

Corporate deposits Retail deposits

Corporate loans Retail loans

OUTSTANDING BANK LOANS

0

50,000

100,000

150,000

200,000

250,000

Dec.00 Dec.01 Dec.02 Dec.03 Dec.04 Dec.05 Dec.06 Dec.07

Source: CNB

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

BANK LOAN AMOUNT MoM growth (3MMA)


Budget Fiscal deficit cut from 3.0% of GDP in 2006 to 2.3%

of GDP in 2007 at odds with an increase of the share of public spending in GDP, where the deficit does not include :

The 1.2% of GDP repayment of debt to pensioners, suggesting a 3.5% of GDP fiscal deficit

Arrears in health and construction sectors and a still unknown amount of state subsidies .

Narrowing deficit and as much as HRK7.4bn in earnings T-HT IPO significantly reduced state borrowing needs → reduction of Croatia’s public debt to an estimated 48.7% of GDP (a 1pp of GDP reduction)

Fiscal deficit at 2.8% of GDP in 2008 Risks: political will and capacity for reform, wage policy, other anti-inflation policies in budget, post-election promises

If MinFin plan (2.3% of GDP gap in 2008) is not realized → zero deficit in 2011, based on optimistic average GDP growth of 6.5% (2pp above potential) in question

BUDGET BALANCE AND FOREIGN DEBT (% OF GDP)

-6

-5

-4

-3

-2

-1

0

2004 2005 2006 2007E 2008F 2009F


30

35

40

45

50

55

60

65

BUDGET BALANCE PUBLIC DEBT

BUDGET AND C/A GAPS (%

OF GDP) vs. GDP GROWTH (%)

0

1

2

3

4

5

6

7

8

9

10

2004 2005 2006E 2007F 2008F 2009F

Source: CNB, MinFin, HAAB research

0,0

1,0

2,0

3,0

4,0

5,0

6,0

7,0

FISCAL DEFICITCAD

GDP


Equity market After a 63.6% Crobex gain in 2007 (in EUR)

against 20% gain in the MSCI Total Return Index for Emerging Markets, trend reversed at the start of 2008 → Crobex is sinking below its 200-day movable average

The 2008 estimated 27.5x PER for Crobex is still considerably higher than the Emerging Europe’s 11.5x

The valuation gap is to some extent justified by Crobex’ estimated 14.5% average EPS growth in 2008

We see growth potential in defensives like T-HT (with a dividend yield of 9.0%), construction sector, distribution and logistics, as well as in transport (shipping sector)

Expected equity market recovery in 2H08 to be supported by long-term investors, who will want to ensure reasonable annual yields

Daily Q.CRBEX 16.07.2004 - 29.02.2008 (FFT)

WMA; Q.CRBEX; Last Trade(Last); 200;29.02.2008; 4.770,91Line; Q.CRBEX; Last Trade(Last);29.02.2008; 4.224,52WMA; Q.CRBEX; Last Trade(Last); 100;29.02.2008; 4.624,29

PriceHRK

.121.500

2.000

2.500

3.000

3.500

4.000

4.500

RSI; Q.CRBEX; Last Trade(Last); 14; Wilder Smoothing;29.02.2008; 44,807 Value

HRK

.1232040

k r l s p s v o t s l s k r l s p s v o t s l s k r l s p s v o t s l s k r l s p s vQ3 04 Q4 04 Q1 05 Q2 05 Q3 05 Q4 05 Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08

EQUITY PURCHASES BY INVESTMENTFUNDS (HRKbn)

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08

Source: HANFA, ZSE, HAAB Research

2,000

2,500

3,000

3,500

4,000

4,500

5,000

5,500

6,000

Domestic equity purchase Crobex


Participants

Markus Ferstl, Chairman of the Management Board

Krešimir Starčević, Management Board Member

Sönke J. Siemßen, Head of Global Fixed Income Research, Bayern LB

Hrvoje Stojić, Head of Economic Research


Thank you!

macroeconomic outlook croatia: tale of a slowing economy zagreb, 3 rd march, 2008

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