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Raiffeisen Report Research

I SSN 1332-9405 R a i f f e i s e n b a n k C r o a t i a R e s e a r c h N o. 3 4 J u l y 2 0 0 9

Few reasons for optimism, many for changes

Gross domestic product, real annual growth rates
8 6 4

2 0 2 4 6
Bosnia a. H. Poland Hungary Czech Rebublic Slovakia Slovenia Croatia Bulgaria Romania Serbia Albania Eurozone USA



Sources: Raiffeisen Research, Bloomberg

Movements in the balance of payments

10 9 8 7 6 5 4 3 2 1 0
2000 2001 2002 2003 2004 2005 2006 2007 2008

Current account deficit Foreign direct investments

Sources: CNB, CBS

The strong fall in economic activity at the beginning of 2009 should not have come as a surprise considering the real sector indicators and the intensity of GDP fall in other countries of the region. Continued strong fall in domestic economy in the next quarters should also not surprise us. In view of the numerous insecurities as regards this years tourist season, we should not discard the possibility of even stronger-than-expected GDP fall. Only slightly more favourable developments may be seen in the second half of next year, which will reflect themselves on the domestic labour market with an additional time delay, not earlier than 2011. The reactions of the economic policy-makers to the crisis were more or less in line with expectations. The central bank continued implementing the stable exchange rate (price) policy, which was, considering the specifics of the domestic economy, a justified choice. At the same time, the fiscal authorities failed to find an appropriate solution, both economic and political, to reduce the rising public spending during the major part of this year. Under such circumstances the largest burden was carried by the corporate sector. We have not seen any efficient anti-recession measures as yet. The character of the current state subsidies system is more that of an instrument of social policy and less of economic policy, therefore its positive influence on the economy is limited. Moreover, the necessity to cut the budget deficit will probably lead to the increase in tax burden and/or excise duties, creating additional pressures on the declining economic activity. The exceptionally strong role of the state in the domestic economy has resulted in a fact that budget deficit leads to a substantial deterioration in the liquidity of the real economy. The said problem is additionally underlined by the fact that corporate sector demand for loan exceeds supply, since a substantial portion of the banks lending potential this year was used to finance government needs. A decline in foreign direct investments and a slowdown in the growth of external debt show that the recovery in capital flows towards the fast-growing economies in the region will take time. Except pressures on national currencies and on the stability of the financial market in the region, reduced inflow of foreign capital will limit the room for recovery of domestic spending. For this reason, more export-oriented countries of the region could see a faster and easier recovery. Croatia is faced with a period for large changes in economic policy because if we continue to rely primarily on stimuli from the external environment, recession will be followed by economic stagnation, not to exclude the possibility of stagflation.

% of GDP


Total loans by sectors

250 230 210 190 170 150 130 110 90 70 50

billion HRK

Sources: CNB, Raiffeisen Research

Q4.05 Q1.06 Q2.06 Q3.06 Q4.06 Q1.07 Q2.07 Q3.07 Q4.07 Q1.08 Q2.08 Q3.08 Q4.08 Q1.09

Loans to households Loans to government

Loans to enterprises



Selected macroeconomic indicators ............................................................................... 3


Strong GDP fall, weaker inflationary pressures ................................................................ 4


Recurring problems in the domestic labour market .......................................................... 5


Tourism does not bring recovery .................................................................................... 6


Expected decline in M1 .................................................................................................. 7


A temporary break ........................................................................................................ 8


External debt growth halted ........................................................................................... 9


In expectation of third budget revision ...........................................................................10


Growing risk of placements .........................................................................................11


Price recovery spurred by expectations of growing demand ............................................12


Global financial crisis and banking systems of New Europe .........................................13


First Eurobond issue since 2004 ....................................................................................16


Optimistic quarter ........................................................................................................17 10 shares account for 70% of turnover ..........................................................................18 In line with global sentiments ........................................................................................19


Selected macroeconomic indicators

2001 GDP & production Gross domestic product, % (constant prices) GDP at current prices (EUR million) GDP per capita at current prices (EUR) Retail trade, % real annual changes Industrial production, % annual changes Prices, employment and budget Consumers prices1, %, eop %, avg Producers prices, %, eop %, avg Unemployment rate2 (official rate, eop) Average net wage, in HRK, eop General government balance3, % of GDP 2002 2003 2004 2005 2006 2007 2008 2009e 2010f 4.4 5.6 5.0 4.2 4.2 4.7 5.5 2.4 4.5 0.4 25,539 28,110 30,014 32,759 35,720 39,102 42,832 47,390 45,495 47,083 5,756 6,327 6,756 7,375 8,045 8,817 9,675 10,724 10,271 10,843 10.0 12.5 3.7 2.6 2.8 2.1 5.3 0.5 9.1 0.6 6.0 5.4 4.1 3.7 5.1 4.5 5.6 1.6 5.1 1.7 2.4 3.8 3.1 3.6 23.1 3,582 6.8 1.9 1.7 2.3 0.4 21.5 3,839 4.9 1.7 1.8 1.0 1.9 19.1 4,045 6.2 2.7 2.1 4.8 3.5 18.5 4,312 4.8 3.6 3.3 2.7 3.0 18.0 4,473 4.0 2.0 3.2 1.9 2.9 17.0 4,735 3.0 5.8 2.9 5.8 3.4 14.7 4,958 2.3 2.9 6.1 4.7 8.4 13.7 5,410 2.4 4.2 3.2 1.9 0.4 14.5 5,150 3.4 4.3 4.4 3.9 4.0 14.4 5,200 2.5

Balance of payment and external debt Goods export, EUR million 10,809 11,128 13,141 14,243 15,273 16,992 18,317 19,835 16,621 18,068 % change 14.8 3.0 18.1 8.4 7.2 11.3 7.8 8.3 16.2 8.7 Goods import, EUR million 12,101 13,801 15,179 16,199 17,473 19,632 21,485 23,739 19,195 22,336 % change 15.9 14.0 10.0 6.7 7.9 12.4 9.4 10.5 19.1 16.4 3.2 7.5 6.3 4.4 5.5 6.9 7.6 9.4 6.7 7.9 Current account balance, % of GDP4 Official international reserves, EUR millon, 5,334 5,651 6,554 6,436 7,438 8,725 9,307 9,121 8,000 7,600 eop 5.3 4.9 5.2 4.8 5.1 5.3 5.2 4.6 5.0 4.1 Official international reserves, in terms of months of imports of goods and services, eop4 Foreign direct investment, EUR million 1,467 1,138 1,762 950 1,468 2,765 3,667 2,930 1,000 1,800 Tourism nightstays, % change 10.9 3.0 4.3 2.5 7.6 3.1 5.6 2.0 8.5 3.0 External debt, EUR billion 13.6 15.1 19.9 22.9 25.7 29.3 33.3 39.3 40.8 42.0 53.3 53.9 66.2 70.0 72.1 74.9 77.6 82.4 89.7 89.2 External debt, as % of GDP4 External debt, as % export of good and 125.9 136.1 151.3 161.0 168.6 172.3 181.5 196.8 245.5 232.5 services4 Monetary and financial data Exchange rate, eop, USD/HRK 8.35 7.15 6.12 5.64 6.23 5.58 4.99 5.16 5.03 4.93 avg, USD/HRK 8.34 7.87 6.70 6.04 5.95 5.84 5.36 4.94 5.25 5.21 Exchange rate, eop, EUR/HRK 7.37 7.44 7.65 7.67 7.38 7.35 7.33 7.32 7.65 7.50 avg, EUR/HRK 7.47 7.41 7.56 7.50 7.40 7.32 7.34 7.22 7.46 7.55 Money (M1), HRK billion, eop 23.7 30.9 33.9 34.6 38.8 48.5 57.9 55.2 50.9 52.0 % change 30.1 30.2 9.8 2.0 12.3 25.0 19.3 4.6 7.8 2.1 Broadest money (M4), HRK billion, eop 106.1 116.1 128.9 139.9 154.6 182.5 215.8 225.0 230.6 241.9 % change 45.2 9.5 11.0 8.6 10.5 18.0 18.3 4.3 2.5 4.9 Credits, HRK billion 75.0 97.5 111.7 127.3 149.2 183.4 210.8 233.0 253.7 281.6 % change 23.1 30.0 14.6 14.0 17.2 22.9 15.0 10.5 8.9 11.0 ZIBOR 3m, %, avg 7.9 4.6 5.5 7.3 5.2 4.3 5.7 7.2 10.5 8.0 Treasury bills rate 12m, %, avg 3.7 4.8 6.3 5.0 3.9 4.2 6.0 7.8 6.7
RPI (retail price index) was used for the period 19972001 Survey of labor force by ILO methodology shows unemployment rate of 8.4% for 2008 Without capital revenues (privatization) 4 In euro terms e estimate; f forecast; eop end of period; pa period average Sources: CNB, MoF, CBS Forecasts: Economic Research Department Raiffeisen Consulting
1 2 3

GDP and inflation

Strong GDP fall, pressures weaker inflationary

Gross domestic product, real annual growth rates
9.0 7.0 5.0 3.0

% 1.0
1.0 3.0 5.0
Q4.05 Q1.06 Q2.06 Q3.06 Q4.06 Q1.07 Q2.07 Q3.07 Q4.07 Q1.08 Q2.08 Q3.08 Q4.08 Q1.09 2010f


Sources: CBS, Raiffeisen Research

GDP growth rates

Croatia Bulgaria Slovakia Poland Hungary Slovenia Czech R. Romania EMU USA 2006 4.8% 6.3% 8.5% 6.2% 4.1% 5.7% 6.9% 7.9% 2.9% 2.8% 2007 5.5% 6.2% 10.4% 6.7% 1.1% 6.8% 6.1% 6.2% 2.7% 2.0% 2008 2.4% 6.0% 6.4% 4.9% 0.6% 3.5% 2.8% 7.1% 0.6% 1.1% 2009e 4.5% 3.5% 4.5% 0.8% 6.0% 3.0% 3.2% 6.0% 4.3% 3.0%

The beginning of the year confirmed expectations of a strong GDP growth, registering the most sizeable contraction of the economy since the end of 1993 (-6.7%). The outlook for the remainder of the year is not optimistic. The most important growth generators thus far, personal consumption and gross fixed capital formation had the most important influence on unfavourable developments, as a reflection of the adjustment of households to new developments and postponement of investment projects. An even stronger fall was softened by the growth of government spending and a stronger fall of imports than exports. The latter is to the greatest extent a consequence of the decline in prices of crude oil and food products in the worlds commodities markets. The decline in trade turnover, stagnation of credit activity, decline in employment and only a mild growth of real wages feed into expectations of further decline of household spending. The lack of capital to finance government investments paired with a reduction, in government spending could cause a greater decline in GDP than the expected 4.5% in 2009. The start of a recovery, accompanied by modest growth rates, is expected not sooner than in the second half of next year. In the long-term, sustainable growth and development can be achieved only by increasing competitiveness, i.e. aligning spending and production, and implementing structural changes. Although the beginning of the year brought about an increase in individually administratively determined prices and weaker demand for goods and services did not result in more substantial pressure on the decline of prices, 2009 will certainly see a more sizeable decline in the prices. This is confirmed by the data for the first five months of the year, during which the annual inflation rate stood at 3.6%. Further reduction of inflationary pressures will be a consequence of last years high base but also of a strong fall in domestic demand. Expected recovery of developed economies in the end of the year accompanied by the growth in energy prices in commodity markets could create certain (external) pressures. Less familiar are the internal factors, such as the adjustment of administratively determined prices against market levels (utilities and energy), the adjustment of the tax system and the excise duty system to EU standards, the increase in tax rates, the introduction of new taxes and finally low competitiveness, i.e. structural problems in the domestic economy.

Sources: WIIW, Raiffeisen research, Bloomberg

Consumer price index, in %, annual level

9 8 7 6 % 5 4 3 2 1 0
5.06 7.06 9.06 11.06 1.07 3.07 5.07 7.07 9.07 11.07 1.08 3.08 5.08 7.08 9.08 11.08 1.09 3.09 5.09
Source: CBS

Industrial production and employment

Recurringdomestic labour market problems in the

Basic indicies of industrial production, 2005 = 100
120 115 110 105 100 95 90 85
2.09 11.06 5.06 8.06 2.08 11.07 11.08 5.08 2.07 5.07 8.07 8.08 5.09

Source: CBS

Construction, yoy change

25 20 15 10 % 5 0 5 10
4.05 7.05 10.05 1.06 4.06 7.06 10.06 1.07 4.07 7.07 10.07 1.08 4.08 7.08 10.08 1.09 4.09

The reduction in domestic and external demand paired with the growth in inventories resulted in the continued strong fall of industrial production in the second quarter. While the fall in production at the beginning of the year was cushioned by strong growth of production in the energy segment (due to inelastic demand and colder weather), the remainder of the year saw a fall in this segment. However, it was paired with a slowdown in the decline of other sectors. Signs of euro zone recovery and the last years lower base will contribute to slightly more favourable future movements. Substantial reductions in capacity, cuts in the number of the employed and reduction in productivity will be only some of the direct consequences of unfavourable trends. However, there is hope that the actual crisis will result in the necessary fast restructuring of the industrial sector, especially its key segments for the domestic economy (shipbuilding, textile and wood industry). The government subsidy system that is still being restructured, undergoing value adjustments and redirection of assets from the so-called vertical to horizontal subsidies, should, after the initial shock, contribute to a more competitive industrial sector. Developments in the labour market during the Q2 were marked by the continuation of the rise in the number of unemployed persons and negative growth rates of employed persons. Low season tourism data indicate that favourable seasonal influences will be less intensive this year. Negative influences from the real sector are expected to reach the labour market with a certain time delay. Except the mentioned cyclical movement, one should not forget the structural problems of the labour market. The unemployment in Croatia may primarily be classified as structural, meaning that it is above all a consequence of the imbalance between supply and demand from the aspect of profession, education, knowledge and expertise of job seekers and requirements of the labour market. Therefore, a high number of registered unemployed persons is concurrent with an increased demand for workers. This imbalance, in the short run, leads to upward pressures on wages, which reduces international competitiveness and in the long run it jeopardises the stability of the fiscal system. Under these circumstances, there is a growing need for new employment measures, in order for the supply of workers to respond to changes in the structure of the economy once the recovery starts. 5

Source: CBS

Unemployed persons, unemployment rates

320 300 280 260 240 220 200
2.09 11.06 5.06 8.06 2.08 11.07 11.08 5.08 2.07 5.07 8.07 8.08

20 18 16 14 % 12 10 8 6


Unemployed persons (left scale) Unemployment rate, official (right scale) Unemployment rate (ILO methodology)
Sources: CBS, CES

Trade and tourism

Tourism does not bring recovery

Retail trade, real growth, yearly
12 8 4 0 % 4 8 12 16 20
11.06 5.06 8.06 2.07 11.07 5.07 8.07 2.08 11.08 5.08 8.08 2.09 5.09

Source: CBS

Tourist overnight stays, yoy change

12 10 8 6 4 % 2 0 2 4 6 8
2001 2002 2003 2004 2005 2006 2007 2008

Mild growth of real wages, an increase in unemployment, stagnation of bank lending activity and finally the prohibition of work on Sundays were the dominant factors contributing to the strong fall of personal consumption and retail trade turnover in the H12009. The annual real rate of decline in trade maintained high two-digit levels, reflecting a strong decrease in the purchasing power of households and indicating the strongest contraction of the largest GDP component. We expect the decline in retail trade turnover to continue, but it is expected that the dynamics of the fall could loose in intensity in the remainder of the year. As a result, the annual real rate of decline in turnover for the entire 2009 will draw closely to a two-digit figure. Domestic consumer optimism is still at very low levels and the continuation of the crisis in the real sector, deterioration in the labour market and relatively slow recovery of the capital market paired with reduced lending activity of banks do not feed into expectations of a pending recovery. A recovery in retail trade is expected to be seen in the second half of next year, however, with prior recovery of other segments of the domestic economy, such as the industrial production and tourism. Preliminary data on the number of arrivals and tourist overnight stays confirmed our expectations of a noticeable decline of physical indicators in tourism. Economic downturn in our emitive markets, stressed a decline in overnight stays and arrivals of foreign guests, who usually dominate the high season. The unfavourable situation will probably be seen at its worst when data on revenues from tourism come in, as they are the most important factor in softening the C/A deficit. Amid the current situation of reduced investments with omnipresent insecurity, it cannot be expected that old problems in the activity under review will be solved. Outspoken seasonality, low average level of accommodation quality, outdated technology, and unfinished hotel privatisation process, low presence of international brands and lack of qualified work force will remain the main weaknesses of this exceptionally important segment of the economy. However, under the circumstances of low profitability of the tourist sector and limited access to external sources of financing it is difficult to expect the restructuring process started in the tourism sector to continue with the opening of new or the refurbishing of the existing accommodation capacities.


Source: CBS

Revenues from travel

8 7 6
billion EUR

5 4 3 2 1 0
2010f 2000 2001 2002 2003 2004 2005 2006 2007 2008

Sources: CNB, CNTB, Raiffeisen research


Interest rates and monetary aggregates

Expected decline in M1
Interest rates
12 11 10 9 8 % 7 6 5 4 3

T-bills 364d
Sources:, CNB, MoF


Loan growth, in %, annual level

40 35 30 25 % 20 15 10 5 0
5.06 7.06 9.06 11.06 1.07 3.07 5.07 7.07 9.07 11.07 1.08 3.08 5.08 7.08 9.08 11.08 1.09 3.09 5.09

Loans to households Housing loans

Source: CNB

Loans to enterprises Others to households

Monetary aggregates and domestic loans (growth rates, annual level)

30 25 20 15 10 % 5 0 5 10 15
5.06 7.06 9.06 11.06 1.07 3.07 5.07 7.07 9.07 11.07 1.08 3.08 5.08 7.08 9.08 11.08 1.09 3.09 5.09

Source: CNB


Domestic loans

Following a period of high tensions and consequently high interest rates, in the second quarter of the year tensions in the domestic money market eased. The precondition for this was the softening of depreciation pressures on the kuna, although the central bank continued implementing a restrictive monetary policy. However, banks ensured their kuna liquidity by selling foreign exchange in the market and structural illiquidity of the system significantly reduced. Thus, overnight yields mostly remained at the level close to the Lombard rate (9%) in the beginning of the period of maintaining the mandatory reserve requirement, while towards the end of the period they reduced to minimum levels. At the same time, the need for Lombard loans to ensure sufficient liquidity sizeably reduced. Weakening economic activity, especially in tourism and trade, created lower pressure on the growth of currency outside banks relative to previous years. However, the widening budget deficit resulted in continued intensive short-term borrowing by the government, creating liquidity pressures. The trends in the domestic money market are not expected to change much during the tourist season. However, in autumn tensions and interest rates could rise again, as confirmed by the fact that the CNB is has pressed ahead with its current policy. The intensity of these pressures will primarily depend on the strength of the downward pressures on the kuna, on this years budgetary deficit as well as on ways in which the government will (re)finance its liabilities. The decline in monetary aggregate M1, as well as further slowdown in the annual growth of the monetary aggregate M4, continued through the second quarter. The decline in M1 at two-digit rates is primarily a consequence of the expected reduction in demand deposits, considering the narrowed credit and investment activity in the domestic economy. Total liquid assets continued growing year-on-year, primarily as a result of rising deposits with commercial banks. However, despite the still high interest rates and insecurity in the capital market, the growth of savings with banks slowed down in the last few months. In the coming period, we expect further decline of the monetary aggregate M1, again primarily influenced by the reduction in demand deposits. In turn, a slowdown in the growth of deposits due to the reduction in the available income of households, rising illiquidity in the real economy and lower tourism income will create downward pressures on the monetary aggregate M4. 7














Exchange rate

A temporary break
Middle exchange rate of the CNB
7.50 7.45 7.40 7.35 7.30 7.25 7.20 7.15 7.10 7.05 7.00
1.09 2.09 3.09 4.09 5.09 6.09 5.08 6.08 10.08 7.08 11.08 8.08 12.08 9.08

6.00 5.80 5.60 5.40 5.20 5.00 4.80 4.60 4.40


EUR/HRK (left scale)

Sources: CNB, Raiffeisen research

USD/HRK (right scale)

Middle exchange rate of the CNB

Middle exchange rate Currency 30.6.2009 EUR USD CHF GBP
Source: CNB

Change compared to: 31.12.2008 Exch. rate 7.3244 5.1555 4.9111 7.4845 Movements % 0.44 0.95 2.78 14.85

7.2920 5.2045 4.7744 8.5960

CNB operations and exchange rate movements

8 7 6 5 4 3 2 1 0 7.45 7.40 7.30 7.25 7.20 7.15
2.09 4.09 2.08 10.08 4.08 10.07 12.07 12.08 6.08 6.07 8.07 8.08 6.09

billion HRK


Creation(+)/Destruction() of kuna liquidity* EUR/HRK average (right scale)

* Effect of FX interventions and reverse repo auctions of T-bills on money supply. Sources: CBS, Raiffeisen research

Exchange rate forecast

2009e EUR/HRK, avg EUR/HRK, eop USD/HRK, avg USD/HRK, eop 7.46 7.65 5.25 5.03 2010f 7.55 7.50 5.21 4.93



Downward pressures on the kuna started weakening already early in the second quarter, which resulted in the fall of the EUR/HRK FX rate from almost HRK 7.50 to HRK 7.23 for euro. The softening of depreciation pressures was a consequence of typical seasonal developments and the narrowing in the balance of payments current account deficit. However, corporate sector demand continued to be prominent amid the need to finance due foreign liabilities. However, possibly the most important influence on exchange rate developments came from the government borrowing in the foreign market. In addition, at a particular moment a significant influence on the domestic market came from the indicators of foreign borrowing by the CBRD, extra budgetary funds and state-owned enterprises. In the period in question, there was no need for the CNB to intervene in the foreign exchange market aiming at stabilising the exchange rate. Ample supply of foreign exchange from tourism should keep the FX rate ranging between HRK 7.30 to HRK 7.45 for euro during most of the tourist season. However, when autumn approaches we expect depreciation pressures on the kuna to gain strength. This years positive trend of declining trade deficit is expected to reverse late in 2009, since strong fall in imports was also a consequence of lower prices of crude oil and intermediary goods. Weaker income from tourism will also have an impact. At the end of this year, we expect the EUR/HRK FX rate to stand at some HRK 7.65 for euro, not excluding even slightly higher levels at times. With the strengthening of seasonal influences, we expect the said depreciation pressures to be present also at the beginning of the next year. A significant influence on the exchange rate developments will come from the governments need to finance the budget deficit but also the ability of the domestic sector to refinance external liabilities that fall due in the foreign markets. While it is expected that banks will manage to refinance most of their liabilities, the government and the corporate sector could have their work cut out for them. The central bank reaffirmed its commitment to price, i.e. exchange rate, stability regardless of the strong fall in economic activity. The rationale for such a decision may be found in the fact that Croatia is a highly euroised country with high foreign indebtedness and that it is dependant on the imports of energy and intermediary goods. The increase in competitiveness should be sought through structural reforms and fiscal policy, while exchange rate policy should be used for fine tuning.

Balance of payments, trade and external debt

External debt growth halted

Current account balance, % of GDP
0 2 4 % 6 8 10
2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: CNB

Foreign trade of goods

25 20 15
billion EUR

10 5 0 5 10

The balance of payments current account deficit totalled EUR 1.8bn, or 7.9% of GDP in the Q12009. Although in absolute and relative amounts it registered a sizable fall, the deficit structure and future expectations do not feed into expectations that the declining trend could continue in the next periods. Moreover, the most favourable way of financing deficit, FDI, fell substantially short in the first quarter. The cumulative data for the entire year are expected to indicate that they are insufficient to cover the current account deficit. This could result in pressures to reduce international reserves. The most important influence contributing to the decline in the deficit came from the reduction in the deficit on the goods account, since the reduction in the value of exports amid the decline in the prices of energy on the worlds commodity exchanges was stronger than the reduction in the value of imports. Despite the expected continuation of the strong contraction in domestic consumption in the second half of the year and partial recovery of external demand, in the remainder of the year we do not expect the latest, favourable, developments in foreign trade to continue, especially taking into account the rising tendency of energy prices. On the other side, the most ample current account revenues, those from tourism, could see two-digit rates of decline. The beginning of 2009 brought about a fall in external debt but also indications of changes in the structure of foreign borrowing. The fall was primarily a consequence of a decrease in bank and government liabilities towards foreign creditors. However, considering the governments latest borrowing on the international capital market and possible further financing of the budget deficit through new issues, we expect the external debt of this sector to widen in 2009. Even when the crisis peaked, domestic banks were able to increase their foreign borrowing and thus significantly contributed to the stability of the overall financial and fiscal system. Therefore it is to be expected that foreign liabilities will continue growing this year. At the same time, more difficult access to sources of financing in line with conditions on financial markets will certainly reign in corporate demand for foreign assets. We expect the absolute amount of foreign debt to see a relatively modest increase in 2009, especially relative to previous years. However, its share in GDP is expected to exceed 90%.


2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: CBS


Balance of foreign trade

External debt and ratios

Quarters External debt (EUR mn) External debt as % of: GDP International Exports of reserves (% of goods and external debt) services

Q4.05 Q1.06 Q2.06 Q3.06 Q4.06 Q1.07 Q2.07 Q4.07 Q4.07 Q1.08 Q2.08 Q3.08 Q4.08 Q1.09
Source: CNB

25,748 26,654 27,716 27,372 29,274 30,149 31,058 31,227 33,253 34,967 35,409 36,259 39,300 39,128

72.0% 72.6% 73.9% 71.3% 74.9% 75.4% 75.9% 74.5% 77.6% 79.5% 78.3% 77.9% 82.4% 83.2%

168.6% 168.9% 172.1% 165.9% 172.3% 175.9% 175.9% 172.2% 181.5% 188.3% 185.4% 183.1% 198.0% 201.1%

28.9% 30.3% 31.5% 29.7% 29.8% 31.6% 29.5% 28.2% 28.0% 28.1% 28.1% 27.1% 23.2% 22.7%



Government budget

In expectation of third budget revision

General government expenses according to revised budget 2009
Expenditures for non-financial assets 2% Other expenses 5% Cost of employees 26%

Social transfers 47%

Material expenses 7% Financial expenses 4% Grants 5% Subsidies 4%

Sources: MoF, Raiffeisen Research

Central government expenditures

140 120 100
billion HRK

80 60 40 20

2002 2003 2004 2005 2006 2007 2008

Sources: MoF, Raiffeisen Research

Public debt
mil. HRK 2002 2003 2004 2005 2006 2007 2008 General government debt 72,454 81,222 92,795 101,185 102,210 104,069 99,332 CBRD Guarantees 3,825 4,925 5,842 7,139 7,686 9,662 10,814 16,079 15,419 12,262 12,455 14,188 17,399 33,307 Total 92,358 101,566 110,899 120,780 124,084 131,130 143,453 % in GDP without guarantees 36.6% 37.9% 40.2% 41.0% 38.4% 36.2% 32.2% % in GDP 44.4% 44.7% 45.2% 45.7% 43.3% 41.7% 41.9%

Source: MoF, CBS, Raiffeisen Research

In line with strong decline in economic activity, the Q1 of the year also saw a nominal fall in budget revenues. The strong fall in domestic consumption resulted in the two-digit fall of the most important source of budget revenues, the VAT, as well as in excise duties. Further, there was a substantial fall in revenues from direct tax (income and profit tax). At the same time, social benefits and employee compensation grew, resulting in the two-digit growth rate of the annual budget expenditures. In the H1, the increase in the budget deficit was mostly covered by the Eurobond issue, and on the domestic market, through T-bill auctions and growth of loans to the government. According to the current indicators, retail trade and tourism expect a continued decline in tax revenues from consumption of goods and services, as well as in excise duties. In addition, the expected continuation of the reduction in the number of the employed and wage cuts will result in further decline of revenues from income tax. Under these circumstances, an unfavourable expenditures structure and slow adjustment of government consumption will result in mounting pressures on the widening of the budget deficit. At times of unfavourable economic developments pressures on the growth of subsidies and social benefits are growing. However, this years second visit to the foreign capital markets will probably be a far riskier and more expensive endeavour. In addition, inability to further substantially reduce foreign exchange reserves of the banking system and the slowdown in deposit growth suggest there is far less room for the governments domestic borrowing. Due to more difficult conditions of financing its budget deficit, Croatia is unable to implement an expansive fiscal policy aimed spurring economic activity. After this years second budget revision, aimed at redistribution of assets on the expenditures side, the announced third revision of the 2009 budget should result in more sizable cuts. The intensity and structure of expenditure cuts will be influenced also by certain political factors, but it is evident that it will come to a further halt in government investments. In addition, the inability to efficiently reduce expenditures in the short-term will probably lead to a certain increase in the tax burden and excise duties, which is necessary, regardless of unfavourable economic effects. However, such measures should not be used to delay reductions in public expenditures. Considering everything that has been said, this years budget deficit is expected to be maintained at levels of 3.5% of GDP.


Financial system

Growing risk of placements

Foreign liabilities and deposits growth, annual level
30 20 10 % 0 10 20
5.06 7.06 9.06 11.06 1.07 3.07 5.07 7.07 9.07 11.07 1.08 3.08 5.08 7.08 9.08 11.08 1.09 3.09 5.09

Demand deposits Time and savings deposits Banks foreign liabilities

Source: CNB

Capital adequacy ratio

20.6 21.3 18.5 17.2 16.2 16.4 14.2

20 15

15.3 14.6 14.0


10 5 0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: CNB

Problem loans share and assets increase

35 30 25 20 % 15 10 5 0 5
1998 1999 2000 2001 2002 2003 2005 2006 2004 2007 2008

Problem loans share

Source: CNB

Assets increase

After the last years bank asset growth of 7.5%, as a result of investors fleeing from the domestic capital market at the beginning of the year and banks increasing their foreign debt at the end of the year, in the first five months of 2009 bank asset growth halted, with bank assets stagnating at HRK 370bn. In the observed period, the level of deposits with banks remained unchanged, as well as the level of loans granted. Only government loans went up, primarily thanks to the releasing of the foreign liquidity reserves to banks. Of the CNBs more restrictive measures, only the limitation of bank credit growth at 12% per year remained in place. However, in view of the stagnation in the volume of loans it is likely that it too will soon be done away with. In line with global trends, domestic banks became more sensitive to the risk of their placements. Conditions for assessing clients creditworthiness have been tightened, as well as those for assessing the quality of collateral. Banks closely monitor their collection rates and carry out organised placement restructuring activities with clients that have growing loan repayment problems. At the end of last year, the years-long trend of narrowing participation of problem placements in total placements, which marked the previous period of economic prosperity and loan expansion, was reversed. As a direct consequence of two-digit loan growth rates, the average age of loans reduced and thus did the ratio of unpaid claims to total claims. However, it is evident that due to recession the average age of their portfolios will grow, as well as losses on value adjustment of their loan portfolios. Therefore bank activities are directed at increasing income, increasing the level of capitalisation and optimisation of losses on portfolio valuation. Although the decision on the increase of the minimum capital requirement together with the abandonment of the share of the capital requirement for currency-induced credit risk will not be implemented this year, banks business policies are to be adjusted to future capital requirements as of the beginning of the year. The amendments to bank policies are reflected in the increase of the capital adequacy ratio, which in the first quarter went up to 15.4%. There is also the general trend of keeping profits in bank capital, as well as of the abandonment of competitive but more risky credit products such as long-term loans indexed to the Swiss franc. In addition, there is the increase in the interest spread from which additional bank revenues are formed and which will cover the expected losses of the loan portfolio. 11

World trends

Price by expectationsspurreddemand recovery of growing

Crude oil price
150 130

110 90 70 50 30
1.09 2.09 3.09 4.09 5.09 6.09 7.08 10.08 8.08 11.08 9.08 12.08 7.09

Source: Bloomberg


World oil demand and supply, mnb/d

OECD OECD Europe North America China Total demand OECD OECD Europe North America TOTAL Non-OPEC OPEC Total supply
Source: IEA

2006 49.6 15.7 20.7 7.2 85.1 20.0 5.2 8.3 51.2 35.8 84.6

2007 49.2 15.3 20.7 7.5 86.0 19.8 5.0 8.5 50.1 35.4 84.4

2008 2009f 47.5 45.8 15.2 14.6 19.4 19.0 8.0 8.2 85.7 84.3 19.3 4.7 8.5 49.8 35.7 85.5 19.0 4.2 8.9 50.8 28.7 83.5

2010f 45.8 14.4 19.2 8.4 85.2 19.0 9.1 51.2 35.4 85.4

Crude oil price (Brent), quarter average

130 120 110 100 90 80 70 60 50 40 30
124 117

98 91 75 57 46 60 66 70 70 72

65 58

Was the growth of crude oil prices in the second quarter a preliminary indicator that the global economy has started recovering or was it just a consequence of market speculations by the largest players? In June, the price of crude oil on the worlds commodities exchanges exceeded USD 73 per barrel, which was its eight-months high and more than double the figure seen in February. However, the IEA warned that the price revision only signalled a shift up from the deepest end of the crisis and by no means indicated a start of the global economic recovery. Further the IEA warned that the crude oil price has not recovered due to optimism in expectation of a financial recovery but due to concrete demand and supply fundamentals. Long-term deliveries, with delivery set for December 2017 grew to above USD 90 per barrel, signalling to investors that there was room for further price growth. According to the latest data, the IEAs estimates of global demand for oil in 2009 have been raised by 120 thousand bpd based on indicators from OECD countries which showed more movement than analysts had expected. Thus, according to the latest data, global demand for crude oil totalled 83.3 million bpd, which was a reduction of 2.9% relative to 2008. The said positive indicators are not necessarily to be understood as signs of economic recovery, but show a slowdown in the strong fall that has been seen thus far. The supply by non-OPEC members has been increased by 330 thousand bpd, spurred by the growth of new wells in Russia. Further, the growth of supply was also seen by OPEC members, which account for 40% of the global production of crude oil. Crude oil supply totalled 83.7 bpd. In the quarter under review, the price of crude oil in the worlds commodities exchanges moved around USD 59 per barrel (WTI). Historically, one of the consequences of economic recovery has always been a spike in the demand for crude oil. We expect the same in this economic cycle. Viewing the production trends, it is clear that OPEC members that have absorbed the decline in production during the current economic downturn are ready to meet a large portion of global needs with their production capacity and, to a degree, meet the growing global demand for oil once the world economy recovers. However, considering that significant investments in the increase of production and transport capacity have been postponed it is very likely that increased demand will result in the growth of oil prices.


Sources: Bloomberg, Raiffeisen Research
















Banking sector

Global financialofcrisisEurope and banking systems New

IMF/EU support for CEE (USD bn)
Bosnia a. H. Belarus Serbia Latvia Ukraine Poland (FCL) Hungary Romania
0 5 IMF
15.8 17.1 1.5 2.4 4 2.3 7.5 16.5 20.5 9.4 9.3






EU, World Bank and others

Sources: Thomson Reuters, IMF, Raiffeisen Research

Total assets in % of GDP

300 250 200 % 150 100 50 0

The collapse of the Lehman Brothers, one of the US largest investment banks, in September last year strongly affected banking systems all over the world and consequently in Central and Eastern Europe. What fallowed was a period of sudden fall in exports, foreign direct investments and, in general, increased aversion of investors to risks in the region. The banking industry in the region was faced with exceptionally limited liquidity and mounting bad placements. However, the measures agreed by the leading politicians and economists of the international community at the G-20 meeting in London in April 2009 restored confidence in the market providing assurance that countries in the region will be able to service their debts. Additional measures that have been taken by supranational institutions like the IMF, the World Bank and the EBRD, as well as governments of individual countries, strengthened the credibility of the banking system, while the majority of foreign-owned banking groups stressed their commitment towards the continuation of operation in the region and in countries generally thought of as risky. The Croatian financial system (both the regulator and commercial banks) showed extreme resilience and maturity in facing new circumstances. Aiming at releasing additional liquidity and stabilising the market, the CNB loosened its restrictive monetary policy since September. The Croatian banking system survived the first impact of the crisis without direct government help or help from other supranational institutions. However, under these new circumstances the lending activity of banks directed at the private sector reduced, or rather almost came to a halt. The widening of budget deficit and larger financial needs of the government pushed other sectors away from the sources of financing as well as led to the piling up of overdue claims and deepening of system illiquidity. Since in accordance with both economic theory and empirical analyses quality financial intermediation ensures optimum allocation of resources, ultimately contributing to economic growth through both direct but also indirect positive effects, the conclusion arises that further continuation of this situation could have negative effects on general economic growth and development. Just the direct, measurable, influence of the financial sector on the creation on the GVA totals as much as 4.5%, while indirect and multiplicative impacts are far larger (rising unemployment, larger contributions to the state budget, risk dispersion, 13


CEE Croatia


SEE Eurozone


Sources: Local central banks, Raiffeisen Research

Return on Assets and Return on Equity, 2008

30 25 20

15 10 5
Bosnia and Herzegovina Hungary Bulgaria Croatia Poland Romania Czech Republic Slovakia Slovenia Serbia



Sources: Local central banks, Raiffeisen Research

Banking sector
cost reduction, etc.). However, as of 2004 banks have been registering a noticeable decline in ROE and consequently of the share of the banking sector in total GVA. By reviewing the figures on bank profit before tax in absolute terms (profit after tax grew also in the first quarter 2009), one is under impression that in contrast to the real sector the Croatian banking system managed to realise exceptionally good operating results even at a time of crisis (although one should wait for what 2010 will bring, i.e. for the data for the entire 2009). However, profit has an economic meaning only when put in relation to the economic size participating in its creation. Therefore, during a bank profitability analysis profit should be viewed against the capital engaged so the only measure used in capturing banking system profitability is ROE. Profitability ratios determine the perception on the success of investments and the behaviour of owners in deciding on profit distribution and new investments. Over the previous years, the banking system was characterised by a high rate of profit reinvestment, thanks to the expected return on capital which indirectly contributed to the development of the economy. Croatian banks had record high return on capital in 2004 but since then the indicator remained at the average in transition countries. Since the end of 2004, bank profitability was declining so the rate of return on capital was drawing closer to European, relatively low, levels, declining to 10.1% in 2008, one of the lowest level in Europe (among comparable countries in Central Europe only Slovenia had a lower ROE of 7.3% in 2008). The trends followed by ROA are only slightly more favourable than the trends followed by ROE. Further, the cost/efficiency indicator, i.e. the average ratio between operating costs and income (C/I) has continued reducing, indicating better cost management. The analysis of the development, size, structure and activity of financial sectors in transition countries shows that even today, after almost two decades, all of the CEE and SEE countries are dominated by banks as the most important financial intermediaries. This is not surprising considering that all these countries entered the transition process without a capital market to speak of and with insurance companies as the only non-banking institutions. Despite significant progress, the size of financial systems and even the banking systems in transition countries continue to lag behind the developed countries. By the ratio of total bank assets to GDP, at the end of 2008 Croatia had one of the largest banking systems among the countries in transition. This indicator for euro zone countries totalled a high 262%, while the average of CEE countries was 100.3% or 79.8% of GDP. Since 2005, Slovenia has been the country with the largest degree of bank intermediation, while the said indicator has been the lowest in Kosovo and Romania. In numerous SEE countries, including Bulgaria, Croatia and Serbia, this level actually reduced during 2008. The banking sectors of CEE countries could head for a serious fall in assets in 2009, considering that

Total loans (% of total deposits)

160 140 120 100 % 80 60 40 20 0


Serbia Bosnia and Herzegovina Eurozone



Hungary Czech Republic Slovakia





Sources: Local central banks, Raiffeisen Research

Total deposits in % of GDP

160 140 120 100 % 80 60 40 20 0 Eurozone Croatia 2004 SEE 2008 CEE

Sources: Local central banks, Raiffeisen Research

Non-performing loans (% of total loans), 2008

12 10 8

6 4 2
Serbia Bosnia and Herzegovina SEE Croatia Hungary Czech Republic Slovakia Romania Slovenia Bulgaria Poland CEE

Sources: IMF, Raiffeisen Research




Banking sector
growth started slowing down already in the last quarter of 2008. In 2010, assets are again expected to grow by some 10%. Due to scarce and expensive foreign financing, ever since mid-2008 deposits have become the primary source of financing of bank lending activity. After the confidence in the banking system had shaken which caused a deposit outflow in the last quarter of 2008, the timely reaction of the government, which increased the amount of insured deposits, prevented a bank run. On annual level, SEE countries recorded a stagnation of the share of deposits in GDP, while in CEE this ratio grew. Slovenia continues to be the country with the most favourable ratio of deposits to GDP. The ratio of deposits to GDP in Croatia slightly reduced, from 73.3% in 2007 to 71.5% in 2008. The loan to deposit ratio, which in SEE totals some 121% and in CEE some 108%, indicates an increase in the use of deposits for lending activity in the region. However, there are still substantial differences among countries. In Croatia, the said ratio exceeded 100% in 2008. The countries in which the said ratio remained below 100% in 2008 are the Czech Republic, Slovakia, Slovenia, Bosnia and Herzegovina, Albania and Kosovo (largely due to the modest lending activity). The said ratio in the euro zone totals 86.4%. And while thus far lending activity has been predominantly financed through borrowing abroad and increasing capital, in the upcoming period it may be expected that banks will turn towards attracting deposits so the ratio of loans to deposits is sure to decline. Since daughter banks in the region are faced with much weaker chances for raising funds for their operation and the ability of their parent companies to provide financing narrowed, activities directed at increasing deposit levels grow in importance. Finally, the crisis and the fall in external sources of financing indicate the necessity to manage both the liabilities and the assets side of banks balance sheets. Therefore, in the period to come deposits will continue to be the so-called necessary evil in that they are a more expensive and more difficult source of financing. Nevertheless, other sources are growing as well, like corporate bonds, which could help balance the financing costs. Under current circumstances, bank problem placements have been taking the spotlight. Generally speaking, at times of credit expansion, the share of problem placements in total placements falls only to rise in the next period. The factors having the most influence on the growth of such placements are strong depreciation of individual currencies in combination with the share of foreign loans without hedges, serious economic recession and consequent increase in the number of bankruptcy and unemployment, as well as the decline in the prices of real estate. Although the exchange rates of CEE countries stabilised after the G-20 summit meeting, other economic adjustments will require time until well in 2010. According to the comparable IMF methodology, the 4.8% share of problem placements in Croatia at the end of 2008 was well below the SEE average of 6.9% but also above the CEE average of 3.6%. In the upcoming period, bank managements will direct their attention to active risk management, liquidity management and ensuring funds for future expansions. The optimisation of assets and liabilities by using sophisticated management techniques and further improvement of cost efficiency will mark the next period. However, one should not expect substantial changes in asset growth and bank profitability until the end of 2010. Currently no one knows the prices for possible acquisitions that could be agreed between potential buyers and sellers. Current market prices generally reflect a substantial deterioration in asset quality, earning potential and economic outlook in the mediumterm. Ever so long as these factors are unforeseeable in the longer term there will only be few potential bank buyers.



First Eurobond issue since 2004

Yields developments
8.0 7.5 7.0 6.5 % 6.0 5.5 5.0 4.5
3.09 12.07 12.08 3.08 6.08 3.07 6.07 9.07 9.08 6.09


Sources:, Raiffeisen Research


Croatian bonds spread

800 700 600 500 400 300 200 100 0
1.08 2.08 3.08 4.08 5.08 6.08 7.08 8.08 9.08 10.08 11.08 12.08 1.09 2.09 3.09 4.09 5.09 6.09

CROATI 6 3/4 03/11

Source: Bloomberg, MoF, Raiffeisen Research

CROATI 5 04/15/14

Yield curves of Croatian bonds

9 8 7 % 6 5 4 3 2 0 1 2 3 4 5 6 7 8 years to maturity 9 10 11 12 EUR linked

Domestic currency Eurobonds, Raiffeisen Research

The (un)justified growth of optimism at global level and increased supply of government debt of most developed countries led to the decline in investor aversion towards investments in developing countries. Thus, we registered slightly favourable movements in financial markets in the region over the few last months, such as the decline in yields on government debt and a recovery of national currencies. Slightly more positive movements reflected themselves in the certain degree of narrowing of the spreads on Croatian bonds, which was, to the largest extent, a consequence of the growth in yields of the benchmark bonds. Still, as in other countries in the region, there are substantial economic risks present in Croatia, as confirmed by the corrections of long-standing credit ratings in the domestic currency over the last few months. A high level of foreign indebtedness and insufficient adjustment of the fiscal policy were the main reasons for the reduction in credit rating. The most important event over the last months has been the first Croatian Eurobond issue since 2004. After long preparations, the said issue has been successful, meaning that the planned amount has been raised (EUR 750m) at the relatively favourable price (mid-swap + 360 bb). However, the said issue showed that the new, this years Eurobond issue would probably be even more expensive. The registered turnover in government and corporate issues at the domestic market totalled some HRK 2bn in the Q2 i.e. only 32% of that seen in the same period last year. The low liquidity level remained the key factor in the domestic bond market. Relatively weak investor interest for domestic bonds was a consequence of the growth of government borrowing through kuna and euro T-bill auctions. The latest indicators have shown that the recession in the world economy will be far longer and far more complex than initially expected, which has led to a certain decline in market optimism. Yields on government bonds of countries in the region may register a decline from the currently still high levels, especially at the short end of the yield curve, as central banks of CEE countries cut their key interest rates. However, over the long-term investors primarily worry over growing needs to finance budget deficits in the observed economies. A significant impact on the movement of prices will come from the future movement of credit ratings, which will primarily depend on public spending being put in a realistic framework but also on certain political factors, such as resolving of the difficulties in EU accession negotiations.



Optimistic quarter
Regions core indices Q2 2009 performance
60 50 40
49.5 43.1 38.4 26.8 23.7 20.2 19.8 23.2 25.5 28.2 45.1

30 20 10

WIG 20 (PL)

* MSCI Emerging Market Eastern Europe. Note: In local currency, value on June 30, 2009 Sources: Bloomberg, Raiffeisen Research

Market turnover and yield 1y performance

240 200 160 120 80 40 0 120 100 80 60 40 20
23.3.09 10.11.08 22.12.08 14.8.08 26.9.08 19.6.09 1.7.08 9.2.09 7.5.09











Regional Returns. The stabilisation of the leading US indicators raised hope among investors that the worst was over and that the worlds economy could start recovering. The optimism from the worlds markets spilled over to regional exchanges, which registered strong growth in the Q2. Nevertheless, this growth had no foundation in local macroeconomic indicators. A decline in their risk aversion and the return of investors to more risky investments were mostly aided by the EUs and the IMFs readiness to help East European economies. BELEX15 (49.5%), the Serbian index, went up the most, primarily under the influence of foreign investors whose trading share went up to 57%. The next to follow was the Romanian index, the BETI, which grew 45.1%, primarily due to the IMFs aid package of EUR 20bn, which restored the confidence of foreign investors. The Croatian equity market once again found itself in the middle of the ladder. In the structure of shareholders in the domestic equity market, domestic legal and natural persons make up a half, while foreign investors, custody accounts and portfolios account for the remaining part, with their share substantially increasing in May 2009. Domestic Returns. News of a possible start of recovery of the global economy spurred optimism also at the ZSE, with the CROEMI ending the quarter with 1,683.17 points, up 26.8% relative to the end of the Q1 and up 8.5% on the beginning of this year. Of the CROEMI constituents, only Ingra (16.5%), Magma (13.1%) and Istraturist (7.6%) went down, while the shares of Atlantska plovidba (74.1%), Dom Holding (68.7%) and Konar elektroindustrija (66.8%) gained the most in value. However, some investors decided to cash in their gains so the end of the quarter brought about a correction. At the end of the Q2 2009, market capitalisation of all shares traded on the ZSE totalled HRK 142.4bn, up 12.7% on the previous quarter. As a result, the share of market capitalisation in the estimated GDP went up from 37.4% to 43%. Turnover. Share turnover on the ZSE went up by 56% in the Q2 2009 relative to the previous quarter, standing at HK 2.5bn. The turnover of HRK 4.1bn in the first half of the year was 55% lower than the turnover realised in the H1 2008, when it totalled HRK 9.9bn. At the same time, market capitalisation of shares was 42.3% lower than at the end of the H1 2008. The remaining share of the fall in turnover can be attributed to increased investor risk aver17

Turnover, HRK mn (left scale)

CROEMI (right scale 31.3.2008 = 100)

Note: Daily values for period from June 30, 2008 till June 30, 2009 Sources: ZSE, Raiffeisen Research

Shares turnover (Q2 2009)

Other 19.8% HT 19.6%

Petrokemija 1.7% Uljanik plovidba 2.4% Viro 1.5% Ledo 1.6% Atlantic 1.2% Konar Ei 2.6% Podravka 1.5% Jadroplov 4.0% Ericsson NT 3.3%

Atlantska plov. 16.3%

Dalekovod 6.6% INA 2.4% Ingra 3.4% Institut IGH 9.1% Adris grupa (P) 3.0%

Sources: ZSE, Raiffeisen Research


10 shares turnover account for 70% of

Performance of CROEMI constituents in Q2 2009
Ingra Magma Istraturist HT Ericsson NT Dalekovod Atlantic grupa CROEMI INA Institut IGH Podravka Belje Zagrebaka b. Viro T Tankerska plov. Adris grupa (P) PBZ Petrokemija Konar Dom holding Atlantska plov.
20 10 10 20 30 40 50 60 70 80 0

Sources: ZSE, Raiffeisen Research

CROEMI constitution by sector

IT 9.6% Construction 13.0% Oil & gas 11.3% Chemicals 1.8%

sion. HT was again the most traded share, accounting for 19.6% of total turnover, followed by Atlantska plovidba with 16.3% and Institute IGH with a 9.1% share. The transport, storage and communications sector again accounted for most of the trading with a share of over 45%, followed by shares of the construction sector with over 25% and of the food and beverages sector with almost 12%. The ten most liquid shares made up 70% of the total turnover, which in comparison with the previous period represents a lower trading concentration. Altogether 211 shares were traded in the Q2. By comparing the domestic market with the region, although it belongs among the larger markets by its market capitalisation, the Croatian market is among the least liquid by its daily turnovers. In comparison with Hungary, which has a slightly lower market capitalisation, average daily turnovers in the Croatian market are several times lower. Regular CROEMI revision. Based on the analysis of trading in the Q2 2009, CROEMI underwent a regular revision. All criteria were met by 49 issuers, which is more in comparison with the prior revision, when 45 issuers fulfilled CROEMI criteria. Of the current CROEMI components, all members have satisfied the CROEMI criteria. In addition, the change has been made in free float calculation in line with new Rules set by ZSE. Weights of all index components will remain at 100%of free float. In the CROEMI index shares of HT (HT-R-A) will have the maximum weight of 15%, while preferred shares of Adris Group (ADRS-P-A) and ordinary shares of Atlantska Plovidba (ATPL-R-A) will weight 13.74 and 12.47%, respectively. This new index constitution will be valid until October 15th, 2009. Comparative indicators. The median of the P/E ratio of the CROEMI constituents amounts to 9.54 and the EV/EBITDA ratio 9.24. If we compare these medium values with the indicators grouped by industry, we may see that shipyard shares are below average, although the prices of Atlatnska plovidba and Tanskerska plovidba shares outgrew the CROEMI in the Q2 of 2009. This relatively low valuation is a consequence of the higher fall of prices of their shares over the past year relative to the market and is a reflection of the outspoken cyclical nature of the shipbuilding industry. On the other hand, constituents from the food sector hold the highest value. In view of the deteriorating economic conditions, the majority of companies decided to retain their

Financials 7.0%

Consumer 23.8%

Transportation 14.4% Telecom 15.0%

Tourism 4.2%

Sources: ZSE, Raiffeisen Research

Structure of equity investors and Mcap

100 90 80 70 60 % 50 40 30 20 10 0 360 342 324 306 288 270 252 234 216 198 180











Domestic investors Foreign investors Others* Total M. Cap.

* Custody and portfolio accounts. Note: For shares that are not traded, nominal value is used. Sources: Central Depository Agency, Raiffeisen Research




HRK bn


In line global sentiments with

CROEMI constituents data
CROEMI mem- MCap (in P/E ber issuer bn HRK) Adris grupa 4.04 8.07 Atlantska plov. 1.43 3.89 Zagrebaka b.* 12.42 9.10 Belje 0.69 134.55 Dalekovod 0.88 10.42 Dom Holding 0.34 n.a. Ericsson NT 1.65 7.30 HT 17.89 7.63 Institut IGH 0.59 9.22 INA 13.64 n.a. Ingra* 0.30 n.a. Istraturist 1.36 n.a. Konar EI 0.99 9.87 Magma 0.34 n.a. PBZ* 10.08 9.33 Podravka 1.26 35.61 Petrokemija 0.42 4.75 Atlantic grupa 1.27 16.62 Tankerska plov. 1.23 4.37 Viro T 0.44 n.a. EV/EBIT 5.6 7.2 n.a. 29.48 8.5 n.a. 9.1 5.4 9.2 18.10 35.30 32.20 n.a. n.a. n.a. 12.8 4.6 11.13 7.34 115.95 Free float 54.4% 80.4% 4.0% 9.5% 82.4% 40.4% 40.9% 42.0% 81.9% 8.0% 68.5% 19.5% 32.2% 15.9% 2.2% 33.5% 45.0% 24.1% 17.1% 34.0%

profits so dividends will be paid out only by companies with largest cash assets. In accordance with the Capital Market Act, the Zagreb Stock Exchange adopted a new set of rules to be applied as of 20 July 2009. One of the novelties is related to the definition of shares distributed to the public which do not include treasury stock and shares of individual investors exceeding 5%. The required percentage of shares distributed to the public for listing in the Regular market is at least 15%, while the Official market and the Prime market require at least 25%. Less than 15% of available shares have Belje, INA, Zagrebaka banka and PBZ, and thus they fail to meet the conditions for inclusion. However, the ZSE may approve listing to companies with large market capitalisation or number of shares. Market Valuation and Outlook. Relative to equity markets in the CEE, the Croatian market, viewed against the CROEMI, ended last year at relative fair values, following strong price corrections and operating results still unscathed by recession. This year we expect valuation for all CEE markets to go up for two reasons: the growth of share prices and a fall in net profits of companies whose aggregated decline could cut 30%-50% in the most regional markets. The expected share growth is based primarily on investor optimism. However, periods of growth could be interrupted due to participants cashing in profits, as was seen at the beginning of the Q3. Growth could also be halted by the decline in investor confidence in global economic recovery, while the domestic capital market will mostly follow movements in international markets, as it did thus far. The recovery of investor confidence will receive a boost when stability in the country is restored and concrete measures are adopted to fight the crisis. However, the strongest positive impulse to shares on the stock exchange would come from the continuation of negotiations with the EU. On the other hand, great attention should be given to domestic macroeconomic indicators. Therefore, we expect the market to remain volatile at current high levels. In 2010 we expect shares to continue on their upward path, paired with recovery in the operating results of companies. In addition, we do not expect new share issues and the continuation of the process of privatisation any sooner than next year.

* Based on uncosolidated results. Note: Calculations are based on 12M trailing business results and prices as at 30.6.2009. Sources: ZSE, Raiffeisen Research

Atlantska plovidba (12 months)

3,000 2,500 2,000 36 30 24 18 12 6 0

1,500 1,000 500 0












Close 50 daily mov. avg.

Sources: ZSE, Raiffeisen Research


20 daily mov. avg. Turnover (right scale)


million HRK




Raiffeisen Research
Raiffeisen Consulting Economic Research Department
Zdeslav anti, Acting Head of Department; Fixed Income Market, Macroeconomics, Politics, MM and Exchange Rates; tel: + 385 1/61 74 337, email: Zrinka ivkovi Matijevi, MSc, Senior Economic Analyst; Macroeconomics, MM and Exchange Rates; tel: + 385 1/61 74 338, email: Elizabeta Sabolek, Economic Analyst; Macroeconomics, MM and Exchange Rates; tel: 01/61 74 338, email: Nada Harambai, MSc, Senior Financial Analyst; Equity Market; tel + 385 1/61 74 870, email: Ana Franin, Financial Analyst; Equity Market; tel: + 385 1/61 74 388, email: Marijana veljo, MSc, Real Estate Analyst; tel: + 385 1/61 74 359, email:

Raiffeisen Consulting Directorate for EU Funds and Business Consulting

Ivona Vegar, Head of EU Department; tel: + 385 1/61 74 312, email:

Raiffeisenbank Austria
Anton Starevi, MSc, Chief Economist; tel: + 385 1/61 74 210, email: Treasury and Investment Bank Division Ivan ii, Executive Director; tel: +385 1/46 95 076, email:

CBRD CBS CEE CES CNB CNTB e EBRD EMU EU EUR f FDI GDP Croatian Bank for Reconstruction and Development Croatian Bureau of Statistics Central and Eastern Europe Croatian Employment Service Croatian National Bank Croatian National Tourist Board estimate European Bank for Reconstruction and Development Economic and Monetary Union European Union Euro forecast foreign direct investment Gross Domestic Product GVA H1, H2 IEA ILO IMF MoF OECD OPEC Q SEE USD VAT ZSE gross value added first/second half of the year International Energy Agency International Labour Organization International Monetary Fund Ministry of Finance Organization for Economic Cooperation and Development Organization of the Petroleum Exporting Countries quarter South East Europe Dollar value added tax Zagreb Stock Exchange

Raiffeisenbank Austria d.d. Zagreb, Petrinjska 59, 10000 Zagreb,, tel. +385 1/45 66 466, fax: +385 1/48 11 626 Publication finished on 20 July 2009

DISCLAIMER This publication is issued by and at the responsibility of Raiffeisenbank Austria d.d. Zagreb. The publication or any part of it cannot be considered an offer or invitation to purchase of any asset or right. Information, opinions, conclusions, forecasts and projections presented in this publication are based on public statistic and other information from resources, the completeness and accuracy of which Raifeisenbank Austria d.d. Zagreb relies on, but which it does not guarantee. Therefore, information, opinions, conclusions, forecasts and projections presented in this publication are liablie to changes depending on the changes of the information source, as well as to the changes which occurred from the moment of writing the text to the actual reading of it. All securities and other assets mentioned in this document can be an issue for taking a position by Raiffeisenbank Austria d.d. Zagreb. All such assets and rights can bear the risk on the assessment of which the stands presented in this document cannot influence. The document or its parts cannot be copied, or reproduced in any other way without quoting the source.