March the 8th, 2021 - The Croatian banking system has had a lot on its already full plate trying to balance out the economic and financial situation caused by the ongoing coronavirus pandemic. As the situation unfolds and remains difficult to predict, it seems that the true extent of the damage done won´t be known for a few months yet.

As Poslovni Dnevnik/Ana Blaskovic writes, the first year of the pandemic for the Croatian banking system saw profit more than halved down to 2.7 billion kuna, and the decline in total income exceeded the correction of the country´s GDP. While the domestic economy as a whole sank by a deeply concerning 8.4 percent, bank inflows plunged one and a half percentage points deeper.

Operating results exceeded 7.3 billion kuna, which means that more than 4 billion kuna was frozen through various value adjustments and provisions. The director of the Croatian Banking Association, Zdenko Adrovic, went on to discuss this further.

In 2021, the growth of lending to companies and individuals is expected to accelerate in line with recovery announcements. Will moratoriums actually be enough? Moratoriums and other measures to help clients peaked at the end of August, when their value rose to almost 40 billion kuna, of which 60 percent went to companies.

"It´s the lion's share of liquidity that has remained with companies and the population through these moratoriums, which have helped keep the steep decline in GDP at these levels," Adrovic explained, noting that these currently paused repayments stand at around 32.5 billion kuna in total. Will that be enough for businesses and citizens?

Adrovic noted that according to the rules of the European Banking Authority (EBA), the length of such a moratorium is limited to 9 months and that they must end by the end of this year.

"More than 80 percent of clients whose moratorium has expired so far have continued to pay their obligations properly. If things return to normal, tourism will kick off again and then that should be enough," he said.

Last year, the Croatian banking system will remember three key characteristic trends of the coronavirus crisis - monetary expansion and government wage subsidies combined with the restraint (and inability) to spend in the private sector, all of which spilled over into strong growth in deposits that have been on an upward trajectory for the past five years.

At the end of December, citizens' savings rose by 6 percent, accelerated to 7 percent in January. Banks currently have around 226.3 billion kuna, as much as 14.6 billion kuna more than before the coronavirus pandemic struck. Interest rates remained low or slightly reduced, and the margin is stable at around 2.6 percentage points.

The average price of housing loans with a maturity of over 10 years is 2.9 percent, more expensive than in neighbouring Slovenia where citizens pay 2.28 percent and cheaper than the Czech Republic, where things stand at 3.52 percent. Finally, loans continued to grow despite the ongoing crisis. Companies were accumulating liquidity when facing an uncertain future, and a proverbial hole of over 30 billion kuna opened up for the state overnight.

Total retail loans rose by 2.3 percent, and although they pulled the brake on cash loans, housing recorded double-digit growth in the last quarter due to APN subsidies and post-earthquake remediation.

The Croatian Banking Association has pointed out that a comparison of credit growth rates in European Union member states shows that "Croatian banks are in the upper half of the distribution of credit growth rates to households and companies by country, and interest rates have remained low, as if Croatia has already adopted the euro."

In the first edition of Croatian Banking Association Review for 2021, in which esteemed Croatian economist Velimir Sonje analyses business over the last year, it is pointed out that with a drop in net profit of 53 percent, net interest income was lower by 5.7 percent, and net income from fees and commissions by 10.5 percent.

Although they cut costs, this adjustment was slower, so the net result before provisions was almost 19 percent lower. The dynamics spilled over into efficiency as measured by the cost-to-income ratio, which, after a long time of approaching 40 percent, sat firmly above the 50 percent threshold.

With a capitalisation of close to 25 percent, the Croatian banking system remains stable, they have already reserved significant amounts, but we will only have a true picture of bad loans and the impact of the ongoing coronavirus crisis at the end of June, according to the aforementioned Association.

Then, the EBA's coronavirus rule is set to expire, according to which moratoriums will not count as bad loans as they would otherwise.

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As Ana Blaskovic/Poslovni Dnevnik writes on the 28th of January, 2020, by launching a strong investment cycle, Croatian tourism can catch up with leading European countries like France, Italy and Spain in terms of productivity, which also means that Croatian tourism can only be sustained by increasing quality, and investing in what creates high added value for the entire economy, especially when it comes to hotels.

This objective should also be put into the Croatian tourism strategy for the upcoming period, which is expected during the year. The prerequisite for activating this potential is to secure a business environment that will attract investors, so in order to jump up the scale in terms of productivity, taxes and barriers to investment should be dramatically reduced.

The conclusion of this analysis is entitled "The contribution of different types of tourism accommodation to value added and economic development" by the independent Croatian economic analyst Velimir Sonje of Archivalytics.

It was presented at the recent ''tourism briefing'' organised by the Croatian Tourism Association (HUT), the first in a series of new format that will present analysis and expert papers in the field of tourism by leading domestic economists, such as Sonje. The aim is to stimulate greater interest from key stakeholders in Croatian tourism, which generates approximately 20 percent of Croatia's GDP, and thus a encourage a better public debate on the role and potential of tourism in the development of the Republic of Croatia as a whole.

As Sonje's analysis has shown, hotel accommodation, which accounts for only 15.7 percent of the country's total accommodation offer, currently generates about 3.7 times the value added per bed compared to accommodation in short-term rental properties, which currently make up 60 percent of Croatia's total offer. According to Sonje, this is a sub-optimal structure that doesn't allow for the maximum economic impact of Croatian tourism and threatens the sustainability of tourism in general.

HUT director Veljko Ostojic also believes that Croatian tourism, at least with its current offer, has a structure that is vulnerable and unsustainable, ie investments in new high-quality hotels are needed. He detailed that in a proposal.

"According to the proposal, subsidies for large enterprises for the reconstruction and construction of four-star hotels should be abolished. We will prove that such a proposal is illogical and, if nothing else, that we need to return to our current state," Ostojic said.

"The comparison of the structure of the tourist offer across the Mediterranean showcases the outdated structure of the offer in Croatia. This is the main reason for the relatively low added value that is created in Croatian tourism. An estimate of value added by type of tourist accommodation shows that hotels and similar accommodation types with an approximate 16 percent share in the number of tourist beds, and a 28 percent share in tourist overnight stays generate approximately 40 percent of added value,'' said Sonje.

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