Agrokor financial difficulties cause split in Croatian governing coalition, heightening political instability and unrest risks across region

Headquarters of Agrokor company in Zagreb, Croatia

PA: 18000381

Today (4 May), the Croatian parliament will vote on a motion of no-confidence against Minister of Finance Zdravko Maric, tabled by the main opposition Social Democratic Party (SDP). The party accuses Maric of being partly responsible for the current crisis at food and retail group Agrokor, owing to his role as head of strategy and capital markets at the company before entering into politics. Agrokor, responsible for 15% of Croatia's GDP, has encountered severe financial difficulties principally due to its accumulated debt. In early April, the Croatian government was forced to pass a law that creates bankruptcy protection for systemic companies, in order to take control of and stabilise their business. The government will provide an immediate cash injection, while restructuring, and the potential sale of subsidiaries will probably follow.

The political fallout of the Agrokor crisis has been substantial in Croatia. The no-confidence motion against Maric only became a cause of severe government instability on 27 April, when three of the four ministers from the junior coalition partner, Bridge of Independent Lists (MOST), unexpectedly expressed their intention to vote against the government's support of Maric. Prime Minister Andrej Plenkovic responded by immediately dismissing the three ministers – of justice, the interior, and the environment – as well as MOST's fourth and final minister, prompting the collapse of the coalition.

This is the second time in under a year that Croatia has been plunged into political uncertainty due to the collapse of a HDZ-MOST coalition. The previous coalition between the same two parties was toppled in June 2016 by a vote of no confidence in the prime minister over a perceived conflict of interest. Despite stating hat they no longer intend to work with one another because of irreconcilable differences, the two parties formed a coalition once again in October 2016 after a snap election failed to deliver the HDZ an overall majority.

Regional implications

The travails of Agrokor could affect the entire region and not just Croatia. The company, which has expanded in neighbouring countries, employs approximately 60,000 people in Croatia, Bosnia and Herzegovina, Slovenia, Hungary, and Serbia. This number is larger still if one considers suppliers that could be affected by Agrokor's insolvency. Further complicating the issue, Agrokor also owns stakes in a number of regional suppliers. In 2014, Agrokor acquired a 59.47% stake in Mercator, a Slovenian retail company with a regional presence. Through Mercator, Agrokor also has a presence in Serbia, where its subsidiary Mercator-S operates. In Bosnia, Agrokor operates through subsidiaries, including Konzum, the largest retailer in the country. Agrokor owes approximately EUR127 million (USD138.7 million) to suppliers in Bosnia. In Strumica, FYR Macedonia, Agrokor established a purchasing and distribution centre in 2011. The project cost EUR15 million and further investments were in the pipeline, but were blocked by the company's debt problems. Liquidation of the company would have a severe ripple effect in these regional economies, in particular Bosnia and Herzegovina, which is already saddled with high unemployment. The political crisis that has enveloped Croatia would consequently spread to neighbouring countries. A steep rise in unemployment would probably increase the risk of unrest across affected countries.

Outlook and implications

In the absence of a regionally agreed settlement and rescue plan, the affected countries are likely to initiate some individual measures to safeguard their interests and mitigate the effects that the current crisis could have on employment. Indicators of such an incipient trend have already emerged. Serbia notably hosted a summit to discuss the Agrokor crisis with regional representatives; the organisers did not invite Croatian representatives. Slovenia meanwhile is likely to adopt legislation similar to Lex Agrokor, which would protect Mercator and its employees whilst preventing Agrokor from extracting capital from the Slovenian retailer to pay off creditors. This increases the risk of triggering a regional trend of nationalisation and expropriation to offset social costs.

In Croatia, the HDZ is seeking new allies in parliament with whom to form a new coalition. The party's ability to muster the 79 MPs necessary to defend its minister Maric will give a strong indication of whether the party will be successful in assembling a majority. Nonetheless, any majority that the HDZ can amass will probably be thin and comprise a number of small and heterogeneous parties. Consequently, the government's ability to pass its ambitious reform programme is likely to be impeded. Efforts to reform public administration and the pension systems, as well as plans to tackle the main administrative barriers to investment by eliminating excessive regulation and lowering administrative costs, are now at risk.

There is also a moderate risk of a snap election being called if the HDZ fails to garner a majority. This could be held either in September or as soon as 6 June, along with the second round of the local election due to take place on that date.