Overview

The Coface Country Essentials offer a concise and clearly struc-tured overview of country eco-nomic facts. The most important facts for 18 countries in Central and Eastern Europe include the most recent risk overview and our Coface country risk assessment.

You receive a general informa-tion on the country ranging from major cities to natural resources and most important sectors. This is followed by our risk assess-ment giving a general overview

on the economic and political situation and the strength and weaknesses of the country. The next chapter focuses on the key facts: top trading partners and economic data like GDP growth, inflation or public debt. The in-solvency part shows you the top and flop sectors, information on the development of insolvencies and the procedure.

Last but not least we provide you with a checklist for business operations and the latest corrup-tion and doing business index data. If you need further infor-mation your will find a list of our contacts in the region.

COUNTRY ESSENTIALS

CROATIASummer 2015

TABLE OF CONTENTS

/ 02 General Information

/ 03 Risk Assessment

/ 05 Foreign Trade

/ 05 Economic Key Data

/ 06 Insolvency

/ 07 Checklist for Business Operations

/ 08 Contacts Coface

/ 09 References

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Croatia is a republic, which is located in South-Eastern Europe and borders on Slovenia, Hungary, Serbia, Bosnia-Herzegovina and Montenegro. In June 1991, it seceded from the Confederation of Yugoslavia. The following war with Serbia ended in 1995, with the signature of the Dayton Agreement on 14 December. A large part of Croatian territory borders on the Adriatic Sea. The country is divided into 20 regions, with Zagreb as the economic and cultural centre. Croatia has been a member of NATO since April 2009 and has joined the European Union on 1 July 2013.

GENERAL INFORMATION

Form of government: Democratic Rebublic

Administrative organisation: 20 regions

Area: 56,542 km²

Population: 4,486,881; density: 79 inhabitants/km²

Official language: Croatian

Local currency: 1 Kuna (HRK) = 100 Lipa

Capital: Zagreb: 793,000 inhabitants

Major cities and population:

SplitRijekaOsijekZadarPulaKarlovac

189,000 inhabitants 144,000 inhabitants 115,000 inhabitants 73,000 inhabitants 59,000 inhabitants 59,000 inhabitants

Ethnic groups: 90% Croatians, 4% Serbs, 6% minorities of Hungarians, Italians, Czechs, Albanians

Religion: 88% Roman Catholic, 4% Serbian Orthodox, 1% Muslim, 1% Protes-tants, 6% others

Natural resources: Salt, silicia, clay, tourism, processing industry, agricultural produc-tion, forestry

Most important sectors: Processing industry, shipbuilding, tourism

Membership in inter- national organisations:

UNESCO, UNIDO, UNCTAD, UNICEF, ILO, WHO, FAO, IAEA, ITU, BIS, UNWTO, ICAO, ISO, EPO, ICSID, CEI, Carnet-ATA-Agreement includ-ing Istanbul Convention, OTIF (the Convention on International Car-riage by Rail), Danube Commission, ADR-Agreement, EU

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The recession has con-tinued in 2014

After a sixth successive year of recession, Croa-tia is expected to return to positive growth in 2015. Activities linked to tourism (restaurants, hotels, transport – 20%

of GDP) will remain the most dynamic in 2015, even though there were fewer tourists from abroad (particularly Russia) in 2014. Domestic demand remains constrained: consumption contracted in 2014 because of high unemployment and wage stagnation.

However, household spending is expected to recover in 2015 with the expected improvements on the labour market. At present, the unemploy-ment rate is still high (18.7% in October 2014), in particular for the young (14.8% for the 14-24 year-olds), which underlines structural problems and questions the country’s competitiveness. In 2015, the main positive contribution to growth is expect-ed to come from exports of services (reflecting the importance of tourism) and from the manu-facturing industry, which will help prevent a bigger contraction.

The economy was marked by low inflation in 2014 due to weak domestic demand. The country experienced a period of deflation between Feb-ruary and July 2014, prices having fallen by 0.3% relative to the previous year. Inflation is expected to become positive again in 2015.

Fiscal consolidation demanded by Brussels

The successive recessions were behind a signifi-cant worsening of the public finances. The con-solidation efforts in recent years have been less marked than in the other Central and East Europe-an countries. In this context, the State has started to privatize the subsidised energy and transport sectors – a total of more than 500 businesses.

Despite these measures, the public debt continues to grow and is currently nearing 70% of GDP. The excessive deficit procedure (EDP) initiated by the European Commission in January 2014 obliged the country to introduce new measures. The recession having led to a revenue deficit, and the structural reforms having been delayed, government spend-ing was only slightly down in 2014, which has caused the country to miss the EDP objectives with the deficit still close to 5% of GDP. Nevertheless, the government is expected to apply further measures enabling a reduction of the budget deficit in 2015.

In 2014, the current account balance generat-ed a surplus concomitant with the weakening of domestic demand. The country has benefitted from its accession to the European Union with an 11.5% increase in its exports to EU member countries between January and September 2014. However, it is not sufficiently directed towards the dynamic economies and has been hit by the Eurozone downturn. Its main partners are Italy and the Balkans. In 2015, the current account balance should be in surplus, driven by exports of services.

As for the banking sector, though robust, it suf-fers from the presence of doubtful loans and a high degree of euro-isation. The exchange rate is strictly controlled by the Central Bank which aims to ensure the kuna’s stability against the euro. This means the government’s room to manoeu-vre is limited. However, the country’s reserves are still more than three months of imports and are expected to increase in 2015.

European Union membership - still waiting for the effects to set in

The country became the 28th EU member state as of 1 July 2013. Membership brought an alignment of the country’s legislation with the common stan-dards leading to a more conducive climate for busi-ness and investment. But the conditions for entry to the Union have also had a negative impact. The need to comply with European austerity has im-pacted on certain industries. These have thus seen

RISK ASSESSMENT

Coface

Country Assessment

B

Strengths

Growth potential reinforced by EU membership

Advanced degree of economic convergence with the EU

High-quality infrastructures

Attractive to tourists

Weaknesses

Low savings rate

High level of private external debt

Dependence on foreign capital

High unemployment level

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RISK ASSESSMENT

their output badly affected by the restructuring process and privatisation with the ending of state subsidies, most notably in the shipbuilding sector.

The governing coalition, which is in trouble, has lost six seats in Parliament as a result of defec-tions. Moreover, the Minister of Finance was dis-missed over a corruption scandal in May 2014. The

centre-right opposition came out on top in the May 2014 European elections. Finally, the greens of the Sustainable Development of Croatia Party (ORaH) are emerging as a new political force alongside the two big traditional parties and could play a role in the course of the December 2015 parliamentary elections.

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FOREIGN TRADE & ECONOMIC KEY DATA

Imports in MEUR 2011 2012 2013 2014

EU 28 5,735* 5,601* 5,927* 6,597

Italy 1,511 1,472 1,395 1,435

Bosnia-Herzegovina 1,174 1,228 1,173 1,224

Slovenia 794 828 1,000 1,173

Germany 967 989 1,129 1,154

Exports in MEUR 2011 2012 2013 2014

EU 28 10,064* 10,134* 12,220* 13,056

Germany 2,049 2,084 2,319 2,586

Italy 2,676 2,707 2,167 2,438

Slovenia 1,012 948 1,897 1,851

Austria 726 730 1,489 1,482

Source: HGK, HBOR, Statistical institute of Croatia, Official pages of the Government of the Republic of Croatia, Eurostat.* EU 27

Key Data 2012 2013 2014 (e) 2015 (f)

GDP growth (%) -2.2 -0.9 -0.8 0.5

Inflation (yearly average) (%) 3.4 2.2 -0.3 0.2

Budget balance (in % of GDP) -3.3 -5.5 -4.7 -2.9

Current account (in % of GDP) -0.1 0.9 2.2 2.2

Croatia’s Top Trading Partners

Economic Key Data

(e) estimate(f) forecastSource: Coface

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INSOLVENCY

Top 5 sectors

Utilities and public services

Financial services

Miscellaneous

Mineral products, chemicals, petroleum, plastics, pharmaceuticals and glass

Mechanics and precision

Flop 5 sectors

Textiles, leather and clothing

Wood and furniture

Non specialised trade

Agriculture, meat, agro food and wines

Construction

Insolvencies in 2014

Against the economic backdrop, insolvency statis-tics are generating a much more positive outlook. In 2014, company insolvencies in Croatia dropped by 14.3% compared to the previous year. Howev-er these good statistics are mainly caused by the high number of insolvencies in 2013.

A new legal act was introduced at the end of 2012, called the pre-insolvency settlement procedure. This act is a judicial composition which aims to achieve creditor agreements with companies re-garding settlement of their receivables. 2013 was thus a peak year in statistics resulting from the new regulations, whereas relative stabilisation was recorded in 2014.

The law introduced an obligation for entrepreneurs to pay their due monies within 60 days. If the dead-line is not adhered to, an administrative procedure of another 60 days is opened and the company’s bank accounts are blocked – which usually leads to

a triggering of pre-bankruptcy agreements. Addi-tionally, the insolvency procedure can be initiated in line with “fast bankruptcy procedures based on official duty” in the case of lack of assets or em-ployees, or not providing financial statements to the authorized body for two consecutive years.

Nevertheless, the above law changes are not the only reasons for insolvencies in Croatia. The high indebtedness of local companies, as well as bad management and liquidity problems, are also causes of bankruptcies.

The construction sector recorded an improvement. Construction company insolvencies decreased by 14% compared to the previous year, although they still have the largest representation in insolvency statistics and constitute one quarter of all bank-ruptcies in Croatia.

The challenging situation of metals in worldwide markets has also been mirrored in Croatia, where insolvencies jumped by 47% in one year.

Company Name Sector Total liabilities in Euro Town

1. SPORTSKI GRAD TPN Construction 78,668,211 Split

2. ZDRAVSTVENO REKREACIJSKI CENTAR LIPIK Business and personal services 60,491,245 Lipik

3. TEMPO Construction 48,802,798 Zagreb

4. EUROYACHTING Non specialised trade 42,619,549 Zagreb

5. MD PROFIL Construction 25,303,043 Đakovo

Croatia’s Biggest Insolvencies in 2014

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The following table summarizes relevant information for investors and exporters.

Corporate law

Minimum capital stock company: HRK 200,000 Minimum capital limited liability company: HRK 20,000 Minimum capital for simple limited liability company: minimum 10 HRK

Tax law

25% VAT 12%, 25% and 40% progressive income tax for natural persons 20% corporate tax Double taxation treaty with Austria

Investments Investments up to 100% generally possible Exceptions for strategic reasons Equal status accorded to foreigners

Foreign exchange Foreign currency accounts allowed Unlimited transfer of profits and capital

Labour lawAverage wage approx. HRK 5,613/month (net) Problems with business-related termination High non-wage labour costs

CHECKLIST FOR BUSINESS OPERATIONS

Corruption

Croatia was 61st in the International Corruption Per-ceptions Index 2014. In comparison, Germany was ranked 12th and Austria was ranked 23rd.

The Corruption Perceptions Index is issued by Transparency International, and lists countries according to the perceived level of public sector corruption. This perception is based on surveys of managers and experts, and related solely to the public sector.

Doing Business

The Doing Business Index issued by the World Bank (www.doingbusiness.org) expresses the ease of doing business in a particular country. In this ranking, Croatia was ranked 65th in 2015 rising two ranks compared to the previous year. Germany and Austria were rated 14th and 21st, respectively.

This index consists of ten different sub-indexes that determine whether laws or other regulations exist in certain areas and whether or how they are applied. For example, the subcategories deal with the payment of taxes, hiring of staff and the found-ing and closing of companies.

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CONTACTS COFACE

Coface Austria & Coface Central Europe

Stubenring 24 - 1010 ViennaT. +43 (1) 515 54-0 - F. +43 (1) 512 44 15www.coface.at

Coface Albania serviced by Coface Croatia

Avenija Dubrovnik 46/III - 10 000 ZagrebT. +385 (1) 469 75 00 - F. +385 (1) 469 75 75www.coface.hr

Coface Belarus serviced by Coface Russia

1st Tverskaya-Yamskaya str., 23, bld. 1 - 125047 MoscowT. +7 (495) 785 57 10 - F. +7 (495) 785 76 24www.coface.ru

Coface Bosnia & Herzegovinaserviced by Coface Croatia

Avenija Dubrovnik 46/III - 10 000 ZagrebT. +385 (1) 469 75 00 - F. +385 (1) 469 75 75www.coface.hr

Coface Bulgaria

42 Petar Parchevich str. - 1000 SofiaT. +359 (2) 821 37 35 - F. +359 (2) 820 71 50www.coface.bg

Coface Croatia

Avenija Dubrovnik 46/III - 10 000 ZagrebT. +385 (1) 469 75 00 - F. +385 (1) 469 75 75www.coface.hr

Coface Czech

I.P. Pavlova 5 - 120 00 PragueT. +420 246 085 411 - F. +420 246 085 429www.coface.cz

Coface Estoniaserviced by Coface Latvia

Berzaunes iela 11a - 1039 RigaT. +371 (6) 732 34 60 - F. +371 (6) 782 03 80www.coface.lv

Coface Hungary

Tüzoltó utca 57 - 1094 BudapestT. +36 (1) 299 20 70 - F. +36 (1) 887 03 25www.coface.hu

Coface Latvia

Berzaunes iela 11a - 1039 RigaT. +371 (6) 732 34 60 - F. +371 (6) 782 03 80www.coface.lv

Coface Lithuania

Vilniaus str. 23-3 - 01402 VilniusT. +370 (5) 279 17 27 - F. +370 (5) 279 17 54www.coface.lt

Coface Macedonia serviced by Coface Croatia

Avenija Dubrovnik 46/III - 10 000 ZagrebT. +385 (1) 469 75 00 - F. +385 (1) 469 75 75www.coface.hr

Coface Moldovaserviced by Coface Romania

39 Calea Floreasca - Et. 2-4 - District 1 - 014453 BucharestT. +40 (21) 231 60 20 - F. +40 (21) 231 60 22www.coface.ro

Coface Montenegroserviced by Coface Serbia

Bulevar Oslobodjenja 111 - 11000 BelgradeT. +381 (11) 397 60 51 - F. +381 (11) 397 09 75www.coface.rs

Coface Poland

Al. Jerozolimskie 136 - 02 305 WarsawT. +48 (22) 465 00 00 - F. +48 (22) 465 00 55www.coface.pl

Coface Romania

39 Calea Floreasca - Et. 2-4 - District 1 - 014453 BucharestT. +40 (21) 231 60 20 - F. +40 (21) 231 60 22www.coface.ro

Coface Serbia

Bulevar Oslobodenja 111 - 11000 BelgradeT. +381 (11) 397 60 51 - F. +381 (11) 391 09 75www.coface.rs

Coface Slovakia

Soltésovej 14 - 81108 BratislavaT. +421 (2) 6720 16 44 - F. +421 (2) 6241 03 59www.coface.sk

Coface Slovenia

Slovenceva ulica 22 - 1000 LjubljanaT. +386 (1) 425 90 65 - F. +386 (1) 425 91 30www.coface.si

Coface Ukraine

4 B. Gmyri Str., of. 10 - 02140 KyivT. +380 (44) 585 31 60 - F. +380 (44) 585 31 60www.coface.ua

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REFERENCES

Internethttp://www.cofacecentraleurope.com >> Country Risk and Economic Research, CEE Insolvencies Pano-rama 2014, Coface, Niederlassung Austria, Vienna 2015http://www.doingbusiness.orghttp://www.dzs.hrhttp://epp.eurostat.ec.europa.euhttp://www.hbor.hrhttp://web.hgk.hrhttp://www.transparency.orghttps://vlada.gov.hr

PrintHandbuch Länderrisiken 2015, Coface, Niederlassung Austria, Vienna 2014.

ImprintMedia owner and production: Coface, Niederlassung Austria, Stubenring 24, 1010 Vienna, Austria; Editorial office: Susanne Krönes.

Copyright and LiabilityCoface, Niederlassung Austria (Stubenring 24, 1010 Vienna, Austria) copyright, conditions of use: you may copy and publish the information on this site provided that you do not make commercial use of it and clearly indicate that it originates from Coface, Niederlassung Austria. This information is provided without guarantee and does not bind Coface, Niederlassung Austria in any way. The Coface Country Assessment was included in this country report as of May 2015. Coface, Niederlassung Austria cannot accept responsibility for changes made at a later date.