Croatian election’s implications for country’s EU entry prospects

LONDON (Reuters) – A victory for the ruling party in Croatian elections this weekend may bring a sigh of relief from foreign investors but most are waiting for progress on the country’s EU membership drive before buying more bonds. Foreign analysts cautiously predict the ruling Social Democrats will win enough support to form a new coalition government and push forward with economic reforms. However, the latest opinion polls have given a slight edge to the right-wing opposition Croatian Democratic Union (HDZ). Despite purging itself of extremists and pledging a reformist agenda, the HDZ is still mistrusted by the international community for its time in power during the 1990s when the country was isolated by corruption, economic mismanagement and a poor human rights record. Croatia’s currency, the kuna, has fallen sharply against the euro this week, to its lowest levels since March, on political jitters ahead of this weekend’s election. The central bank intervened to buy kuna yesterday to help stem the fall. «On balance, we still expect the current coalition government to win another term in office, but the outcome is by no means clear-cut,» said Alex Garrard, emerging markets strategist at UBS. Garrard said the HDZ had played a strong pro-EU card, but added, «Investors would prefer to see continuity from the existing government.» «Even if we get continuity, the big question mark is what happens with their bid for EU candidacy.» Croatia applied for EU membership in February and hopes to get the green light to start accession talks next year, but, while the leading parties are targeting membership by 2008, two contentious issues are threatening to delay progress. Croatia has been accused of failing to cooperate fully with the Hague war crimes tribunal and has also been drawn into a spat with Slovenia and EU-member Italy over fishing rights in the Adriatic Sea. Croatia’s Agriculture Ministry decided in August unilaterally to set up an exclusive economic zone in the Adriatic that would give the country sole rights over economic activity in a 200-mile band off its shores. «It’s becoming increasingly difficult to see Croatia joining along with Romania and Bulgaria (in 2007),» said Garrard. His view was echoed by Margarete Strasser, a fund manager at Capital Invest in Vienna. Analysts do not rule out some short-term weakness in Croatian markets in the event of an HDZ victory, but most expect investors to adopt a wait-and-see approach. One optimistic view is that the HDZ may be in a better position than the Social Democrats to sell EU-linked political reforms to a skeptical populace. Others warn that its nationalist leanings may make it more difficult for the HDZ to compromise on contentious issues, like the Adriatic fishing rights and the war crimes tribunal. Gavin Gray, an emerging-markets analyst at HSBC, said in a recent research note that Croatia could become the next big convergence trade if the Social Democrats win, but saw gloomy prospects under the HDZ.