This report reviews key macroeconomic data and microeconomic developments for Croatia published between January 4 and February 5, 2014. During this period, as expected, the EU opened the excessive deficit procedure for Croatia (its newest member) on January 28. Several days after that, the local authorities presented their measures aimed at cutting the budget deficit to 4.6% of GDP from the initially planned 5% of GDP. Hungary’s MOL and a Romanian buyer have been involved in privatization-related developments. Croatian creditor Agrokor has agreed to a EUR 100mn recapitalization of Slovenian retailer Mercator if an acquisition occurs.

On January 24, the S&P cut Croatia’s rating to BB from BB+, saying the EU accession benefits are undermined by the lack of internal growth drivers due to the lasting policy inertia and constraints to fiscal and structural reforms. The S&P furthermore said it now believes the country will not recover from the five-year recession this year, as previously anticipated, but will rather slip further in economic woes.

The EBRD said in the reviewed period it is now more pessimistic about Croatia’s 2014 GDP performance and has lowered its growth forecast to 1.0% from the previously expected 1.5%.

Key Points:

• Hungary’s MOL is threatening to exit oil and gas company INA, while the Croatian state cancelled the privatization of a large stake in HZ Cargo to a Romanian buyer. Croatian creditor Agrokor has reputedly agreed on a EUR 200mn recapitalization agreement for Slovenian retailer Mercator.

• Average CPI inflation slowed to 2.2% in 2013 from 2.2% in 2012. Consumer prices were up only 0.3% year on year at the end of December. The working-day adjusted industrial output decreased 2% in 2013 due to smaller production in the mining and quarrying and manufacturing sectors.

• The unemployment rate climbed to 21.6% in December 2013 from 21.1% at the end of 2012. The ILO, however, said it expects Croatia's unemployment rate to fall to 17% in 2014 from 17.2% in 2013 as its economy is expected to recover from the lasting recession this year.