Investors Applaud Former Drug Executive's Plan to Heal Croatia

  • Technocrat Oreskovic's nomination for premier ends stalemate
  • Croat bonds outperform most peers, remain `very attractive'

Croatia’s dominant political parties might be fuming after inconclusive elections blocked them from leading the government for the first time since independence. Investors, however, are cheering.

The country’s junk-rated bonds have outperformed most emerging markets since former pharmaceutical executive Tihomir Oreskovic got the president’s nod a month ago to lead the next government. Now he awaits a confidence vote in parliament to become the first prime minister who doesn’t hail from the two parties that have traded power since the Adriatic state broke from Yugoslavia in 1991.

Oreskovic, 49, will inherit an economy recovering from a six-year recession and grappling with one of the highest public-debt burdens in the European Union, the results of years of political resistance to overhauling the economy. While his success hangs on the support of a coalition between the Bridge party and the Croatian Democratic Union, the latter of which has dominated politics with its Social Democrat rivals for a quarter of a century, his pledge to cut the budget deficit and secure better credit ratings has won investors’ blessing.

“A technocrat prime minister seems good for Croatia, as this may help them adopt unpopular measures,” said Dmitri Barinov, a money manager overseeing $2.6 billion for Union Investment Privatfonds GmbH in Frankfurt, who has an overweight stance on the country’s Eurobonds. “The yield is still very attractive. The debt level is high, but it should stabilize soon.”

Beating Peers

Croatia, the EU’s newest member, has seen its bonds return 2 percent since Dec. 23 when Oreskovic’s nomination ended a six-week political gridlock that followed inconclusive November elections. That is the best performance after Ukraine and South Korea among 60 nations in the Bloomberg USD Emerging Market Sovereign Bond Index, which has fallen 1.4 percent.

The yield on Croatia’s euro-denominated note due May 2022 rose three basis points on Thursday to 3.7 percent as of 2:50 p.m. in Zagreb, rising a second day from a four-month low. The security traded 374 basis points above comparable bonds from Germany.

The premier-designate, a chemical engineer raised in Canada who also holds a degree in business administration, is endorsed by the upstart Bridge party, known in Croatian as Most. Formed by a group of mayors and independents, the party has used its third-place finish in the ballot and a hung parliament to outmaneuver its larger rivals.

Economic Overhaul

After coalition talks collapsed with both parties, the Croatian Democratic Union agreed to join Bridge, which is pushing for measures to overhaul an economy that has seen 12 percent of its output wiped out and its debt-to-output level double since 2008. Oreskovic, who’s scheduled to ask parliament to approve his cabinet on Friday, has pledged to sell some state-owned companies and trim the state administration to win the trust of foreign investors.

That follows scrapped highway and energy exploration tenders by the outgoing Social Democrat-led government of Zoran Milanovic, which also forgave the debt of Croatia’s poorest citizens amid the economic downturn. Before that, the Croatian Democratic Union lost a 2011 election after a graft and abuse-of-power scandal that resulted in the conviction of former Prime Minister Ivo Sanader. The prospect of a technocrat-led government is drawing investors.

“Mr. Oreskovic’s policy priorities and commitment are not in doubt,” Erik Nielsen, chief economist at UniCredit Bank AG, said in a Jan. 17 report to clients. “If he can put together a government that will deliver the core of a proper reform program, we could be in for a measurable leap forward.”

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