Croatian economy in 2019: rise in credit rating and GDP, shipyards in trouble

NEWS 26.12.2019 14:10
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Economic growth, a successful tourist season, and on the other hand shipyards facing bankruptcy and a labour shortage in industrial sectors have been the main features of the outgoing 2019 in Croatia's economy, which has also seen Fortenova succeeding Agrokor and the country coming a step closer to the introduction of the euro.

Croatia’s rating rises to investment grade

In March, Standard&Poor’s raised Croatia’s rating to BBB-/A+, including it in the investment category after more than six years thanks to an improved budget situation and economic recovery.

A month later Moody’s upheld Croatia’s Ba2 speculative credit rating and upgraded the outlook from stable to positive as a result of improved fiscal metrics and reforms the agency believes will have a positive impact on the economic growth outlook.

On 8 June, Fitch Ratings raised Croatia’s credit score to investment-grade level, by one notch to BBB-, with a positive outlook, from BB+.

GDP continues rising

As far as the country’s Gross Domestic Product is concerned, the first estimates, released in early February, showed that the economy grew in the last quarter of 2018 by 2.3% year on year, and GDP throughout 2018 increased by 2.6%.

The initial estimates of GDP in Q1 2019 showed the economic growth of 3.9% on the year, which was the biggest rise since Q4 2016 when the economy expanded at the rate of 4%.

Q2 2019 saw a rise in GDP by 2.4% compared to Q2 2018, and the economy in Q3 2019 increased by 2.9%.

All that positively impacted Croatia’s economic outlooks.

Therefore, this August the ministry of finance auctioned off EUR 32 million in treasury bills, at a negative interest rates of – 0.05% and Finance Minister Zravko Maric welcomed the fact that the treasury bills were issued at a negative interest rate for the first time for the country.

Doing Business: Croatia moves upward by seven places

The good performance of the economic polices pursued by the government were recognised by the World Bank which assesses in its Doing Business report for 2020 that Croatia has moved up seven places on the ranking, and is currently 51st among 190 economies in terms of the ease of doing business. In the previous report, Croatia came in as 58th.

Preparations underway for euro adoption

During 2019, the government led by Prime Minister Andrej Plenkovic and the Croatian National Bank (HNB) under the helm of Governor Boris Vujcic have taken several steps towards the introduction of the euro.

On 27 May, Croatia sent to the European Central Bank (ECB) a letter of request for close cooperation with Frankfurt-based ECB in supervising credit institutions. EU Member States whose currency is not the euro can participate in the Single Supervisory Mechanism (SSM) by requesting the establishment of close cooperation between the ECB and their national competent authority (NCA). Once close cooperation has been established, these Member States can join both the SSM and the Single Resolution Mechanism.

In July a letter of intent to join the Exchange Rate Mechanism (ERM II) was sent from Zagreb to Denmark and the institutions of the European Union. ERM II is a sort of waiting room in which each candidate country has to spend at least two years before joining the euro area.

The tasks to this aim cover the implementation of 19 measures in six areas, and some of the most important segments are reinforcing the capacity of the national statistical office (DZS), continuing the fight against money laundering and terrorism funding, upgrading the country’s business climate and improving conditions for doing business by further trimming parasfiscal tariffs, Finance Minister Maric said in late May.

A 12-month deadline for delivering on the commitments specified in the letter started running upon the delivery of the letter. Entering the ERM II is a step forward in the introduction of the euro and Croatia is likely to stay in the exchange mechanism for two years during which the country’s ability to meet the Maastricht criteria will be tested.

Peljesac Bridge, tourist season

Some of the most important events marking the outgoing year on the economic front are the beginning of the construction of Peljesac Bridge by the China Road and Bridge Corporation in late July and also the start of the construction of access roads in the region by Austrian Strabag and Greek J&P Avax.

The tourist season saw record high number of arrivals, 20.5 million of guests, and 108 million overnight stays.

Revenues from the tourist trade in 2019 rose 8% compared to 2018. However, the tourist and hospitality industry is facing a serious problem, a shortage of workers. Therefore, the government decided that during 2020 it would be possible to issue 78,470 work permits for foreigners.

The new employment quota stands at 64,604 permits.

Broken down by sectors, construction can hire 33,300 foreigners, tourism and hospitality service can count on 18,370 permits, the transport sector 2,904, metal industry 2,300, food industry 1,410, agriculture and forestry 1,380 and so on.

Shipyards, Fortenova, Kras…

In parallel to the good performance on the macroeconomic front, the national economy was also faced with the crisis going on in the shipyards in Pula and Rijeka: Uljanik and the 3.Maj respectively. The efforts to address this crisis are being taken.

On the other hand, the problems surrounding the privately owned retail and food group Agrokor seemed to be efficiently dealt with. The Agrokor Group changed its name to Fortenova, and started operating under that name as of 1 April. Out of 159 companies operating within the Agrokor Group, 47 unsustainable companies have been transformed into mirror companies that are members of the new group. The mirror companies will have the word “plus” added to their names, so that, for example, Konzum will become Konzum plus, Ledo will be called Ledo plus and Jamnica will be renamed Jamnica plus.

The stakes in the remaining 30 viable companies doing business in Croatia were transferred to the Fortenova Group, and after the completion of the transfer they exited the emergency administration procedure.

The implementation of the settlement agreement between Agokor’s creditors started on 1 April when the management of the conglomerate, previously run by the court-appointed emergency administration, was transferred to the new company called Fortenova Group.

In mid-December the Fortenova Group stated the Slovenian AVK regulator had temporarily seized the shares of Mercator, which is part of this Zagreb-based group, criticising the Slovenian authorities for a disproportionate and unfounded penalty. “The seizure is based on an unprecedented disproportionate, non-final penalty in the amount of EUR 53.9 million, imposed by AVK on Agrokor d.d. in September 2019 in relation to a concentration case that Agrokor is appealing in the Slovenian court,” Fortenova says on its website. In September AVK imposed this penalty on Agrokor over its failure to report concentration of Agrokor AG and Ardey Global Ltd. Fortenova says that the non-final penalty “is clearly disproportionate since the company in question, Costella, generates globally only slightly more than EUR 1 million in revenue yearly.”

“The seizure of Mercator shares is in itself also largely disproportionate, since the shares in question have an appraised value of in excess of EUR 140 million, and the appealable penalty – that is being contested – is in the amount of EUR 53.9 million,” says the group.

Change in ownership of Kras

In late November, the Braca Pivac meat industry (Pivac Brothers Meat Industry) and the Kras-ESOP (Employee Stock Ownership Plan) concluded a sales agreement on the transfer of ESOP shares in the largest Croatian manufacturer of confectionery products to the Braca Pivac. Under the agreement. MI Braca Pivac company purchased 276,441 ordinary shares, that is 18.44% interest, from Kras small shareholder, at the price of HRK 861.20 per share or 238.1 million kuna for the whole transaction. The price corresponds to the weighted average price of the Kras share on the Zagreb Stock Exchange (ZSE) in the last three months.

The deal was achieved after the Kras ESOP held a general assembly on 23 November when it instructed the management on negotiations with potential buyers.

Apart from the agreement on the shares transaction, also an agreement on social partnership between the Braca Pivac company, Kras workers and the trade union of workers in agricultural and food producing industries (PPDIV) was concluded defining the obligations of MI Braca Pivac for further investments in Kras, protection of the rights of the Kras employees and the maintenance of the existing production plants at the same locations.

MI Braca Pivac management board chair Ivica Pivac was quoted as saying that the group sees Kras as one of the up-and-coming producing companies in Croatia and that the new owner would like to advance the production of this sweets manufacturer. He said that he was glad that workers recognised the Pivac group as a steady partner for Kras. This acquisition makes the Pivac group one of the biggest food producing companies in southeast Europe and some 5,000 employees are on its payroll.

In the run-up to the acquisition, Pivac’s main rival was Kappa Star, owned by the Serbian businessman Nebojsa Saranovic.