The coronavirus outbreak is likely to deal a hard blow to Croatia's economy, which may see the nation's GDP contract by almost 5 percent year-on-year in 2020. At the same time, recovery efforts will be hampered by the seasonal nature of its torist industry and weak manufacturing sector, Raiffeisenbank Austria analysts told state agency Hina on Friday.

Croatia’s economy is largely dependent on tourism, which is estimated to account indirectly for around 20 percent of GDP – one of the highest ratios in the world. The draconian travel bans imposed by most European countries are almost certain to deal a crippling blow to the tourism and hospitality sectors.

At least 20 percent of all overnight stays and tourism revenues in Croatia are reported in the second quarter of every year, from April to June, while the main tourist season in the third quarter, from July to September, accounts for 70 percent of tourism revenue and overnight stays.

They also warned that other European countries which are the main markets where visitors come from – especially Germany, Slovenia, Italy, and Austria – will also suffer economic downturns.

In addition, since private-owned short-term rentals account for 60 percent of Croatia’s total tourist capacity, a dramatic reduction in visitors will also translate to lower disposable income and lower household spending. Unemployment is also likely to increase dramatically, and investments are likely to drop.

Overall, the most affected sectors will be transport and all other services that depend on tourism, such as accomodation, food and drinks, entertainment and travel services. Manufacturing sectors such as chemical, textile, paper, and lumber industries, will experience a drop in demand, as its main export markets are outbreak-hit Italy and Germany.

All this will definitely put pressure on public spending, as budget revenues are likely to drop as there will be less income from the value-added tax PDV, which is currently at 25 percent, one of Europe’s highest, and the main source of the government’s income.  On the other hand, spending will have to increase to fund various emergency measures, and revenues will be further cut by recently introduced minor tax cuts.

This will all result in an almost certain budget deficit at the end of 2020, on the heels of Croatia’s historic three straight years of budget surplus. Public debt is also certain to increase, RBA analysts said.

In terms of monetary policy, the central bank HNB is expected to introduce continue maintaining exchange rate stability.  The local currency kuna is traditionally kept in a narrow band of approximately 7.40 to 7.60 kuna per euro.

Since the outbreak crisis started, the kuna has been sliding to reach 7.59 on Friday. The HNB had four interventions on the money market earlier this month, spending €1.6 billion to buy back kuna on the local money market to shore up the currency.

The central bank currently has some €19 billion in foreign currency reserves.

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