ZAGREB, 11 May 2022 - The Croatian National Bank (HNB) Council on Wednesday said the domestic financial system's exposure to systemic risks has increased due to the war in Ukraine and sanctions against Russia, and that inflation will increase the cost of new loans and burden loan repayments with variable interest.

The HNB Council discussed current economic and financial trends, underscoring that statistical indicators show that economic growth strengthened at the start of the year but that weaker consumer confidence is evident which, despite a mild recovery, retained a relatively low level in April.

Increased employment stopped in March, even though nominal wages are growing increasingly fast, while inflation has accelerated as the increased prices of oil and raw food on global markets, partially affected by the war in Ukraine, are spilling over onto domestic prices of petroleum products and food, HNB said.

Due to expected changes in the monetary policies of central banks in major economic areas, short-term and long-term costs of state financing have increased, with interest rates on corporate loans increasing slightly too, the HNB Council said. In those circumstances, lending to non-financial companies has accelerated, while household loans continue to increase at stable rates, reflecting strong housing loans.

The financial system's overall exposure to systemic risks has increased due to the war in Ukraine and sanctions against Russia, with the consequences prices of raw materials and other goods on global and regional markets. The uncertainties with regard to the pandemic and recent geopolitical tensions have not yet jeopardised the stability of Croatia's finance sector, HNB said.

The challenges in the coming period are related to geopolitical instabilities and inflationary pressures, the effects of expected normalisation of the monetary policy and the continued increase in real estate prices, HNB said.

Gradual price increase on new loans and burden on repayment of loans with a variable interest rate

The duration of the war in Ukraine will determine the degree of impact on macroeconomic, fiscal and financial trends.

HNB notes that disruptions in supply chains which additionally impact price rises could be a great burden on companies and households. In circumstances of growing inflation, it is expected that monetary policies will sharpen and key interest rates will increase in the largest economic areas. That will gradually increase the cost of new loans and burden loan repayments with a variable interest rate, HNB noted.

The negative impact of increased interest rates is buffered by a tendency of a decreased debt by households and companies and a relatively low level of debt by households and a relatively small number of loans whose repayments could increase significantly. The introduction of the euro as the official tender will additionally impact price increases and the government's debt.

Harsher financing conditions on international financial markets and then an increase in domestic interest rates could buffer some risks for financial stability that strengthened over the long period of low interest rates, such as the strong borrowing by the private sector, low bank profitability and search for risky investment alternatives that offer a higher return rate. That risk is also related to a strong price increases in real estate, which is supported by a large volume of housing loans, HNB said.

HNB underscored that it is monitoring and analysing the development of the financial system's vulnerability so that it can introduce measures in its remit. It recalled that at the start of 2022 it had announced raising the rate of anti-cyclic protected capital which would additionally strengthen the resilience of credit institutions from possible losses related to exposure to cyclic systemic risks in a downward phase of a financial cycle or the emergence of an unexpected crisis.

For more, make sure to check out our dedicated business section.

7 March 2022 - Raiffeisenbank Austria (RBA) analysts on Monday revised down their estimate of Croatia's economic growth in 2022 from 4.4% to 4%, underscoring uncertainty and negative risks, particularly regarding investments.

The analysts said that in light of the war in Ukraine and growing uncertainty, their forecast for the euro area economy has been marked down by 0.7 percentage points to 3.3%.

"The expected trends will have a negative, albeit a limited impact on Croatia's GDP. In the scenario that excludes the possibility of the war spreading to other countries of the EU and/or Western Balkans and implies, at least for the time being, that the tourism season will be successful, the forecast for the real annual GDP growth rate for 2002 has been revised from 4.4% to 4%," the analysts said.

The analysts however remain cautious, underscoring uncertainty and negative risks, particularly with regard to investments.

Inflation in 2022 at 4.9%

They also see a more significant risk in the spilling over of the global increase in energy and food prices, and have therefore revised up their inflation forecast.

RBA estimates that this year's inflation rate in Croatia will be 4.9% whereas previously it was forecast at 3.6%.

Data from the Croatian Bureau of Statistics (DZS) indicated an increase in inflation of 5.7% in January this year compared to January 2021, which is the highest increase since October 2008.

"We expect that this year will see stronger inflationary pressure, directly on food prices, and that the impact of price growth on producers will also affect consumers, which will negatively impact available income. In such circumstances we cannot rule out the possibility of additional fiscal support," the analysts said.

ZAGREB, 16 Feb 2022 - Financial stability risks remain increased compared to the period before the crisis due to uncertainties surrounding the end of the pandemic, rising inflation, residential real estate price hikes, and geopolitical risks, the Croatian National Bank (HNB) Council concluded on Wednesday.

The economy continued to grow in the last quarter of 2021, albeit at lesser intensity than previously in the year, with industrial production increasing, while the real retail turnover and construction stayed at Q3 levels, the HNB said in a press release.

In Q4 2021, employment continued to increase while the unemployment rate dropped, making their levels better than before the pandemic. Nominal pay growth also continued to accelerate, while inflation resulted in a decrease of the real pay average.

In December, the annual inflation rate increased to 5.5% from 4.8% in November. Higher food prices contributed the most to that. Together with energy prices, they are increasingly influencing inflation.

The continuation of expansionary monetary policy continues to stimulate the fall of banks' interest rates. Keeping interest rates on the money market at zero is accompanied by a mild increase in sovereign bond yields.

At the end of last year, bank lending increased 3.9% year on year, just as it did at the end of 2020. Household lending went up from 2.1% in December 2020 to 4.5% last December, primarily as a result of a strong increase in housing loans. Corporate lending decreased from 5.6% to 2.3%.

Although a strong economic recovery enabled a gradual revocation of government aid to businesses, new waves of the pandemic continue to cause problems in global supply chains, stimulating price growth.

Hence, there is a prominent risk of long-term inflationary pressures and higher inflation than currently forecast, which could prompt a faster and stronger tightening of the monetary policies of the largest monetary markets' central banks.

Increased volatility on financial markets at the start of this year is reflected in uncertainty about inflation trends, the evolution of monetary policies and expected interest rate growth.

Residential real estate prices increasingly further from fundamentals

Last year saw a strong increase in housing loans in Croatia as well as residential real estate prices, which went up to 9% in Q3. Those prices are moving further and further from long-term trends and macroeconomic fundamentals, increasing the risk of their fall in case of economic disruptions.

Increased household borrowing is accompanied by relatively mild borrowing standards which again this year, will be supported by government subsidies. These may, at the start of the repayment period, pose a smaller burden on borrowers but when the subsidies expire, they increase repayment costs as well as vulnerability to possible shocks.

In response to the continued accumulation of cyclical systemic risks, notably the rise in residential real estate prices and housing lending, the HNB has announced increasing the countercyclical capital buffer rate for Croatia from 0% to 0.5% as of 31 March 2023.

The aim is to set aside additional capital in time in order to boost the resilience of credit institutions to possible losses due to cyclical risks, the press release said.

For more, check out our business section.

ZAGREB, 17 Dec 2021 - The Croatian economy is expected to grow at a rate of 9.5% in 2021 and 4.6% in 2022, the Croatian Banking Association (HUB) said on Friday, citing projections by the four largest banks in Croatia.

HUB once again revised the Croatian GDP growth rate upward from July's estimate of 5.3%.

The national economy is expected to grow at a rate of 9.5% this year, with economists' projections ranging between 9.2% and 9.7%, HUB said in its latest outlook.

"That isn't surprising considering the developments and data released since July. Croatia is firmly positioned in the group of Central and Eastern European countries which are mostly surpassing the pre-pandemic level of economic activity," the report says.

Bankers' optimism isn't waning for 2022 either with the average expected growth rate forecast at 4.6%, with very little divergence in estimates - from 4.4% to 4.8%. 

Increased inflation to "eat up" a great deal of wage growth

The analysts expect that the accelerated economic growth will spill over to the labour market through lower unemployment rates and increased wages. They expect wages to increase by 3.7%, which is a faster rate than the 2.9% inflation rate estimated for next year.

The difference between the two rates is less than in previous years. "In other words, increased inflation will 'eat up' a great deal of the expected growth in nominal wages," HUB said.

The two main drivers of economic growth will be exports and investments. After a spectacular increase in exports this year, this trend is expected to continue at a high rate of 12% in 2022 while investments are expected to accelerate from 9.2% in 2021 to 11% in 2022.

NPOO to stimulate investment

Given that the corporate sector is still fairly passive with regard to investment, the main stimulus to investment in the short term should come from state investments, depending on how quickly funds from the National Recovery and Resilience Plan (NPOO) are activated. 

Croatia to catch up with ECB monetary expansion

HUB said that the general government balance to GDP ratio is decreasing roughly in accordance with government projections by 4.5% in 2021 and by 2.9% in 2022, and that gross public debt should decrease from 87.3% in 2020 to 82.9% in 2021 and 79.7% in 2022.

With regard to Croatia's aspirations to join the euro area in 2023, the analysts believe that the European Central Bank's quantitative easing policy will continue long enough for Croatia to catch, in terms of the impact of euro area monetary policies on demand for Croatian government bonds.

For more on business, follow TCN's dedicated page.

ZAGREB, 18 Sept, 2021 - Prime Minister Andrej Plenković said on Saturday the affirmation of Croatia's investment rating and forecast of a 6.5% economic growth this year were a confirmation of the government's good policy, which retained Croatia's economic and financial stability during the pandemic.

"The Standard & Poor's agency has affirmed Croatia's investment rating with a stable outlook and raised the economic growth estimate in 2021 to 6.5%! This is another confirmation that Croatia has retained economic and social stability as well as jobs during the COVID-19 pandemic with the government's measures for the private sector," the prime minister tweeted.

With a successful tourism season behind and the implementation of reforms and the National Recovery and Resilience Plan thanks to European funds, Croatia is on the path of a strong and fast recovery, he wrote.

"Another priority is to go back to the policy of public debt reduction and budgetary stability. Entry to the eurozone will contribute to the further strengthening of the credit rating," he added.

For more on business, follow TCN's dedicated page.

For more about Croatia, CLICK HERE.

ZAGREB, 22 May 2021 - PM Andrej Plenković on Saturday expressed satisfaction with Fitch rating agency's having maintained Croatia's rating at BBB- with a stable outlook, saying his government was working to create conditions for economic growth so that this and next year its growth rate could be among the highest in the EU.

Fitch Ratings on Friday affirmed Croatia's rating at 'BBB-', with a stable outlook, saying that pressure on state finance linked to the pandemic should be neutralised by economic recovery on the back of tourism and EU support.

"We are very happy. The... rating confirms what we have been doing in the past 15 months," Plenković told reporters while visiting Crikvenica and Rijeka in Primorje-Gorski Kotar County, where he met with candidates of the local branches of his HDZ party ahead of the second round of local elections set for 30 May.

Plenković stressed that Fitch had sent a message that Croatia had maintained political stability.

"We had parliamentary elections last year, we quickly formed the government, continued working, fought against the pandemic while at the same time keeping the stability of public finances," he said, adding that owing to public finance stability it was possible to secure funding for healthcare, wages, pensions, and job-keeping support.

"The coronavirus crisis has cost us so far HRK 32 billion, the damage caused by the earthquakes in Banovina and Zagreb amounts to HRK 125 billion. But despite that, we have managed to make sure everyone continues receiving their wages, we have secured job-keeping support in the amount of HRK 10.5 billion, 680,000 workers have received wages owing to the government's political decision to compensate employers for their workers' wages, and we have introduced measures for shorter working hours, various forms of support for liquidity in numerous sectors, and the coverage of fixed costs," he said.

"With a timely entry into the domestic capital market and access to international sources of financing, clever agreements with the Croatian National Bank and the European Central Bank, we have managed to maintain our reputation with credit agencies and all international institutions," he said, adding that apart from functioning normally and heading towards the euro area, Croatia was also in the European Exchange Rate Mechanism II.

"A budget revision will be on the agenda soon, in early June, and we will try to maintain, this year as well, the framework that will make it possible for our growth in 2021 and particularly in 2022 to be among the highest in the EU," said Plenković.

For more about business in Croatia, follow TCN's dedicated page.

He put this in the context of vaccination against COVID-19, calling on Croatians to get vaccinated.

Plenković believes that as regards reputation, Croatia has a very stable position and that with vaccination it is also creating conditions for an excellent tourist season, which, he says, together with the green digital certificate and the pandemic subsiding, will enable economic growth.

"Croatia is on the right track and I am encouraged by the assessment of those who have an unbiased and very precise judgment of our performance in the current crisis, it is very encouraging in my opinion," said Plenković.

In its latest rating, Fitch has upgraded the projection for Croatia's economic growth in 2021 from 3.8% to 5.5%.

Fitch forecasts GDP growth to accelerate to 6.1% in 2022 before averaging 4% in 2023-25, driven largely by investment and notes that Croatia will receive around €6.3 billion in grants from the Recovery and Resilience Facility, in addition to €1 billion from the EU Solidarity Fund for earthquake reconstruction and €12.6 billion in the 2021-27 Multi-Annual Funding Facility.

ZAGREB, 22 May 2021 - Fitch Ratings on Friday affirmed Croatia's rating at 'BBB-', with a stable outlook, saying that pressure on state finance linked to the pandemic should be neutralised by economic recovery on the back of tourism and EU support.

The 'BBB-' rating balances strong structural features, the agency says, singling out better indicators of human development and governance in comparison with countries with a similar rating and higher GDP per capita.

The rating is restricted by a high public debt and periods of weak economic growth, in part due to the slow adoption of structural reforms.

The stable outlook "weighs large short-term downside risks related to pandemic developments against stronger medium-term growth prospects linked to substantial EU fund support and our fiscal consolidation and debt reduction baseline that is underpinned by the authorities' commitment to fulfilling convergence criteria under the Exchange Rate Mechanism (ERMII)."

"Fitch expects the economy to expand by 5.5% in 2021, from a combination of base effects (growth was stronger than expected in 2H20), the resilience of sectors such as construction and goods exports, and a gradual recovery in consumption," the agency says.

"Our forecasts rest on an improved tourism sector outlook (at around two-thirds of 2019 levels), assuming a pick-up in summer tourism as the health crisis in Europe continues to abate. However, renewed travel restrictions due to the still uncertain evolution of the pandemic, including the spread of new variants, cannot be discounted."

European support

Fitch expects the economy to grow this year, "even if tourism levels remained at 2020 levels (50% of 2019), but the weaker recovery could increase the risk of longer-term scarring and put pressure on public and external finances."

Fitch forecasts GDP growth to accelerate to 6.1% in 2022 before averaging 4% in 2023-25, driven largely by investment and notes that Croatia will receive around €6.3 billion in grants from the Recovery and Resilience Facility (RRF), in addition to €1 billion from the EU Solidarity Fund for earthquake reconstruction and €12.6 billion in the 2021-27 Multi-Annual Funding Facility.

Work force problem

According to those projections, Croatia will likely reach pre-crisis output in early 2022, "limiting the risks of labour market hysteresis and corporate sector bankruptcies."

Rapid labour tightening in sectors such as construction could delay some of the investment momentum, as could the need to pass a large number of reforms, in a short timeframe in order to get RRF fund disbursement.  

"Croatia's absorption capacity lags the EU average and the sheer size of funds accentuates the implementation challenges."

"If the authorities are successful at adopting long-standing reforms, this could mitigate major growth challenges such as adverse demographics. According to the EU Commission, the working age population could contract by 26% by 2050."

Deficit forecast raised

Fitch raised the public deficit forecast from 3.5 to 4% of GDP in 2021 and forecasts a fall to 3% in 2022, up by 0.8 percentage points from the forecast made last December.

"The authorities put in place relatively generous and effective pandemic support measures that are gradually being wound down, with very limited direct budget costs expected beyond 2Q21."

That will help bring public spending/GDP down from a record 55.4% of GDP in 2020, while revenue should benefit from strong nominal growth, but recovery in certain segments could be jeopardised if tourism activity disappoints.

Eurozone entry in 2024

Public debt/GDP should fall to 82.7% of GDP in 2022 from 88.7% in 2020, Fitch said, reducing the forecast from December by 2.8 percentage points.

Croatia benefits from favourable financing conditions and deposits, reducing liquidity pressures.

"Over 75% of public debt is foreign currency-denominated (almost all in euros), but there are few concerns about exchange rate stability and this long-standing vulnerability will dissipate once Croatia joins the eurozone."

The authorities continue to target euro adoption by early 2023, but the biggest challenge remains fulfilling the public finance convergence criteria targets, as the government deficit and debt reduction strategy could face challenges in the near term if macroeconomic conditions do not improve as expected.

Fitch maintains its forecast that Croatia should enter the eurozone in 2024.

Consolidation

The agency says that it could upgrade Croatia's rating if near-term macroeconomic risks dissipate and if criteria are met and eurozone accession goes as planned. A stable reduction of the public debt and budget deficit through budget consolidation would also have a favourable effect.

The rating could be downgraded in case of failure to reduce general government debt over the medium term, "for example due to a more pronounced and longer period of fiscal loosening and economic contraction," as well as in case of deterioration in macroeconomic prospects, for example through a setback to the tourism sector.

For more about business in Croatia, follow TCN's dedicated page.

ZAGREB, 15 May 2021 - The European Commission has received Croatia's National Recovery and Resilience Plan and Prime Minister Andrej Plenković on Saturday thanked government members and all who worked on the key document for structural reforms and investments.

He tweeted that by implementing the reforms, Croatia will ensure more than HRK 47 billion in grants that will contribute to economic growth.

Croatia's plan is based on a green and digital economy; public administration and judiciary; education, science and research; the labour market and welfare; healthcare; and post-earthquake reconstruction.

The plan covers 77 reforms and 152 investments which, Plenković said earlier, will also make Croatia more resilient to future crises.

For more, follow our business section.

December 19, 2020 – A surprising success story in a difficult year as Croatia agriculture and food exports jump in 2020, while imports of the same have fallen

Good news from any place is welcome in this most difficult of years. According to provisional data from the country's Central Bureau of Statistics, the total value of Croatia agriculture and food exports in the period from January to September 2020 amounted to 1.7 billion Euros, an increase of 5 percent from the same period in 2019. Within the same period, the value of agricultural and food imports into Croatia was 2.5 billion Euros, a decline of 7.3 percent from last year.

The success of Croatia agriculture and food exports in the period means that the country's trade deficit has decreased by huge 26.6 percent compared to the same period last year. With this year's findings taken into account, the trade deficit now stands at 758.8 million Euros.

© Romulić & Stojčić

Croatia agriculture and food exports covered 69 percent of total imports this year, an increase of 8.11 percent. A total of 15.86 percent of all exports from the country come from the Croatia agriculture and food exports sector.

The most important item of production within the sector is corn, which accounts for 5.4 percent of all Croatia agriculture and food exports.

From January to September 2020, the most significant products in exports were: cereals (205.4 million Euros – a growth of a huge 62.6 million Euros); various food products (168.1 million Euros – including manufactured/processed foods like sauces, soups, ice cream, sugar products); fish and other seafood (a huge 147.4 million Euros – showing a growth of 14.5 million Euros); cereals, flour, starch or milk products; confectionery products, including chocolate (135.9 million Euros – a growth of 13.8 million Euros), and tobacco-related products (122.6 million Euros). TCN recently took a closer look at the successful and well-established Croatian chocolate industry

Other successes within 2020 Croatia agriculture and food exports were live animals, with an increase of 10.1 million Euros, and the residue and waste of the food industry, which is exported to go into prepared animal foods. The latter saw an increase of 8.6 million Euros.

So far this year, Italy was one of the most important destinations for Croatia agriculture and food exports. Their total consumption of Croatia agriculture and food exports was 300.8 million Euros, which amounts to 17.76 percent of Croatia's exports in the sector. Croatia agriculture and food exports to Italy increased by 21.9 percent this year, while imports from Italy to Croatia in the same period was 263 million Euros, a decrease of 16.6 percent on 2019. This creates a surplus of 37.6 million Euros.

The most important Croatia agriculture and food exports to Italy are maize, wheat and soybeans, tobacco-related products, sea bass (brancin) and bream (orada).

For the last five years, Croatia agriculture and food exports top consumer has been Germany. For the past seven years, Germany has also been the country from which Croatia has imported the most.

ZAGREB, October 22, 2020 - If the government does not change the public policies, there will be no progress, World Bank (WB) Country Manager for Croatia Elisabetta Capannelli said in Thursday's issue of Vecernji List daily.

Boosting the efficiency of the Croatian judiciary, increasing the public administration's efficiency by streamlining administrative procedures and reducing bureaucracy and investing in education, research and development and innovation are the crucial but not the only areas of the public sphere in need of an urgent reform so that the business climate would improve and that the trust in Croatian public institutions would be strengthened, Capannelli said.

In an interview for Vecernji List she analysed the goals of Croatia's draft 2030 National Strategy and warned that economic growth could not be the only aim.

What is economic growth without justice, fairness, the voice of the people and democracy? Growth cannot be the only goal of public policy, Capannelli said.

She said that Croatia could move closer to EU averages faster, but more effort was required if we wanted to achieve stronger and more inclusive economic growth.

However, it will not succeed if it continues pursuing public policies of the past ten years in the next decade. Strategies turn into reality only when they are implemented, and Croatia has not really been successful in implementing good ideas. If the government and, what is even more important, the entire society are truly committed to implementing important reforms, Croatia can really escape the low-growth trap it is in today, Capannelli said.