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International Monetary Fund. European Dept.
This Selected Issues paper explores how intersectoral vulnerabilities and risks have shifted over 2001–17, and especially after the Global Financial Crisis. It analyzes financial positions at the sectoral levels deposit taking institutions and non-financial corporations, households, the public sector, and the Croatian National Bank by disaggregating them into instruments, currencies, and maturities. The paper has employed balance sheet analysis (BSA) to gauge cross-sectional exposures and risks. The BSA approach is a method to study an economy as a system of interlinked sectoral balance sheets. The policies to reduce the remaining vulnerabilities have also been discussed in the paper. Standard macroeconomic indicators demonstrate that Croatia’s overall external vulnerabilities have declined since 2010. However, the balance sheet matrix shows little improvement in reduction of important cross-sectoral dependencies and liabilities to the rest of the world over 2010–17. One of the recommendations made is to encourage deleveraging through specific policy options and strategies.
International Monetary Fund. European Dept.
This paper highlights Bulgaria’s state-owned enterprises (SOEs) sector and to assess its performance in a regional perspective. A detailed and rich firm-level dataset of state-owned and private firms was compiled for this note to compare key performance indicators of SOEs to private firms in the same sector and to similar firms in Croatia and Romania for a regional comparison. In some network industries, such as energy, SOEs are heavily loss-making. Large amounts of debt have been piled up notably in the energy and transport sectors which, to the extent that it is classified outside the general government accounts, can pose significant risk to public finances in the form of contingent liabilities if the SOEs run into financial difficulties. SOE profitability and resource allocation efficiency largely lag private firms in the same sectors, even when isolating SOEs engaged in competitive market activities and hence classified outside of general government. Coupled with comparably poor output quality, these challenges have the potential to impair competitiveness and productivity across the economy.
International Monetary Fund. European Dept.
This paper mainly examines fiscal decentralization, credit-loss recovery, and unemployment in Croatia. The degree of expenditure and revenue decentralization in Croatia appears limited relative to its peers. At about 16 percent of general government spending, subnational government spending in Croatia is modest compared to other southeastern European countries and to the EU-28 average, and particularly low compared to the most decentralized countries in the EU. Croatia’s recovery since late 2014 has been moderate. Croatia’s recession lasted six years and was thus the longest among the new EU member states. Croatia’s structural and cyclical unemployment rates are very high, at about 11.5 percent and 5 percent respectively in 2015.
Dilyana Dimova, Ms. Piyabha Kongsamut, and Jérôme Vandenbussche
This paper presents a detailed account of the rich set of macroprudential measures taken in four Southeastern European countries—Bulgaria, Croatia, Romania, and Serbia—during their synchronized boom and bust cycles in 2003–12, and assesses their effectiveness. We find that only strong measures helped contain domestic credit growth, the share of foreigncurrency- denominated loans provided by the domestic banking sector, or the domestic banking sector’s reliance on foreign borrowing during the boom years. We also find that circumvention via direct external borrowing often fully offset the effectiveness of these strict measures, and thatmeasures taken during the bust had no discernible impact. We conclude that (i) proper calibration of macroprudential measures is of the essence; (ii) only strong, broad-based macroprudential measures can contain credit booms; (iii) econometric studies of macroprudential policy effectiveness should focus on measures rather than on instruments (i.e. classes of measures) and in so doing allow for possible non-linear and state-contingent effects.
International Monetary Fund. European Dept.
This 2015 Article IV Consultation highlights that after six years of persistent recession, Croatia’s economy is showing first signs of recovery. Robust retail sales and value-added tax receipts suggest that private consumption has bottomed out. Employment has stabilized and corporate profits are recovering. Tailwinds from a favorable external environment have helped, notably lower energy prices, stronger euro area growth, and ample domestic and external liquidity that contain debt servicing costs. For 2015, the economy is projected to grow by 0.5 percent. Net exports are expected to make a modest positive contribution to growth.