Croatia Politics September 2016

Croatia

Croatia: September snap elections point to market-friendly government

After months of political conflict had led the government to collapse in June, snap elections were held in Croatia on 11 September. The elections came just as the Croatian economy was gaining steam, supported by robust fixed investment and a buoyant tourism sector. The conservative Croatian Democratic Union party (HDZ) won the most votes but did not secure an absolute majority of the 151 seats in Parliament. This will probably result in it renewing its alliance with its previous coalition partner, the centrist Bridge of Independent Lists (MOST), with the balance of power shifting further towards HDZ this time around. This bodes well for economic activity, since it would mean a market-friendly government with enough strength to implement at least some of a battery of much-needed economic reforms—especially of the expensive pension system, the bloated public administration and the rigid labour market. Such reforms, which have been impossible to date due to unfavourable political conditions, are a prerequisite to raise the country’s medium-term GDP growth rate. In contrast to last November’s elections, which were followed by a lengthy period of uncertainty due to difficult coalition talks, this time it looks very likely that the outgoing coalition government will soon be confirmed in power again.

Looking at the results in further detail, HDZ won 61 seats, 2 seats more than at the previous elections in November 2015. The center-left People’s Coalition, headed by the Social Democratic Party (SDP), came second with 54 seats, losing 2 seats. MOST, the junior partner in the governing coalition, won 13 seats, thus losing 6 seats, which could hurt its bargaining power against HDZ in the distribution of government posts. On 28 September, President Kolinda Grabar-Kitarovic started official consultations to appoint a new Prime Minister and to form a new government, the outcome of which is expected in the coming weeks. MOST’s support is not in itself sufficient to give HDZ an absolute majority, but a stable government is nevertheless in sight, as coalition talks between HDZ and MOST are well-advanced and HDZ can most likely count on the support of a further eight MPs representing ethnic minorities. As HDZ and MOST share a fundamentally pro-market and low-tax philosophy, the time needed to form a new government depends mainly on negotiations over its composition, with the Ministry of Economy being the main bone of contention.

Commenting on the outlook ahead, Hrvoje Stojic, Economic Research Director at Addiko Bank, adds:

“[…] Investors as well as rating agencies will soon focus on the composition of the new economic management team and hopefully speedier reform presentations ahead […].The Croatian economy has so far withstood political uncertainty remarkably well […] and relatively fast technocratic cabinet formation could trigger a more positive market response than could be imagined before the elections.”

The parties set to constitute the next government have broadly similar pro-business economic proposals, which could give a further boost to growth. The Central Bank sees the economy expanding 2.3% in 2016 and 2.5% in 2017. The FocusEconomics Consensus Forecast panel expects GDP to expand 2.0% in 2016, which is unchanged from last month’s forecast. In 2017, panelists also expect the economy to increase 2.0%.


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