Croat Growth Quickens as No-Confidence Vote Triggers Turmoil

  • Coalition infighting over no-confidence vote may halt reforms
  • Economy grows on tourism, exports, low energy prices

Croatia’s economic revival accelerated in the first quarter on exports and tourism, a pickup that may be undermined by infighting in the governing coalition before a June no-confidence vote.

The economy expanded 2.7 percent in the first quarter from a year earlier, faster than the fourth quarter’s 1.9 percent, the Statistics Office said Tuesday. Output grew 0.6 percent compared with the last three months of 2015. It was the sixth consecutive period of annual growth after a record six-year recession that wiped out 12 percent of the European Union member’s output.

While the Adriatic country of 4.2 million people has resumed growth, reforms underpinning the recovery are at risk as the four-month-old coalition wrangles ahead of a June no-confidence vote against Deputy Prime Minister Tomislav Karamarko. The smaller of the two ruling factions, the Bridge Party, said last week some of its lawmakers will back the ouster against Karamarko, who leads the coalition’s larger Croatian Democratic Union, or HDZ. Their dissent would give the opposition a majority in the vote, which could torpedo the coalition and end its efforts to overhaul the Balkan economy.

“Coalition instability and infighting raises questions over the feasibility and timing of crucial economic reforms,” Otilia Dhand, senior vice president at Teneo Intelligence, said in an e-mailed comment to Bloomberg. “Delays and watering-down of reforms would negatively affect economic growth outlook, as well as financial markets perceptions.”

The Croatian expansion trailed that of neighboring Serbia, which grew 3.5 percent in the first quarter. Growth in fellow EU nation Slovenia slowed to 2.5 percent, from 3.3 percent the previous quarter. Croatia’s government forecast in April that the economy will grow 2 percent this year from 1.6 percent in 2015.

The yield on Croatian bonds maturing in 2022 rose five basis points to 3.481 percent at 2:19 p.m. on Tuesday, the highest since March 10.

Reforms Threatened

Technocrat Prime Minister Tihomir Oreskovic, who isn’t aligned with either ruling party, is planning to cut government spending by 2.5 billion kuna ($372 million) this year, including by trimming the public administration and reducing payments in health care and pensions. Buoyed by Croatia’s 2013 EU entry and the inflow of development funds, Oreskovic has pledged to cut red tape, hold off on raising taxes and repair Croatia’s credit rating, boosting investor sentiment.

His administration sees the budget deficit narrowing to 2.6 percent of economic output this year, from 3.2 percent in 2015, and public debt declining to 86 percent of gross domestic product, from 87 percent last year.

The infighting may undermine Oreskovic’s efforts, however. While Bridge lawmakers said they’d vote to oust Karamarko, HDZ threw its support behind the veteran politician at convention on Saturday. Dismissing a call from Bridge leader Bozo Petrov for him to resign, Karamarko said Monday he will remain in government and will rule without Bridge if needed, calling the smaller party “a pebble in the shoe.” In turn, Petrov said Bridge will leave the coalition if Karamarko survives the no-confidence vote, which must happen by June 18.

That will either mean that HDZ must find someone to replace Karamarko as deputy premier if he’s is voted out, or if he survives, the party may lose its ruling partner. Either option may trigger the collapse of the government and early elections that would put an end to Oreskovic’s term and reform drive.

“Although early elections suit no-one in the coalition, they seem to be the most likely outcome,” said Zeljko Lovrincevic, professor at Zagreb Economic Institute. “Croatia has an opportunity to use the recovery to continue with public sector reforms and to lower public debt. Should this political instability continue into the second half of the year, we will lose a chance to overturn the negative trends.”

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