Croatia: Very tight election results, ruling HDZ got modest advantage to claim another government mandate

Preliminary results:

According to preliminary results released by the State Election Commission (DIP), the HDZ has won 61 seats, followed by the SDP with 56 seats. The HSS-HSLS coalition won 8 seats, the HNS 7 seats, the HDSSB 3, the IDS 3, the HSP and the HSU 1 seat each. Based on incomplete and still unofficial results, parliamentary minority lists will have eight seats in parliament being as crucial as the HSS-HSLS coalition for forming a coalition. Preliminary counts show that almost 82% of the electorate residing outside of Croatia voted for the HDZ, followed by the independent candidate Jerko Ivankovic Lijanovic (10%) and the HSP (4,3%). Based on this count, it is almost certain that at least 5 seats in the Croatian parliament will go to the Croatian Diaspora, at least four of them to HDZ if not all. Therefore, 153 seats in the parliament would be taken. Despite the likely HDZ win it is still l debatable which party will support HDZ or SDP since only HNS and IDS revealed clear commitments for a coalition with SDP. This will not be sufficient for the parliamentary majority of 77 seats. Other potential coalition partners are still sidelined and waiting the final results. However, the HDZ has the better positioning to form a coalition with one of the smaller parties. Finals results will be available after a larger number of ballots (e.g. more then 99.9%) have been counted (expected 48 hours after elections). There are some announcements that the vote count will be repeated in some smaller communities that should not affect the final outcome.

Expectations:

As expected the two key rivals (HDZ and SDP) both fell short of ensuring the 77 deputies required for a parliamentary majority. Thus, the winner will depend on post election deals as both major parties announced they will try to form a government. However, due to the fact that ruling HDZ is once again the strongest individual party, they have clear advantage and strongest chances to form a new “old” government with Mr. Sanader as Prime Minister again. The most “surprising” election results were sharp decline of HSP voters (this right wing party lost 4 seats) and disappointing results of HSU (pensioners). Namely, during campaign most of the pools were showing rising popularity of these parties. The fact that the new ruling party has to please smaller parties might affect public finances (e.g. HDZ lost an attractive coalition partner due to the weakness of HSU).

Outlook:

No significant change in economic policy, the relations with EU and in the stance towards foreign investors is expected. RZB analysts believe that most of the reforms that should support and improving business climate and economic growth are defined by unquestioned EU path Croatia took. Our basic economic scenario points at a strong growth, clearly around 6%, in 2007. The new government has to think about how to create incentives for more private investments and how to replace growth based on consumption with growth based on investments. Any stall in structural reforms that will slowdown the public enterprise reform agenda and finalization of privatization can do harm to investments, economic growth as well as EU entry prospects. Macroeconomic stability (reflected in low and stable inflation as well as declining exchange rate volatility) was one the most striking aspects since 2000 and especially in the last 4 years. Additional inflationary pressure might arise out of liberalization of still administered prices (electricity, gas and utility services) and harmonization with European excise taxes. One has to keep in mind that the major actor working for reforms and containment of external indebtedness is the de jure and de facto fully-independent Croatian National Bank, so one might expect further monetary tightening in the future leading to stabilization of share of current account deficit and foreign debt into GDP around current levels. The free-floating but tightly managed kuna should not feel the impacts from latest elections at all and in the medium-term appreciation pressures might remain dominant as Croatia progresses towards EU membership. RZB analysts\' medium-term outlook for the Croatian equity market remains fairly positive despite its current modest correction and a high P/E ratio compared to the region. An unfavourable but unlikely impact might arise from a longer period of discussion for forming government which can eventually bring some uncertainty in the market for foreign investors.