ZAGREB, November 21, 2018 - Next year the European Commission will continue analysing macroeconomic risks in Croatia and overseeing its progress in reducing excessive macroeconomic imbalances, the European Union's executive said in a report on Wednesday.
The Commission released the 2019 Annual Growth Survey, the 2019 Alert Mechanism Report and the 2019 Joint Employment Report, marking the beginning of the 2019 European Semester cycle of economic and social policy coordination.
The Alert Mechanism Report says that 13 member states will be covered by an in-depth review in 2019 to assess whether they are experiencing macroeconomic imbalances. Those countries are: Bulgaria, Croatia, Cyprus, France, Germany, Greece, Ireland, Italy, the Netherlands, Portugal, Romania, Spain, and Sweden.
The results of the in-depth reviews will be presented as part of the country reports to be published in February or March 2019. Based on an assessment of whether the government's reform programme is ambitious enough to correct imbalances, the Commission will decide whether or not it will be necessary to trigger a corrective mechanism to address the macroeconomic imbalances.
"In March 2018, the Commission concluded that Croatia was experiencing excessive macroeconomic imbalances, linked to high levels of public, private and external debt, all largely denominated in foreign currency, in a context of low potential growth. In the updated scoreboard, a number of indicators are beyond the indicative threshold, namely the net international investment position (NIIP), the government debt and the unemployment rate," the Commission said.
If these positive trends continue, the Croatian economy may still experience macroeconomic imbalances next year, but they will no longer be excessive as in the previous five years.
Among the positive trends, the Commission cited the reduction of public debt and improvement of the net international investment position, which was negative - 90 percent of GDP in 2010 and 59.8 percent in the second quarter of 2018. The negative NIIP largely reflected foreign direct investment.
Unit labour costs were reduced, which contributed to competitiveness, and as a result Croatia gained market shares, albeit at a slower pace than in previous years. Private sector debt continued decreasing despite a recovery of credit flows in 2017. The reduction of non-performing loans in the banking sector slowed, and a large share of loans to non-financial corporations remains nonperforming, the report says.
"The government debt ratio declined further in 2017 also on account of an improving general government balance. The unemployment rate continued to decrease. However, labour market participation remains very low and, combined with sluggish productivity developments, it continues to weigh on potential growth. Risks associated with the country's largest employer, Agrokor, diminished after its creditors adopted a debt restructuring plan.
"Overall, the economic reading highlights the still high but decreasing debt levels and currency risk exposures in all sectors of the economy and the importance of higher potential growth for a durable correction. Therefore the Commission finds it useful, also taking into account the identification of an excessive imbalance in March 2018, to examine further the persistence of macroeconomic risks and to monitor progress in the unwinding of excessive imbalances," the Commission said, speaking about macroeconomic risks in Croatia.
According to data from Eurostat, the EU's statistical office, Croatia's public debt to GDP ratio was 76.1 percent at the end of the second quarter of 2018, its lowest level since 2012 when it stood at 69.4 percent of GDP. The unemployment rate in September 2018 was 8.2 percent.
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