The Croatian economy is affected by the worldwide credit crunch, but is still scoring much better than Europe in average. Although the economy looks set to continue slowing during 2008 and 2009: industrial production and retail sales are already weak, credit growth is sluggish (given the 12% nominal administrative limit imposed by regulators) and the international environment is not doing great either. At the same time, inflation appears, as expected, to have peaked in July and should end the year slightly higher than 5.0% yoy. The recent drop in oil prices is a key factor behind this scenario. In the meantime, however, the current account deficit should widen to approximately 10% of GDP this year as the impact of higher oil prices in H1 2008 and a widening income deficit on profit repatriation and higher interest payments feed through. Hence, there is no prospect of looser monetary policy settings in the near term. Nonetheless combined FDI and medium and long-term credit inflows will comfortably cover the current account balance.
Thus, the kuna will remain exposed to appreciation pressures.