Target EU entry date of 2011 will prove very challenging
Overview:
Croatia is in a unique position amongst EU Accession countries with regards to its prospective EU entry. Despite Enlargement fatigue amongst the existing member states which makes a significant further major expansion of the Union unlikely for some time Croatia has a target date for entry of 2011. Whether this date will be met is open to considerable doubt, however, and not just because compliance with the Acquis will be tougher given Bulgaria and Romania's poor post-Accession implementation of reforms. Despite progress in a number of areas, the HDZ-led government will struggle to complete the tougher Chapters of the Acquis in order to complete technical negotiations by the end of 2009 as required. These reforms are also essential for raising Croatia's low underlying growth rate.
Recommendations:
Despite a large and persistent current account deficit the exchange rate regime appears stable and the financial system sound in the face of the global financial crisis. Domestic interest rates, however, are low at between 4%-5%. A small delay in the current EU Accession timeframe would not duly affect external debt spreads which are tight. We are neutral on both Croatian domestic interest rates and external debt.