Chief economists of the biggest Croatian banks say that a recession in 2009 is unavoidable, but the European Union candidate will not suffer a financial crisis, a survey showed on Friday. They said on average that Croatia's gross domestic product will fall 1.5 percent in 2009 on an annual level, while the fiscal deficit will reach 2.7 percent instead of 0.9 percent of gross domestic product as targeted by the government.
The survey was released by the Association of Croatian Banks (HUB). More than 90 percent of Croatian banks are in foreign ownership. The government projected this year's growth at 2.0 percent, but later acknowledged there are downside risks. According to the economists polled, the strongest contribution to GDP decline will come from lower investments and exports. In recent years Croatia's economy has been expanding at between four and five percent, largely fuelled by state investments, personal consumption and tourism services.
Local economists and businessmen have urged the government to cut budget spending as much and as soon as possible. The government has so far stopped short of acknowledging recession, but has tasked an Economic Council, comprising around a dozen of government-chosen economists, to draft a proposal of anti-recession measures. The banks' chief economists also said in the survey that despite recession Croatia would not have to fight a financial crisis.
They said the inflow of foreign capital will not stop and the central bank will not be forced to change its key interest rate of six percent used at reverse repo auctions. They also said that money market rates, which have soared to as much as some 25 percent in recent weeks amid tight liquidity, are likely to stabilise and remain around eight percent for most of this year. The national kuna currency has been under noticeable depreciation pressures since late December due to a slower inflow of foreign capital, but chief economists said that the pressures would ease towards the end of the year.