Balkans.com Business News / Croatia

June 30th-At midnight Croatia will become the 28th member state of the European Union, ushering in new rules and regulations in the Croatian aviation industry. The new business environment will have an impact not only on Croatia Airlines but Croatian airports and foreign airlines operating to the country as well. The Croatian government approved a final cash injection into Croatia Airlines late last year so as to avoid anti subsidy measures enforced by the European Union. Joining the 27 member bloc does not exclude Croatia Airlines from government subsidies, but does make it much harder to come by and requires approval from the European Commission. Since European Union based airlines will be treated as domestic carriers in Croatia from July 1 their taxes will be reduced. Similarly, Croatia Airlines will be considered a domestic carrier when operating to any European Union member nation. Furthermore, the Croatian carrier will have more freedom to operate within different EU markets. According to legislation, all EU airlines may operate air services on any route within the EU. However, this move is often too costly for legacy carriers to undertake. It is this legislation that could also harm Croatia Airlines. Low cost airlines registered in EU member states will be able to easily set up bases in the country. Ryanair has already jumped at the opportunity by opening a base in Zadar just a few months ago.Croatian airports will be the big winners from the country’s European Union membership. EU accession naturally brings with it more investment, tourism and business. In January 2007 Bulgaria and Romania joined the European Union thanks to which the airports in Sofia and Bucharest flourished. In 2006, Sofia Airport handled 2.2 million passengers. This number jumped to 2.7 million in 2007, an increase of 24%. Wizz Air created its Wizz Air Bulgaria subsidiary in 2006, a year before the country joined the EU. At Bucharest’s Henri Coanda Airport, the EU impact was even greater with numbers jumping from 3.5 million in 2006 to 4.9 in 2007, a 40% increase. Croatia’s costal airports have already benefited from numerous pre-membership funds which have been allocated to the development of airport infrastructure.

Croatia Airlines has been given approval from the Croatian Competition Agency to carry through its restructuring program. The decision comes two weeks after the Agency sent Croatia Airlines’ proposal back for further clarification. The approval will now allow the Croatian carrier to continue on with its cost cutting measures, which are scheduled to be completed by 2015, by which time the airline expects to be operating with a profit. “Encouraging results from the first half of the year further confirm the effectiveness of the restructuring program and Croatia Airlines’ potential to operate as profitable business in the future. Our management is determined to implement all the necessary measures and goals and we believe the restructuring will have a positive outcome”, Croatia Airlines’ CEO, Krešimir Kučko, said following the Agency’s decision. The restructuring program given to the Agency outlines the airline’s plans to downsize on the number of employees. Croatia Airlines will close its representative offices in Austria, Switzerland, the Netherlands, Great Britain, Bosnia and Herzegovina and Macedonia. Furthermore, it outlines “a change in the carrier’s fleet structure” and a reduction in the number of operational jets. The airline is looking to sell some of its Airbuses as well as spare parts for the aircraft. The sale of slots at various European airports is also part of the restructuring program which should help the airline return to profitability. During this week Croatia Airlines held talks with Airbus in an attempt to cancel its 2008 order for four Airbus A319s. Following this year’s discontinuation of several routes, the airline further plans to cancel some loss making services in 2014 and 2015. “It is important to note that the European Commission is keeping a close eye on what is happening at Croatia Airlines. It is encouraging to see that the management realises that restructuring is the only way Croatia Airlines can stay competitive in the future”, Olgica Spevec, the head of the Competition Agency, says.

Reassessing our expectations for the better, we arrive at a new target price of HRK 1,552 (from 1,505) and increase our recommendation to Accumulate (from Hold). With regard to ERNT's geographical scope, we identify increased spending aimed at speeding up mobile communications, partially demanded and funded by the EU. Stronger than expected growth could come from the CIS and/or Ericsson. Dividend expected to be cut to HRK 100 (from HRK 170) in 2013 on. While the attractive dividend payout has been fuelled to a great extent by remarkable WC reduction in recent years, we reckon that ERNT has hit a level from which it will be difficult to further lower working capital (DSO down from 211 in 2007 to 65 in 2012). ERNT's current valuation might still not seem a bargain but it is, in our view, justifiable, given the still attractive dividend yields (> 7%) and gradually improving financials.bne/Erste

Across Croatia, the bunting is up and parties are set to kick off in the main squares of its towns and cities as it celebrates re-entry to the European mainstream. But as Croatia seals EU membership, anti-corruption analysts are urging the country to maintain the fight against graft. Amidst the good cheer, economic reform has stalled and GDP has not shown meaningful growth since 2008, yet Zagreb has pushed past the strict criteria to join the club. Now, with the watchdog concerned that having achieved its goal Zagreb's efforts to stamp out graft risk coming to a standstill, Transparency International (TI) has slammed the failure to really get to grips with political corruption. For Croats, always proudly Western-looking, favourable comparison to their Balkan neighbours in a report looking into party political financing in the region will come as scant consolation. The international watchdog focused on Croatia's opaque system of campaign financing as a particular weakness. "Croatia should make political party financing more transparent to strengthen its democracy as it prepares to join the European Union (EU)," TI said in a statement. The report ranks Croatia third from bottom in the region in terms of "the reliability of political parties' financial reporting", beating only Serbia and Macedonia. "According to the report, independent experts in Croatia estimate that official reports on campaign financing only cover up to 50-60% of the actual revenue in campaign budgets," TI said. A common issue across the whole region is that structures and legislation are in place, but implementation is patchy, and this is apparently the case in Croatia's efforts to increase transparency. "A lack of reliable and accurate financial reporting from political parties leaves the door open to corruption and abuse of the democratic system by wealthy donors, including big business," said Anne Koch, Transparency International's regional director for Europe and Central Asia. Unholy alliance Luka Oreskovic, a Croatian researcher at Harvard University, told bne that the issue of election campaign finance in Croatia is closely tied to the broader challenge of corruption, and that efforts to tackle graft have necessarily to encompass those to enhance transparency in political funding. However, he concedes that reforms in recent years have substantially reduced the flow of suspect money. Previously, an unholy alliance between parties and PR and marketing companies led to the recycling of cash from the advertising spend of state-owned enterprises (SOE) back to the ruling party. Oreskovic says that this channel has now been "completely eradicated," noting that state-owned companies (of which Croatia still has a number as its privatisation efforts have slowed) are now banned from using PR agencies. That makes it "highly unlikely that services of PR and marketing companies will be used by SOE's in exchange for later favorable campaign financing and advertisements for the party in power," Oreskovic suggests. However, TI's report suggests "there is evidence to suggest that the media and advertising companies sell advertising space to parties and candidates at different prices", despite legislation intended to stamp out these practices. As the watchdog says, Croatia has gone further down the path of tackling high-level corruption than most of its neighbours. The jailing last year of former prime minister Ivo Sanander for graft and war profiteering, for instance, has few precedents. Oreskovic cites it as an example of the country's seriousness in the struggle. The hope is that Croatia's long-awaited EU membership will be an incentive to intensify that campaign, rather than to stall it, as many claim happened in the CEE states that entered the European bloc in 2004.By Andrew MacDowall in Split bne

Croatia's accession to the European Union on July 1 isn't being celebrated on the debt market as the ex-Yugoslav republic's borrowing costs rise relative to peers.The extra yield on Croatia's dollar bonds over those of other developing countries in JPMorgan Chase & Co.'s EMBI Global index increased to 86 basis points yesterday, the most since April 2, before falling to 50 today, according to data compiled by Bloomberg. The yield on Croatia's 2023 dollar note fell 8 basis points to 5.985 percent, after jumping to 6.40 percent this week, 62 basis points more than similar securities from Romania, an EU member with the same BB+ junk-rating from Standard & Poor's.Unlike its former-communist peers that became EU members last decade, Croatia is entering a bloc in the midst of its longest recession. While nations from Estonia to Bulgaria benefited from joining the world's biggest trading bloc, Croatia won't get a similar boost as it depends on tourism for about one-fifth of gross domestic product and as rising labor costs make it harder to attract investment into export industries.bne/Bloomberg