Croatia: 4Q BoP
4Q C/A outperformed expectations – FY10 C/A deficit at 1.4% of GDP
The 4Q BoP figures brought some favorable developments, as CAD landed at EUR 1.05bn, a robust 74% drop on the annual level. The merchandise account performed in line with the trade balance figures, with only marginally better performance than we anticipated. Exports were up a strong 26% y/y, while imports growth remained humble at 4%. Services were also supportive, driven by 3% y/y higher inflows, resulting in a better than anticipated 8% higher surplus. 4Q figures were also supported by a 25% y/y income account deficit resulting from lower profit repatriation and debt servicing costs. Current transfers showed the traditional limited volatility, although being 5% y/y lower. The FY10 figures confirmed that the merchandise account was the strongest consolidation driver (-20%), being driven by the picking up of exports, while the slow domestic demand pick up supported largely stagnant imports and close to 10pp higher exports-imports coverage ratio compared to 2009. Services in total showed some signs of recovery after a slump in 2009, while the income account performed benignly, posting a 12% lower deficit, profiting from cheaper debt servicing cost compared to 2009. Strong 4Q figures, in combination with a favorable revision of the 1-3Q figures, narrowed the 2011 C/A deficit to 1.4% of GDP, a record low level from 1994. The extent of consolidation in last two years has thus been strong, given a 9.1% of GDP deficit in 2008, bringing the C/A trends into the sustainable region and supporting the external position and exchange rate stability. As for 2011, we are expecting some reversal on the merchandise account, with some slowdown of exports performance after catching up in 2010, though external environment remains fairly supportive to exports. Imports are showing some recovery, on domestic demand stabilization and higher commodity prices that would affect nominal figures. Services remain heavily dependent upon 3Q performance and the tourist season, where we are not anticipating negative shocks at present (developments in Africa and stable regional countries economic prospects), though remaining fairly cautious on recovery in financial terms and seeing only modest improvement in 2011. With no major shocks on the income account we are thus seeing the C/A deficit landing in the region of 2.5-3% of GDP, being a rather comfortable level in terms of financing and exchange rate support.
On the financing side, net FDI trends remained on the weak side, given the negative balance on the quarterly level and net FDI drop from 2.7% in 2009 to 1.3% in 2010. As argued before, FDI momentum remains poor, where weakness to attract greenfield FDI inflows remains evident. Given the ongoing C/A adjustment, 4Q net FDI coverage of the C/A deficit remained in a comfortable region close to 100%. Other investments, i.e. creation, filled the gap to a large extent (predominantly banks), while FX reserves came under some minor downward pressures in the period, though remaining stable on the annual level.
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