While Croatia should officially come out of the economic recession in 2010, Croatian citizens have little reason for optimism. Over the next 12 months at least 50 thousand more Croatian citizens will lose their jobs. Those who manage to keep their jobs will most likely face pay cuts, and there is also the possibility of new taxes being introduced. On the other hand living expenses will increase, the price of natural gas, electricity and indirectly a swath of consumer items and services will all increase, lowering the standard of living significantly in comparison to last year. Interest rates are not likely to decrease for the majority of the year, and in combination with the stricter regulations for approving loans, there will be a continued slump in real estate sales, as well as cars and other items that are usually financed through loans.

That kind of drop in consumer spending will also result in less tax revenues for the state, forcing the state to secure the required money by once again indebting itself on the international markets. Because of this Croatia's foreign debt in 2010 will reach 100 percent of the gross domestic product, upon which Croatia will formally be listed among the most indebted countries in the world. For this reason it is clear why as early as November Croatian National Bank Governor Zeljko Rohatinski declared that 2010 would be a year of sobering up, forecasting that the possibility of the beginning of economic recovery could come only at the end of the year. In that context it seems that economically speaking 2010 could be Croatia's worst year of the past decade, but also a year in which the economic doctrine that it has practiced until now, based on high state spending, imports and taking loans abroad, will finally collapse. In order to change this model, Croatian Government must begin a series of reforms if it wants to ensure a new long-term ascent of the domestic business sector. Damir Kustrak, the president of the Croatian Employers' Association, expects Government to begin with the required reforms this January. "I expect Government to present the package of measures with which it plans to stimulate economic growth as early as a few days after the presidential elections.

In my opinion those measures must be threefold. Government must lower the taxable and non-taxable burden on the business sector and citizens, initiate a new wave of privatisation so as to resolve the problem of ineffectiveness in companies that are in state ownership and represent a significant portion of the economy, and come up with measures to begin a new investment cycle into domestic business. If the state does not decisively turn down that path, a large number of Croatian firms will be faced with enormous problems in their operations, and will be forced to implement radical measures such as letting people go. The construction sector will definitely have the most problems in 2010, but also all those sectors that are tied to it, meaning producers of construction tools and materials, the lumber industry, as well as those industries that rely on exports." For a large number of Croatian companies in that sector their future will depend on their ability to find sources of financing and in that way survive this period of poor business. It is very questionable however, if that money will be available and if so, under what conditions. Namely, after Franjo Lukovic, the top man at Zagrebacka bank, announced the lowering of interest rates on the domestic market in early December, the remaining heads of the larger domestic banks quickly distanced themselves from that kind of proposal. The head of the Raiffeisen bank Zdenko Adrovic for example, announced that there was no basis for any significant lowering of loan interest rates in 2010, given that an increase in problems with regards to collecting outstanding loans is expected among all small businesses and the retail sector.

From this one can see that Croatian banks will continue with a very restrictive credit policy, and another problem for the domestic capital market in that time period will definitely be the state's loan activity abroad. Namely, in 2010 Croatia must pay off nearly 10 billion euro in due obligations, and if the amount required for financing the fiscal deficit is added to that, then the amount Croatia will need to borrow on international markets is around 13 billion euro. Added to the existing debt and compared to the projected GDP, it is almost a guarantee the Croatia debt will reach 100 percent of the GDP sometime this year. This will have a very negative effect on the country's credit rating, that of state institutions, but also of all companies that do business here, making foreign capital significantly more expensive and unavailable. That problem it appears has also been recognized by the CNB, prompting Governor Rohatinski to recently announce that he is prepared to allow banks to lower their required reserves by 6 billion kuna if they put that money towards the business sector. However, Rohatinski also announced how he has no intention of doing so until he receives guarantees from the state and from commercial banks that these funds will not be used to finance state or personal spending.

Furthermore, there is disagreement regarding the model based on which that money would be paid out to businesses. Government's economic advisor Borislav Skegro proposes the establishing of a 10 billion kuna fund for assistance to the business sector, from which wayward companies would be given a line of credit. Rohatinski is against this and wants the money be put towards the business sector through existing institutions such as the Croatian Bank for Reconstruction and Development (HBOR). The Governor is allegedly fearful that by creating a new fund, decisions pertaining to who receives loans and under what conditions, would once again be made on the basis of political preference, and without clear criteria. If the state does not succeed in securing stable sources for financing the domestic business sector, it is guaranteed that many firms will be forced to continue the 2009 policy of cutting costs, namely lay-offs. According to a recently conducted survey by the MojPosao web portal, 66.7 percent of the surveyed directors of Croatian firms believe that over the following six months the economic situation will worsen, 40 percent of which are already now announcing lay-offs in that period.

In 2010 the number of unemployed in Croatia is expected to surpass the 300 thousand mark, a point last reached in 2002, when a record 389 thousand unemployed were registered. The worst is expected in trade and the construction sector, where in December alone 3 thousand jobs were cut. Firms from those two sectors could have serious problems in 2010 for more than one reason. Those construction companies that in recent years based their business development on revenues from large state infrastructure projects will be faced with a drop in income as a result of Government's decision to curb public spending. As a result information that some of the big construction companies such as the Civil Engineering Institute of Croatia and Dalekovod will be forced to lower employees salaries by 15 percent has been leaked to the public. And while this information is not official, it clear attests to the difficult situation in the construction industry, particularly in large firms that have over the years significantly increased their number of employees and as a result today have extremely high operating costs. On the other hand those companies do not have the possibility of re-orienting themselves towards other kinds of jobs, such as residential construction, because that sector has also seen a serious drop in recent years.

In fact, according to forecast by specialized Internet portals, construction activity in Croatia in 2010 could reach its lowest level in the past 10 years. Hrvoje Bujas, director of the GoHome real estate Internet portal, feels that the collapse of residential construction could threaten an entire series of connected businesses. "Currently in Croatia there are between 8 and 12 thousand newly built but unsold apartments. Given that figure, I feel that the only quality solution to the problem is that the banks in cooperation with the investors lower the prices even more, both of the actual apartment, as well as the mortgages, and advertise those new prices in a quality fashion. Construction is a development multiplier, a profitable sector, which as opposed to the shipbuilding sector, has never been state funded. Now thousands of workers from this otherwise successful sector could be left without a job, and thousands of small to mid-sized businesses, from construction companies, retailers, furniture manufacturers, to construction material producers, are in an extremely bad position. Many of them are on the brink of bankruptcy, this wave must be stopped with investments into the future development of the construction sector right now."

The situation is similar in commerce, a sector that throughout 2009 consistently recorded a drop in spending, at times even greater than 10 percent. That trend will most likely continue in 2010, and is possible that it will be even more pronounced given that the purchasing power of citizens is also expected to drop again. It will be brought about by the growth in unemployment and the expected wage cuts in the real sector, while on the other hand the real value of pensions will be less, because a temporary halt on the practice of biannually harmonizing them with inflation and salaries has been introduced. All of this will result in new business problems for the commerce sector, and in combination with the restrictive loan approval policy of the banks, it will be particularly difficult for those outlets selling big ticket items such as car dealers. That branch of the Croatian economy was probably hardest hit by the crisis in 2009, with the sale of motor vehicles dropping by 50 percent in one year, and it looks like the situation will not get better in 2010.

Darin Jankovic, a car market analyst from the Jato Dynamics company, insists that the future of the car market in Croatia depends primarily on the position of the domestic banks. "If domestic banks and leasing companies do not begin to offer better terms for financing the purchase of a car, a significant number of companies will not survive to the end of 2010. It all depends on the banks, because dealers in reality no longer have any room to lower their prices. This year they truly reached the absolute minimum in terms of being profitable, they lowered their margins as much as possible, cut costs, laid off employees, but I think they no longer have any room to manoeuvre. Simply put, the price of a car in Croatia has never been lower and I do not think it could get any lower. On the other hand, I cannot understand why the state does not try, at least in some way, to kick-start the market. The automobile industry was for years one of the key contributors to the countries tax revenues, an entire swath of business sub-sectors, such as the service industry, depend on the sale of cars, as for example does the advertising industry. That is why it is unclear to me whose interest it is in for car dealers to go under." As a result of lowered consumer spending, domestic firms have less income and are seeking state assistance.

The state does not have any money for assistance; in reality it cannot go further into debt, and the only way to get more money is to lower planned expenditures or increase revenues. Lowering expenditures means cutting investments and lower wages and pensions, while increasing revenues means increasing taxes. On the short term all of this will result in a drop in spending, and thereby compound the woes of the business sector. Precisely because of this the measures for coming out of the economic crisis will not be in the least bit simple, and regardless of which approach Government chooses, they will in the end result in a drop in the living standard for Croatians. Because of this, there is no doubt that 2010 could be the beginning of a very difficult period that could last for more than one year.