Ascension To Unlock Considerable Growth Potential
Whilst already a destination for considerable amounts of European money for the development of the country's infrastructure, Croatia's ascension to the EU is set to unlockbillions of Euros for investment in better connecting the bloc's newest memberto the single market. Deputy Prime Minister Vesna Pusic has stated that Croatia will be the recipient of EUR10bn (US$13bn) up to 2020 to be spent on infrastructure projects. We currently forecast after a number of years of decline, the Croatian construction industry will grow in real terms by 1.5% year-on-year (y-o-y) in 2013 and then see an average 4% growth per annum from 2014 to 2022. Whilst Croatia's EU membership has already been built into our forecasts in terms of the economic benefits the country will enjoy boosting demand for infrastructure and commercial building, we highlight the upside presented as this EU money is translated into new projects.
Whilst the volume of construction work dropped by 8.5% y-o-y in April 2013 according to the Bureau of Statistics, we see this as a temporary decline, highlighting that many projects will have been postponed until EU ascension is complete to benefit from greater competition. In any case growth will begin to pick up with the EUR10bn available now Croatia is an EU member, of which the government is looking to spend half on six major infrastructure projects and the remaining on municipal level infrastructure such as sewerage, transmission grids and smaller roads. The major infrastructure projects which are likely to benefit from this money and provide upside to our infrastructure forecasts include:
The overhaul of Croatia's railways and connect them to the European network
A 9km bridge along Croatia's Adriatic coast to avoid having to travel through Bosnia-Herzegovina to access the southern part of the country
The completion of the Corridor VC highway, of which there is a 40km stretch left to build, which joins Hungary to Bosnia-Herzegovina through Croatia
Irrigation systems to develop Croatia agricultural land, of which currently only 2% is properly irrigated
Croatia has previously garnered the support of the European Bank for Reconstruction and Development (EBRD) and the European Investment Bank (EIB). The (EIB) estimates that it has provided some EUR2.5bn in loans (including current loans) to Croatia since 2001, to help implement projects that have developed the country's accession prospects. Another EUR85mn was provided by the EIB in September 2011 alone to help support infrastructure projects in the country. In 2010, the EBRD provided EUR60.6mn for the Corridor VC project. Since its first investment in the Croatian motorways in 2001, the EBRD has committed to date over EUR400mn for the modernisation of Croatia's transport sector.
|Membership Realised, Now For Growth|
|Construction Industry Value (US$bn) and Real Growth (% y-o-y)|
Croatia has become a tourism hotspot in recent years, with estimated 10.2mn arrivals in 2012. BMI forecasts that this figure will rise to 11.2mn by 2015 and as such there is considerable investment being made to facilitate tourist numbers. For example, construction work on Zagreb's new terminal at the Zagreb International Airport is to begin in September after the project secured EUR120mn in financing from the EIB and loans from Zagreba?ka Bank and Erste Bank worth EUR65mn. Zagreb International Airport is a good example of the opportunities on offer for international firms as Croatia attempts to increase its infrastructure capacity; a Turkish firm is expected to build the new terminal with a Belgian company taking on the facade. The French Aeroport de Paris signed a concession with the Croatian government worth EUR1.9bn to operate the facility for thirty years. As transparency in banking, financial services and the tendering process, which have all improved markedly on Croatia's path to EU membership, increase further, we expect more European construction firms to enter the Croatian market in an attempt to escape the slower growth countries elsewhere in Eastern Europe such as Poland.
Oil and Gas Production Upside
Croatia is set to launch a licensing round in 2014 for the potential oil and gas fields off its coast. Economy Minister Ivan Vrdoljak announced the country's intention to further open acreage for exploration, and hopes to 'secure several hundred millions of US dollars' from new contracts signed. If this comes to fruition, royalties from oil and gas production could greatly alleviate the government's fiscal position leading to greater investment in infrastructure projects. BMI's Oil and Gas team believe that the allocation of new licences will not immediately ease the country's fiscal position as it could take up to 10 years before exploration turns into commercial production, but oil and gas revenues would nonetheless brighten its long-term fiscal outlook (see, 'Hopes On Liscensing Round To Spur Development',3 July). Moreover, the potential for an oil and gas industry to develop will depend upon large infrastructure investments in areas such as pipelines and refineries.
The country has been actively pushing for the development of gas infrastructure to meet a projected increase in import needs. The first scheduled to be operational is the Adria liquefied natural gas (LNG) terminal, which will have an import capacity of about 10-15 bn cubic metres (bcm) per year and is planned for a 2017 start. Zagreb is currently looking for more investors in the LNG project. It is also one of the first to sign on to Gazprom's 63bcm per year South Stream pipeline project and has agreed to build the Croatian section of the pipeline in H213. In June 2013, it also joined Greece, Albania and Italy to throw its support behind the Trans-Adriatic Pipeline (TAP) project over Nabucco West as the choice pipeline to deliver Azeri gas into Europe. Zagreb had hope that it would benefit from gas deliveries made via an interconnector from Albania to Montenegro and into Croatia.