Strong GDP Growth Expected Despite Agrokor Crisis

By , 21 Apr 2017, 12:02 PM Business

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Addiko Bank has kept it estimate of GDP growth in this year.

Although the crisis in Agrokor is a cause for concern, analysts of Addiko Bank have kept their estimate of the growth of Croatian economy this year by 3.5 percent, thanks to strong domestic demand, another record tourist season, increased funding from EU funds, and export growth which remains the main basis of recovery, reports on April 21, 2017.

However, they point out that financial issues and uncertainty associated with Agrokor represent a negative risk. “Given the problems in Agrokor, whose revenues account for 15 percent of GDP, the fact that the extent of restructuring is not yet known, and the fact that there are about 2,000 companies with strong business links with Agrokor, there are negative risks. It is too early to quantify them,” say the Addiko Bank analysts.

Still, they also believe there are a number of positive factors that will mitigate the negative impact of Agrokor, such as a record tourist season, commodity exports, and stronger EU funding and direct foreign investments.

Exports continue to benefit from moderate EU demand, competitive gains and improved role in global value chains. More expansionary monetary policies are enabled by a higher surplus in the balance of payments, stronger external position of the banks and the expected exit of Croatia from the excessive deficit procedure.

In addition to keeping the GDP growth estimates for this year, Addiko has slightly lowered consumer price growth estimate to 1.4 percent, although there is a risk of its rise due to the impact of another record-breaking tourist season.

The budget deficit unexpectedly declined significantly last year, to just above one percent of GDP, mainly due to the lack of spending during the caretaker government, as well as the investments from EU funds. However, after two years of strong fiscal consolidation, the analysts expect higher deficit this year of around two percent of GDP due to tax cuts, wage increases in public services, higher spending on projects funded by EU funds, higher spending on defence, and growth of debt in healthcare.

“With the short-term impact on GDP growth and tax revenues, Agrokor restructuring is an undeniable threat to the budget, if the new law (“Lex Agrokor”) leads to taxpayers covering the company's restructuring costs or if it exposes the state to legal proceedings due to non-market practices,” say the Addiko analysts.

According to the baseline scenario, they expect that the stronger GDP growth and low interest rates will lead to further decline in public debt to 82.5 percent of GDP. At the end of last year, public debt stood at 84.2 percent of GDP.

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