• Economic reival tempers split threatening to sink government
  • Bond yields fall despite standoff between ruling parties

Investors are brushing off Croatia’s political crisis, saying improving economic prospects following the country’s entry into the European Union was outweighing a feud in the ruling coalition that may torpedo the government.

Deputy Premier Tomislav Karamarko, the leader of the coalition-leading Croatian Democratic Union, said on Saturday he may seek a new majority in parliament -- an effective threat to abandon its ruling pact with the Bridge party. The head of the Foreign Investors Association said the country was still attractive.

“This political situation will not be construed as an obstacle to investment for those who know Croatia,” Malden Fogec, chief executive officer of Siemens Croatia and the head of the association that represents banks, manufacturers and other foreign investors, told reporters at a conference in Zagreb on Monday. “The key thing going is to separate the economy from politics.”

While the standoff is threatening to halt the four-month-old government’s drive to cut the budget deficit and debt, shrink the public administration, and sell state assets, investors have reacted with calm. Yields on Croatia’s international bonds have fallen since last month, when Bridge party lawmakers threatened to support an opposition-led no-confidence vote against Karamarko, who is a deputy premier, over allegations of conflict of interest. First-quarter growth data, meanwhile, showed last week the country is reviving after a record six-year recession that ended in 2014.

Croatia’s economy expanded 2.7 percent from January to March compared with a year earlier. It was the sixth consecutive period of annual expansion after the downturn that wiped out 12 percent of the European Union member’s output. The yield on Croatia’s dollar bond maturing in 2025 fell 3 basis points on Monday to 3.708 percent at 1:02 p.m. in Prague. It was five basis points lower than on April 27, when the Bridge lawmakers said they’d vote to oust Karamarko from his position in the government.

“The saving grace for this is the backdrop macro is looking pretty good at present, with Real GDP growth going great guns as the benefits of EU membership finally work through,” Tim Ash, head of EMEA Credit Strategy at Nomura International Plc, wrote in a note Monday. “I guess the question is can/will all this political uncertainty kill the recovery - I have my doubts.”

The crisis emerged last month after newspaper Nacional reported a lobbyist for Hungarian refiner Mol Nyrt. paid Karamarko’s wife, Ana, for consulting services beginning in 2013 before they married. Karamarko has argued the contract doesn’t represent a conflict of interest. The Hungarian refiner is fighting an arbitration suit against the government over its management takeover of Croatian INA Industrija d.d.

Last week, Prime Minister Tihomir Oreskovic called on Karamarko and Bridge leader Bozo Petrov to quit as his deputies. Petrov has also called for Karamarko to step down before the no-confidence vote, which must take place by June 18. Karamarko said his Croatian Democratic Union, known as HDZ, will rule without Bridge if necessary, although his party only controls 51 of parliament’s 151 seats, and both Bridge and the opposition Social Democrats have vowed not to join it in government.

While the government may collapse, Oreskovic is trying to defuse the crisis. The former pharmaceutical executive, and the country’s first ever prime minister who isn’t allied to a political party, may see a solution emerge from Karamarko’s party itself. Vladimir Seks, a HDZ veteran and former speaker of parliament, told national HRT television Monday that it would be “in the national interest for Karamarko to step down.”

Political Turmoil

Early elections would also punish both Bridge and HDZ, making the probability of a government reshuffle more likely, Juraj Kotian, head of CEE Macro research at Erste Group, said in a note. Investors, who have plowed about 30 billion euros ($34 billion) into the country of 4.2 million people since its independence in 1991, indicated the political impact was less important than the country’s renewed growth for now.

“The narrowing Croat spreads show the world has learned to live with political turmoil,” Nenad Bakic, who owns stakes in tourism service provider Valamar dd. and heavy-machinery maker Djuro Djakovic dd, said at the conference in Zagreb. “GDP growth in Croatia is far more important than temporary political instability.”

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