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1. The Summer of 2020

In early July, Croatia is heading towards a very challenging election cycle. After a quite successful fight against the COVID-19 epidemic, the Croatian government has decided that parliamentary elections should be organized as soon as possible. The Croatian Parliament has been dissolved on 18 May and the government will soon operate in so-called „technical capacity“ – caretaker government – and only the most important political and economic projects will be prioritized and approved.

However, there are several issues that strike us as critically important and extremely interesting to share with our clients and partners. The Vlahovic Group public policy team has been diligently studying the Plenkovic administration and his team and our insights come from working closely with top administration officials.

As this report indicates, August will bring us a new Croatian government – certainly a coalition – which will face tough times in autumn, as the COVID-19 economic recovery will be slow and difficult.

The summer of 2020 looks totally unpredictable and hard currency coming from foreign tourists will be scarce. Croatian beaches still look very attractive for many Europeans but it is highly unlikely that bookings will recover in a month from now.

Additionally, a number of key reforms will have to be prioritized such as smaller government, privatization, cutting red tape in bureaucracy and swift digitization. On top of this, labor issues, healthcare and unreformed state administration will continue to burden the progress rate as well as credit and investment ratings of Croatia.

This report will provide a snapshot of what is going to happen in Croatia in the next three months with the aim to help companies plan their policy and regulatory activities.

2. How the Government Coped with COVID-19

The general opinion in Croatia is that the government has managed the crisis well, which is reflected in widespread and rising support; polls conducted during the ongoing epidemic show that the ruling conservative party HDZ and Prime Minister Plenkovic personally regained the lead while he recorded a great increase in popularity, as well as his Health Minister Vili Beros.

In April, the gov’t recorded an unprecedented support of 94% in the fight against the coronavirus, with 65% of the respondents convinced that Croatia was coping with the epidemic better than most other European countries. The New York Times praised Croatia’s^[1] management of the epidemic, referring to its high ranking in the Oxford scale of measures and its low death rate of 2.1 per 100,000 inhabitants; they underscored that “Early measures to stop the outbreak have generally been aided by cooperation from citizens galvanized by tough recent experiences of war or financial disaster.”

Explaining the relatively low number of infections in Croatia, the PM emphasized that Croatia “Has been closely monitoring developments in China since 8 January. At the World Economic Forum in Davos, I spoke with the WHO Director-General and even then it was clear to me that it could be dangerous.”^[2]

The gov’t is paying out the minimum wage of € 533 monthly for the duration of three months and it remains to be seen how many will be laid off in June, once the measures elapse. So far, from the middle of March until 15 May, the number of unemployed has risen from 134,000 to 158,618 and the unemployment rate in April was 9.7%^[3] and rising. It is worth noting that the largest unemployment growth is in the hospitality sector which directly generates 19.6% of the GDP, according to the Croatian National Bank. This is why the gov’t has been putting significant efforts into multilateral and bilateral negotiations on opening borders in the EU which would undoubtedly enable the flow of tourism. Nevertheless, the Tourism Minister expects a 60-75% decrease in visits and overnight stays and true economic consequences of the crisis in Croatia will be felt in Q3 and Q4.

According to IMF forecasts released in April, Croatia’s GDP will fall 9% this year, the highest among European emerging economies, with the unemployment rate reaching 11.5%; recovery should follow next year, with an estimated growth rate of 4.9%, in line with the gov’t predictions. State budget revision in May revealed that the annual budget deficit has increased by € 4 billion due to the expenditures that would remain as was originally planned. At the beginning of the epidemic, Croatia ranked ninth in the EU in terms of indebtedness, with a debt level of approximately 73% of the GDP, also being the most indebted among the EU countries in transition. A renowned economic expert Zeljko Lovrincevic from the Institute of Economics in Zagreb believes that in the best scenario, Croatia’s public debt will reach 90% of GDP if the crisis ends in three months. This would significantly affect Croatia’s strategic goal of joining the Eurozone given the Euro convergence criteria of max 60% public debt and GDP ratio. The growth curve of Croatian public debt would be steeper than in Italy, expects Lovrincevic^[4].

On 19 May, the gov’t revealed that the measures to help the economy will be prolonged, but in a reduced volume, and the priorities would be to ensure liquidity and working capital for entrepreneurs in Croatia. The minimum wage measure would be halted as of June.

3. The Election Game: New Political Landscape

Parliamentary elections are going to be held on 5 July. The ruling, center-right party HDZ (Croatian Democratic Union) will run independently, led by its president and PM Andrej Plenkovic. The largest opposition party, center-left SDP (Social Democratic Party) led by Davor Bernardic, gathered an opposition coalition called „Restart“. This center-left bloc was joined by HSS (Croatian Peasant Party), HSU (Croatian Party of Pensioners), SNAGA (POWER – People’s and Civic Engagement Party) and GLAS (Civic Liberal Alliance).

A new right-wing political party is going to challenge two major parties HDZ and SDP, the Domovinski pokret (Homeland Movement) led by a famous Croatian singer and former presidential candidate Miroslav Skoro. Considering he won 24% support in the 2019 presidential elections, Domovinski pokret by Miroslav Skoro is expected to play a pivotal role in forming the next government. Election polls expect Skoro’s party to win approximately 14 seats which would give him crucial coalition potential.

He coalesced with the right-wing Hrvatski suverenisti (Croatian Sovereignists)^[5] and tried to include MOST (Bridge of the Independent Lists) but without success. Apparently, the negotiations broke down due to the inability to reach a common understanding between the two sides, according to MOST leader Bozo Petrov^[6]. Finally, there is a big question of how HNS (Croatian People’s Party) and Bandic Milan 365 – Stranka rada i solidarnosti (Labour and Solidarity Party), led by the Mayor of Zagreb Milan Bandic, will fare in the elections on their own. Having played a key role in the restructuring of the government in the fall of 2017 as part of HDZ’s ruling coalition, HNS lost a lot of support and discontinued its long-term partnership with SDP. At the same time, Bandic’s rating has been sustaining strong losses in public support following his statements and the perceived mismanagement of crisis in the aftermath of the earthquake in Zagreb^[7].

Recent public opinion polls leave the two major parties fairly even in terms of popularity and expected number of seats in the parliament. One poll even puts SDP ahead with 64 seats out of 151, leaving HDZ with 54^[8]. This makes it highly probable that Croatia will again have a coalition government, it’s just a question of which parties. There have recently been rumors of a grand coalition between HDZ and SDP but the leader of SDP, Davor Bernardic rejected this option^[9].

The idea of a grand coalition was also excluded by the Speaker of Parliament, HDZ’s Gordan Jandrokovic^[10].

4. The Executive Takes Over

Parliamentary elections were initially planned for Q4 2020, but the altered circumstances have made a strong case for the elections to be moved sooner. Now that the Parliament has been dissolved and the elections have been set for 5 July, questions arise on what the immediate future has in store and what this means for the quotidian political processes until a new government is formed.

Croatia is now being run by a caretaker government^[11] with a limited set of authorities – an autopilot of sorts. With the day of calling the elections, the caretaker government may not make decisions on appointments to office. Exceptionally, this government may, in cases where this is necessary to ensure the smooth operation of state administrative bodies or other state bodies, name an acting appointee^[12].

Also, the caretaker government may not conclude contracts of significant value, unless the non-conclusion of the contract would cause significant material damage or if the conclusion of the contract is necessary to meet the international obligations of the Republic of Croatia, presumed that these dealings will be conducted before the new government assumes power. A contract concluded contrary to the aforementioned shall be null and void.

However, this government can, in the period from the dissolution or expiration of the term of the Croatian Parliament until the day of the first session of the newly elected Croatian Parliament, regulate certain issues within the scope of the Croatian Parliament, except for the adoption or amendment of the state budget and the prescribing of taxes and those issues which, according to the Constitution of the Republic of Croatia, may be regulated only by the Croatian Parliament^[13].

Nevertheless, the current government showed great vision with the amendments to the Law on Execution of the State Budget for 2020, passed by the Parliament on 19 March this year. These amendments abolish the limit of a maximum of 5% of redistribution on certain budget items, or 15% for projects related to EU funds. The caretaker government still has no authority to increase the state budget deficit, but with these amendments, it has a variety of options to create additional funds for COVID-19 economic reliefs and disbursements through redistributing the expense side of the budget. The redistribution must be reported to the Parliamentary Committee for Finance and state budget which remains operative, although the plenum of the Parliament has ended its term^[14].

The current government has secured all necessary prerequisites to retain a sufficient decision-making capacity without the Parliament. In order to further control the post-COVID economic response, the caretaker government can make crucial economic decisions, except additional bank loans and indebting. All the legislative files on the Parliament’s agenda are put ad acta until the new Parliament is constituted. However, the gov’t will continue to pass bylaws, including ordinances and regulations,  providing for major COVID-related political and economic processes to run regularly.

As part of bidding farewell at the end of their mandate, the Plenkovic administration ensured that several important new appointments and mandate extensions were confirmed by this outgoing Parliament, including:

• Zlata Hrvoj-Sipek as the new State Attorney
• Ivana Jakir-Beko as the new Vice-Governor of the Croatian National Bank
• Zdravko Vukic as the Head of Personal Data Protection Agency
• Mladen Cerovec as the Head of the Croatian Competition Agency
• Daniel Markic as the Head of Croatia’s Security and Intelligence Agency (SOA)

5. Key Legislative Files: Unfinished Business

There are several major legislative initiatives that have been launched by the now caretaker government, aimed at transposing EU into national legislation, of which we draw your attention to the following:

• Directive on Reduction of the Impact of Certain Plastic Products on the Environment (single-use plastics or the SUP Directive) – The transposition of the SUP Directive has been incorporated in the new Waste Management Act, sponsored by the Croatian Ministry of Environmental Protection and Energy. This key Act in waste management issues will have transposed a total of five EU Directives, the SUP Directive being one of them.
  » Stage of the legislative process: To enter the online public consultations process
• Directive on Unfair Trading Practices in the Agricultural and Food Supply Chain Directive (commonly referred to as the UTP Directive) – The UTP Directive transposition has been made part of the amended national UTP Act.
  » Stage of the legislative process: Working group

In the digital arena, two major legislative initiatives have been initiated and are expected to be finalized by the next government:

• Copyright and Related Rights Act, transposing the EU Directive on Copyright and Related Rights in the Digital Single Market of 2019, is in the legislative procedure, with the phase of the online public consultation process soliciting input from the interested parties being finalized on 17 May
  » Stage of the legislative process: Online public consultations process completed
• The new Electronic Media Act transposing the EU Audiovisual Media Services Directive (the AVMS Directive).
  » Stage of the legislative process: The online public consultation process has been finalized, report on the process pending

It is worth noting that, unless the new government makes the promulgation of this Act their top priority, Zagreb might face criticism and possible penalties from Brussels, given that the transposition deadline as stipulated by the AVMS Directive is September 2020.

6. Opportunities that Lie Ahead

The next Croatian government will be faced with running or initiating a number of major projects, an overview of which is listed below:

Energy and Environment

• Floating LNG terminal on the island of Krk with the capacity of 2.6 bcm is yet another of the large projects planned or already initiated. This project, worth € 250 million and also co-funded by the EU Commission in the amount of 85%, will secure a safe natural gas supply for Croatia and the neighboring countries. The project is expected to be completed by the end of 2020 and the terminal will commence operations in Q1 2021. Half the capacity of the new terminal has already been booked
• The development of waste management centers and the rehabilitation of contaminated areas are some of the tasks awaiting the new government. Croatia is lagging behind in transposing the EU norms for waste management and recycling and is facing the threat of penalties
• Despite PM Plenkovic 2016 Christmas wish to buy back the Hungarian energy group MOL’s stake in the INA national oil & gas company and the government’s engagement of new consultant Lazard, the deal is still on hold. MOL is the biggest shareholder in INA with a 49.1% stake. The Croatian government owns 44.8%, with the remaining 6.1% held by institutional and private investors.^[15]

Infrastructure

• Act on the Reconstruction of the City of Zagreb in the aftermath of the earthquake that hit the national capital in March 2020. Despite strong pressure coming from the opposition, the Plenkovic administration refused to have the Act adopted by Parliament given that the price tag of the Act has been estimated at a staggering € 5 billion
• The revitalization of the Croatian Railways network and rolling stock investments worth € 1.6 billion and the forging of a strategic partnership with a foreign partner that would invest in the national air carrier Croatia Airlines
• The Peljesac bridge, under construction by the China Road and Bridge Corporation, is scheduled for the summer of 2021. 85% of the overall value of this investment worth € 300 million is being financed from EU Cohesion Policy
• The Rijeka port container terminal expansion project, worth approximately € 220 million, has also been launched. The project envisages the development of a multi modal platform and connection with the Adriatic Gate container terminal. The next phase in the realization of this public investment state project is to call a tender for potential investors
• Revival of the toll motorways privatization project, an investment initially estimated at over € 2 billion

Tourism

• The golf project Prukljan in Dalmatia worth € 280 million includes the construction of a hospitality – tourism zone with entertainment center, as well as construction of a golf course along with accommodation capacities. The hospitality-tourism zone will be developed on 30 ha and will include hotels, villas and apartments, as well as an entertainment center (aqua park) on additional 30 hectares. The golf zone is planned on an area of 160 hectares and will consist of a golf course encompassing at least 60% of total area envisaged for golf, a playing course (including the driving range and service buildings), and accommodation capacities (villas and apartments). The public call for submission of bids is open until 1 July
• A new 2021-2027 National Tourism Development Strategy will be devised by the Ministry of Tourism. It is expected to be brought forth by the end of the year. The initial idea was to relieve the high season and entice year-long tourism practices, such as health, sports and congressional tourism, as well as attract visitors from distant markets and develop a more luxurious destination image. However, it may be subject to a complete overhaul due to COVID-19 ramifications

This report was prepared for the use of our clients and partners as part of the VLAHOVIC GROUP LLC Political Briefings. Consistent with fair use, this report may be quoted or reproduced with prior written consent of VLAHOVIC GROUP LLC.

For additional insights about likely policy developments, please feel free to contact Natko Vlahovic at nv@vlahovicgroup.com

Contributors:

Natko Vlahovic, Chief Executive Officer

Miljenko Pekic, Chief Operations Officer

Tomislav Lacovic, Account Director

Dubravko Bolsec, Senior Advisor

Fabijan Popovic, Account Manager

Tomislav Vidovic, Researcher

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