This report reviews key macroeconomic data and microeconomic developments for Croatia published between March 6 and April 4, 2014. During this period, Croatia’s public finances experienced another major blow with the European Commission reportedly rejecting the government’s budget revision as inadequate and asking for more cuts. The government is thus already facing a second budget rebalance, which might be implemented by June.

However, the IMF has warned the fiscal consolidation within the first year of Croatia’s excessive deficit procedure should not be too stern since this might additionally suffocate the waning domestic demand. The IMF has warned it sees the Croatian economy shrinking for a sixth consecutive year in 2014.

On the other hand, Moody’s downgraded Croatia’s rating outlook to negative from stable on March 21 due to the worsening economic prospects, the government’s slow reaction to consolidate fiscal spending and the continuing external liquidity programs.

The statistics office confirmed the 2013 GDP declined 1% because of the declining manufacturing output, weak exports and subdued domestic demand. The report also contains details on the two IBRD credit lines of combined EUR 225mn, which Croatia plans to spend for health sector and fiscal support.

On the financial front, Vaba Banka is eyeing recapitalisation by Czech peer J&T. On the other hand, the EBRD is reportedly screening again the financial state of lender HPB although unofficial sources indicate no equity investment has been under consideration.

The report also provides details on the opening of the state tender for oil and gas exploration, and the interested participants. It contains the latest developments on the dispute between the government in Zagreb and Hungary's MOL over the management and ownership of energy firm INA, describing how the relations between the two parties have deteriorated.

Key points:

• Croatia says 2009 contracts with Hungary’s MOL related to oil and gas company INA should be cancelled. Diversified Zagrebacki Holding intends to issue bond to refinance existing debt of EUR 300mn.

• CPI dropped by 0.6% year on year in February following a 0.1% year on year increase in January 2014. The working-day adjusted industrial output recovered in January-February (up 1.9% year on year) after contracting nine months in a row on an annual level. It rose by 1.6% year on year in February, building up on the 2.2% year on year increase a month earlier. The government debt jumped to 66.8%/GDP at end-2013 from 55.8%/GDP a year earlier.

• The unemployment rate climbed further to 22.7% in the second month of 2014 from 22.4% in January and 21.6% at end-2013, according to a flash estimate. The average net monthly wage somewhat recovered in January, edging up by a real 0.3% year on year, after dropping 1.5% in 2013.