CROATIA

The country is witnessing a growing class of entrepreneurs that increasingly drive economic growth and prosperity in this country of 4.4 million people. Small and medium-sized enterprises are a strong segment of the economy now. These people are all middle class. This is a new strata of the society. Entrepreneurs control a growing piece of the economic pie. The private sector is taking over.

As new entrepreneurs start up, they add variety to the growing private sector, and this yields security. “Because the economy is not dominated by any particular sector, or just a few sectors, the risk of sudden turnarounds is reduced,” says Martina Dalic, state secretary at Croatia’s finance ministry.

Growth in the country’s gross domestic product (GDP) slowed to 3.8 per cent last year, but Croatia’s fundamentals appear stronger than at any time since the collapse of Yugoslavia, 15 years ago. Debt sustainability in public and private sectors, long a problem, is beginning to stabilize. Inflation remains below four per cent annually.

Some concerns remain. For example, Zeljko Rohatinski, the central bank governor, says the heavy flow of foreign cash into the country places growing pressure on the kuna, Croatia’s currency, to appreciate. This could jeopardise the kuna’s managed peg to the euro, which holds movement against the euro within a price “corridor” of 15 per cent.

Business climate has improved, characterized by freer trade and a gradual reduction of red tape-a world away from the economy of a decade ago. Banks are opening their doors to small companies, as the foreign banks that dominate the sector diversify their portfolios and compete by pushing down interest rates. Foreign owned banks dominate Croatia’s banking sector, providing security for millions of depositors once scared off by financial instability.

Zagrebacka banka, owned by Italy’s Unicredito, and Privredna banka Zagreb (PBZ), owned by Italy’s Banca Intesa, together controls 45 per cent of the market. Other big players include Austria’s Raiffeisen, Erste Steirmarkische, Hypo Alpe-Adria and Germany’s HVB. Foreign banks combine to control 91 per cent of total assets in the sector.

Central bankers praise these banks for reinvigorating Croatia’s once lackluster banking sector, and depositors show their approval by voting with their wallets. Overall time and savings deposits in the sector trebled from 2001 to today. Demand deposits more than doubled. Foreign currency deposits grew by 61 per cent.

The banks have responded by modernizing Croatia’s financial world. Some six million charge cards circulate among a population of 4.3 million people, says Bozo Prka, president of the managing board at PBZ, making consumer payments easier in Croatia than anywhere else in the western Balkans.

The country’s Central Bank last month raised the banks’ marginal reserve requirements from 30 to 40 per cent aiming to slash yields on external borrowing. The frequency of central bank intervention has increased sharply in the past 12 months.

Croatia’s central bank has acted previously to restrain foreign-owned banks, capping their annual lending growth at 16 per cent in 2003. This restriction was dropped last year, but it demonstrated the monetary authority’s readiness to intervene.

The central bank intends to keep the managed peg in place until Croatia fulfils its goal of adopting the euro.

The country has made good progress on some fronts. Croatia’s external debt began to fall in early 2005 after years of constant growth. The current account deficit fell below the IMF’s target, contracting to 4.6 per cent of the GDP on the strength of export growth and tourism revenues during 2004.

The state squeezed its budget deific down to 5 percent from 6.3 per cent in one year, and the government unveiled medium-term reform plans for the railways and health sector.

UKRAINE

The country gained independence in 1991. The 47.2 million population lives on a per capita income of less than $80 per month with per capita gross domestic product last year at just $1350.

The government faces the daunting challenge of pulling such a large and populous country out of its traditional backwardness and into the fast moving global economy of the 21st century.

Ukraine’s economy has staged a rapid recovery since 2000 with growth peaking at 12 per cent last year. Much of this has come from the steel and chemicals industries, spurred by surges in world prices.

However, small and medium sized businesses were granted an increasingly liberal climate so long as they did not challenge the political order. That helped foster a broad based recovery.

After hitting the extraordinary 14 per cent in the third quarter of last year, Ukraine’s gross domestic product growth has slowed with a vengeance to 8.5 per cent in the fourth quarter, 5.4 per cent in the first quarter of this year and 3.9 per cent in April.

The primary factor behind the slowdown is inflation, which erupted after the former government doubled the minimum pension in September, just before presidential elections. The quarterly inflation rate was 6.2 per cent in the fourth quarter of last year and was still running hot at 4.4 per cent in the first quarter of this year. Some of the new government’s inflation fighting techniques, such as temporary caps on petrol prices in April and May, arguably caused more problems than they solved. Not wanting to appear miserly, the new government increased social spending further and gave state employees wage increases of up to 57 per cent.

Exports, which account for a quarter of the economy, have been hit by a five per cent appreciation of the currency. The central bank raised its peg against the dollar in April to help tame inflation and cool speculative demand for the denominated government debt.

However, other factors besides inflation are behind the slowdown. Construction was down 5.9 per cent in the January to April period as both government and big business held back from capital investments. The government has had to slash capital projects to free up funds for the pension increase while private owners are paying more taxes and worrying about how the government’s plans will affect their businesses.

General tax rates have not been raised and customs duties on some products have even been cut. The extra revenues are coming from more even collection and a cancellation of exemptions previously granted to special economic zones and small businesses.

The metallurgy industry, which accounts for 40 per cent of exports and had been one of the main engines of growth in 2003-04, only barely increased its output in the January to April period by 0.5 per cent. Sharp output increases by China and India have other steel producers slightly trimming output in hopes of averting a price collapse.

The economy has been gradually diversifying from its traditional dependence on heavy industry and agriculture. The latest data for different sectors’ share of GDP is from 2003, when industry accounted for 30 per cent of the GDP (down one point from 2001); agriculture for 12 per cent (down four points); transport and communications for 15 per cent (up one point); trade for 13 per cent (up one point); and “other”, a catch-all that includes most services, for 18 per cent (up two points).

The new government in Ukraine intends to revise up to 29 privatization sales carried out by the former government. A special law is being prepared to regulate the process.