Croatia's economy may see double-digit contraction in 2020 - Erste

April 6 (SeeNews) - A double-digit contraction in Croatia's gross domestic product this year is not to be ruled out amidst the ongoing coronavirus crisis, Erste Group said.

Erste has revised downward its current economic forecast for 2020 by 10 percentage points to a contraction of at least 7.5%, with downside risks, the Austria--based banking group said in its latest Macro Outlook report on Croatia published last week.

"Needless to say, we are more in scenario analysis mode; hence, point forecasts should be taken with a grain of salt, and in that sense risks clearly remain tilted to the downside, i.e. reflecting the increasing likelihood of a delayed and constrained normalization scenario," Erste said.

Erste expects the coronavirus quarantine measures to last well into the second quarter of the year, followed by gradual normalisation in the second half of 2020, with both private consumption and investments expected to deteriorate throughout the period.

"On the export side, the impact would be two-fold - goods affected by quarantine measures and the EA GDP decline and tourism taking a 50+% hit, strongly affecting 3Q GDP growth as well. Consequently, 2Q and 3Q are set to deliver growth contraction well in double-digit negative territory," the report read.

At the same time, inflation should decelerate as a result of deflated oil prices and deflated demand-side pressures, with Erste seeing Croatia's average CPI at 0.2% this year.

The country's 2020 budgetary outlook has deteriorated with the fiscal gap expected to widen considerably, which, however, is evident across all EU member states, Erste noted.

"Taking into account the government COVID-19 offsetting measures and dented revenue side outlook sets the stage for a deficit in the 6-7% of GDP region. Downside risks prevail. Public debt is heading into the 80+% of GDP region. The rating outlook is becoming more uncertain, as it remains to be seen to what extent rating agencies will react to virus related shocks."

Erste analysts also said they remain optimistic on Croatia's prospects of joining the European Exchange Rate Mechanism II (ERM II), the training grounds for adopting the euro.

The Croatian authorities sent in July 2019 a letter of intent to join the ERM II, targeting entry in mid-2020. The whole process of joining the euro area is expected to take at least four years to complete, including the two-year mandatory stay in ERM II.

"The current baseline is that Croatia would get the green light for EMR II entry in 3Q20, although in the current global situation the risks are increasing," Erste said.

Following are the Erste Group's latest forecasts for Croatia's economic indicators: