Abstract
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.
Croatia’s Credit-less Recovery1
1. This chapter describes the credit-less recovery in Croatia. There are indications that the deleveraging process may be gradually coming to an end. Some new EU member states have experienced even larger credit contractions than Croatia. Section B looks at the relatively accommodative monetary stance of the Croatian National Bank (CNB) and the ability and willingness of banks to lend. Section C examines the deleveraging and increase of precautionary savings of non-financial companies (NFCs) and households.
A. The Credit-Less Recovery in Croatia and Peers
2. 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.2 It is well-established that recessions last longer when combined with a financial sector crisis.3 Luckily, Croatia did not face a banking crisis, but unfortunately it had one of the characteristics of a country facing a financial crisis; namely, excessive bank lending that was funded from abroad.
Real GDP of Croatia and Peers
(100 = Q4 2008 1/)
Citation: IMF Staff Country Reports 2016, 188; 10.5089/9781498321587.002.A002
Sources: Croatian National Bank, Haver, and IMF staff estimates.1/ Index set at first quarter with negative annual real GDP growth. Only Poland did not experience a recession following the collapse of Lehman Brothers on September 15, 2008. Quarterly data are seasonal adjusted.2/ Peer countries include Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovenia, and Slovakia.Real GDP of Croatia and Peers
(100 = Q4 2008 1/)
Citation: IMF Staff Country Reports 2016, 188; 10.5089/9781498321587.002.A002
Sources: Croatian National Bank, Haver, and IMF staff estimates.1/ Index set at first quarter with negative annual real GDP growth. Only Poland did not experience a recession following the collapse of Lehman Brothers on September 15, 2008. Quarterly data are seasonal adjusted.2/ Peer countries include Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovenia, and Slovakia.Real GDP of Croatia and Peers
(100 = Q4 2008 1/)
Citation: IMF Staff Country Reports 2016, 188; 10.5089/9781498321587.002.A002
Sources: Croatian National Bank, Haver, and IMF staff estimates.1/ Index set at first quarter with negative annual real GDP growth. Only Poland did not experience a recession following the collapse of Lehman Brothers on September 15, 2008. Quarterly data are seasonal adjusted.2/ Peer countries include Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovenia, and Slovakia.3. Domestic bank lending continued to grow in real terms during the first part of the recession, albeit at a slower pace. It only began to decline in 2012, as the recession persisted and some European countries faced sovereign debt challenges. The realization of the extent of the legal difficulties to recover debt may have also contributed to this contraction (Annex I). There were many law suits, related in particular to Swiss franc denominated and indexed loans. In 2013, the CNB introduced stricter provisioning requirements, with a view to prevent ever-greening and to encourage banks to deal with their increasing NPLs. The prevailing difficult economic environment also meant that there was less demand for credit, with the exception of the government.
Croatia - Real GDP and Domestic Credit
(100 = Q4 2008 1/)
Citation: IMF Staff Country Reports 2016, 188; 10.5089/9781498321587.002.A002
Sources: Croatian National Bank, Haver, and IMF staff estimates.1/ Quarterly real GDP data are seasonal adjusted.2/ Real credit deflated by GDP deflator.Croatia - Real GDP and Domestic Credit
(100 = Q4 2008 1/)
Citation: IMF Staff Country Reports 2016, 188; 10.5089/9781498321587.002.A002
Sources: Croatian National Bank, Haver, and IMF staff estimates.1/ Quarterly real GDP data are seasonal adjusted.2/ Real credit deflated by GDP deflator.Croatia - Real GDP and Domestic Credit
(100 = Q4 2008 1/)
Citation: IMF Staff Country Reports 2016, 188; 10.5089/9781498321587.002.A002
Sources: Croatian National Bank, Haver, and IMF staff estimates.1/ Quarterly real GDP data are seasonal adjusted.2/ Real credit deflated by GDP deflator.4. Credit-less recoveries are common.4
New lending should usually not be determined by legacy debt, but should ideally be extended if the expected net present value (ENPV) is positive for both the borrower and lender. The lack of Croatian banks’ ability or appetite to lend seems to be mostly due to the challenging economic environment. However, it could also be influenced by the large level of legacy debts and the manner in which they are being resolved. When legacy debt impedes the ability and/or willingness to borrow and lend—a protracted balance sheet recession is likely. When enterprises and households realize that they are over-leveraged, their primary focus becomes repaying debt and increase savings, rather than investing or consuming. Since late 2008, some peers have experienced larger real credit contractions than Croatia, despite that fact that they had stronger recoveries. This confirms the fact that the deleveraging path is usually influenced by various country-specific determinants. Since subdued credit growth could potentially impede the recovery, it has been widely discussed in the region (IMF, 2015), as well as in Croatia.5
Domestic Bank Credit
(100 = Q4 2008 1/)
Citation: IMF Staff Country Reports 2016, 188; 10.5089/9781498321587.002.A002
Sources: Haver, Croatian National Bank, Bank of Latvia, and IMF staff estimates.1/ Index set at first quarter with negative annual real GDP growth. Only Poland did not experience a recession following the collapse of Lehman Brothers on September 15, 2008. Domestic bank credit deflated by the GDP deflator.2/ Peer countries include Bulgaria, Czech Republic, Estonia, Hungary, Latvia since 2003 Q3, Lithuania, Poland, Romania since 2007, Slovenia from 2007, and Slovakia from 2006.Domestic Bank Credit
(100 = Q4 2008 1/)
Citation: IMF Staff Country Reports 2016, 188; 10.5089/9781498321587.002.A002
Sources: Haver, Croatian National Bank, Bank of Latvia, and IMF staff estimates.1/ Index set at first quarter with negative annual real GDP growth. Only Poland did not experience a recession following the collapse of Lehman Brothers on September 15, 2008. Domestic bank credit deflated by the GDP deflator.2/ Peer countries include Bulgaria, Czech Republic, Estonia, Hungary, Latvia since 2003 Q3, Lithuania, Poland, Romania since 2007, Slovenia from 2007, and Slovakia from 2006.Domestic Bank Credit
(100 = Q4 2008 1/)
Citation: IMF Staff Country Reports 2016, 188; 10.5089/9781498321587.002.A002
Sources: Haver, Croatian National Bank, Bank of Latvia, and IMF staff estimates.1/ Index set at first quarter with negative annual real GDP growth. Only Poland did not experience a recession following the collapse of Lehman Brothers on September 15, 2008. Domestic bank credit deflated by the GDP deflator.2/ Peer countries include Bulgaria, Czech Republic, Estonia, Hungary, Latvia since 2003 Q3, Lithuania, Poland, Romania since 2007, Slovenia from 2007, and Slovakia from 2006.B. Supply of Credit
5. The CNB has maintained a relatively accommodative monetary stance within the limitations of the quasi-peg to the euro.6 The CNB has continued to reduce the interest rates of some standing facilities7 and ensure ample excess liquidity.8 In February 2016, it introduced a new quarterly four-year reverse repurchase facility with a view to facilitate stable long-term kuna funding. At this juncture, given the high levels of both deposit and loan euroization, there is no alternative to the quasi-peg to the euro. The scope for monetary policy space is therefore limited, and is determined by the perceived currency risk, asymmetry of information, and transaction costs that may affect capital mobility. Furthermore, the monetary policy stance of the European Central Bank (ECB) is very relevant for many borrowers that have loans denominated or indexed to the euro.
6. A monetary condition index (MCI) indicates that the CNB has been leaning against the wind,
within the limitations of its exchange rate anchor and financial stability objectives. In spite of its caveats, an MCI can be a useful tool to gauge the relative monetary stance.9 A staff constructed a real MCI for Croatia shows that the real relative monetary stance eased after the initial financial stress caused by the collapse of Lehman Brothers disappeared.10 It also shows a further easing as the Croatian recession protracted. For Croatian borrowers with loans denominated or indexed to euro, the easing by the ECB may have been partially neutralized by changes in Croatia’s risk-premium.
Real Monetary Conditions Index
Citation: IMF Staff Country Reports 2016, 188; 10.5089/9781498321587.002.A002
Sources: Croatian National Bank and IMF staff calculations.1/ The MCI is the weighted sum of the real short-term interest rate (3-month ZIBOR rate deflated by core inflation) and real effective exchange rate (adjusted for CPI) deviation from the average of the period, with weights of 0.75 and 0.25., espectively.Real Monetary Conditions Index
Citation: IMF Staff Country Reports 2016, 188; 10.5089/9781498321587.002.A002
Sources: Croatian National Bank and IMF staff calculations.1/ The MCI is the weighted sum of the real short-term interest rate (3-month ZIBOR rate deflated by core inflation) and real effective exchange rate (adjusted for CPI) deviation from the average of the period, with weights of 0.75 and 0.25., espectively.Real Monetary Conditions Index
Citation: IMF Staff Country Reports 2016, 188; 10.5089/9781498321587.002.A002
Sources: Croatian National Bank and IMF staff calculations.1/ The MCI is the weighted sum of the real short-term interest rate (3-month ZIBOR rate deflated by core inflation) and real effective exchange rate (adjusted for CPI) deviation from the average of the period, with weights of 0.75 and 0.25., espectively.7. Nominal lending interest rates of Croatian banks have declined somewhat in recent years.
Lending rates are usually determined by the funding costs and a profit margin that should be sufficient to cover other operational costs and risks. The funding costs are, in turn, affected by the risk-premium that reflect country risks. Other factors include borrowers’ past performance, availability of collateral, and how easily it can be executed and liquidated. An increase in the risk of lending—for instance, due to high costs of debt recoveries—could lead to an increase in lending rates, even when funding costs decline. Deflation has increased the real lending rates. However, the purchasing power of many borrowers has also benefitted, since the deflation is mainly due to lower energy and food prices.
Bank Lending Rates
(Average lending rates of outstanding amounts)
Citation: IMF Staff Country Reports 2016, 188; 10.5089/9781498321587.002.A002
Sources: Croatian National Bank, Haver, and IMF staff estimatesNote: At April 2016, unindexed kuna loans amounted to HRK 61.7 billion, indexed kuna loans to HRK 92.5 billion, and FX denominated loans to HRK 11.3 billion.Bank Lending Rates
(Average lending rates of outstanding amounts)
Citation: IMF Staff Country Reports 2016, 188; 10.5089/9781498321587.002.A002
Sources: Croatian National Bank, Haver, and IMF staff estimatesNote: At April 2016, unindexed kuna loans amounted to HRK 61.7 billion, indexed kuna loans to HRK 92.5 billion, and FX denominated loans to HRK 11.3 billion.Bank Lending Rates
(Average lending rates of outstanding amounts)
Citation: IMF Staff Country Reports 2016, 188; 10.5089/9781498321587.002.A002
Sources: Croatian National Bank, Haver, and IMF staff estimatesNote: At April 2016, unindexed kuna loans amounted to HRK 61.7 billion, indexed kuna loans to HRK 92.5 billion, and FX denominated loans to HRK 11.3 billion.8. The manner in which the stock of legacy NPLs is handled can affect new bank lending.
The stock of NPLs is high, as in some other EU new member states, particularly for loans to enterprises involved in trade, real estate, and construction. In 2013, stricter provision requirements were gradually introduced. This has facilitated the sale and write-offs of NPLs. However, there are still some tax issues that remain to be resolved. NPLs can constrain liquidity, capital, and management capacity, as well as the willingness of banks to lend (Aiyar et al., 2015). There could even be “NPL illusion”—akin to money illusion—particularly if the focus is solely on the NPL ratio before provisions. Banks with high NPL ratios and relying on wholesale funding or in need of new capital may be penalized by markets if provisioning levels are not given due consideration.11
Croatia: Non-Performing Loans
(2008 to March 2016)
Citation: IMF Staff Country Reports 2016, 188; 10.5089/9781498321587.002.A002
Source: Croatian National Bank.Note: Non-performing loans meaning 90 days overdue and classified B or C.Croatia: Non-Performing Loans
(2008 to March 2016)
Citation: IMF Staff Country Reports 2016, 188; 10.5089/9781498321587.002.A002
Source: Croatian National Bank.Note: Non-performing loans meaning 90 days overdue and classified B or C.Croatia: Non-Performing Loans
(2008 to March 2016)
Citation: IMF Staff Country Reports 2016, 188; 10.5089/9781498321587.002.A002
Source: Croatian National Bank.Note: Non-performing loans meaning 90 days overdue and classified B or C.Liquidity does not appear to constrain lending. There is currently ample excess liquidity in the Croatian banking system. Deposits have been increasing, the CNB has ensured abundant liquidity, and global liquidity is also plentiful. Lending to the government has increased, but given the ample liquidity and capitalization of banks, it does not appear that “crowding-out” is the reason behind the current contraction in credit to the private sector. Banks have even been repaying their foreign funding, typically from parents. At end-2008, net foreign liabilities amounted to 7 percent of total bank assets. In contrast, by October 2015, banks had a small net foreign asset position.
Capital does not seem to currently constrain banks’ ability to lend. On average, the banking system is well capitalized and provisions have improved. At the earlier stages of the protracted recession, NPLs continued to rise and some banks may have become more reluctant to lend due to uncertainty about future potential losses. In other words, they may have wanted to “reserve” excess capital for potential losses from existing loans. However, this currently seems to be less of a constraint after some banks boosted their capital and provisions, and as the growth of NPLs decelerated and seems to have halted. The capital adequacy ratio for the system was 21.0 percent at end-2015, i.e., well above the minimum requirement.
Many banks have established internal units to address the legacy NPLs and are now also speeding up the selling or writing-off NPLs. Large holdings of legacy NPLs tend to absorb the administrative capacity of a bank, which could adversely impact its ability to lend. The recent apparent stabilization in the NPL ratio would thus help re-direct banks’ administrative capacity to new lending.
The handling of legacy NPLs has implications for new lending. To the extent permanent measures to address the stock of NPLs will help reduce costs and uncertainty about future debt recoveries, they will obviously facilitate new lending. However, it is too early to assess the impact of recent reforms, such as the new Consumer Bankruptcy Act (which came into force in 2016), the consolidation of the Pre-Bankruptcy Settlement Law with the old bankruptcy legislation, and the envisaged taxation changes for provisions. Nevertheless, these reforms are steps in the right direction.
9. Banks’ willingness to lend appears to be improving as the recovery solidifies. Banks did reportedly tighten their credit policies after the collapse of Lehman Brothers, perhaps focusing more on helping their existing clients than developing new ones. Recent lending surveys, however, suggest that banks have eased somewhat their credit policies, probably in light of the improved business environment since late 2014.
C. Demand for Credit
10. Total debt of Croatian non-financial companies (NFCs) continued to increase after the recession, but began to stabilize in 2011 and has since declined.12 It is, however, still high compared to peers. At end-2015, this debt was around 98 percent of GDP (unconsolidated) and slightly below 80 percent of GDP (consolidated). The share of domestic bank claims peaked at 35 percent of GDP in 2011 but has since declined to 28 percent of GDP at end-2015. The decline during 2015 can largely be attributed to sales and write-offs of NPLs. Preliminary data suggest a further decline in 2016 Q1, in part due to exchange rate effects. The bulk of the remaining debt is financed externally, including from parent companies.13 NFC deposits with domestic banks peaked at almost 17 percent of GDP in 2007, but declined during the recession to nearly 12 percent in 2012, whereupon they have increased to almost 16 percent of GDP by end-2015. These developments suggest that the financial position of the average NFC and hence the ability to borrow has been improving.
Unconsolidated Debt of Non-Financial Corporations, 2001-15
Percent of GDP
Citation: IMF Staff Country Reports 2016, 188; 10.5089/9781498321587.002.A002
Note 1: New EU Member States, excluding Cyprus, comprise Bulgaria, Croatia Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and SloveniaNote 2: Includes loans and debt securities.Source: Eurostat’ (Balance sheet data) and IMF World Economic Outlook (nominal GDP).Unconsolidated Debt of Non-Financial Corporations, 2001-15
Percent of GDP
Citation: IMF Staff Country Reports 2016, 188; 10.5089/9781498321587.002.A002
Note 1: New EU Member States, excluding Cyprus, comprise Bulgaria, Croatia Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and SloveniaNote 2: Includes loans and debt securities.Source: Eurostat’ (Balance sheet data) and IMF World Economic Outlook (nominal GDP).Unconsolidated Debt of Non-Financial Corporations, 2001-15
Percent of GDP
Citation: IMF Staff Country Reports 2016, 188; 10.5089/9781498321587.002.A002
Note 1: New EU Member States, excluding Cyprus, comprise Bulgaria, Croatia Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and SloveniaNote 2: Includes loans and debt securities.Source: Eurostat’ (Balance sheet data) and IMF World Economic Outlook (nominal GDP).11. As balance sheets of NFCs are being repaired, profits have increased, and business confidence indicators improved the willingness to borrow appears to have strengthened. Preliminary figures suggest that net profit over equity of all NFCs increased from about 2.3 percent in 2014 to 4.2 percent in 2015. Employment also increased for private NFCs. Recent lending surveys and anecdotal information, show an increased demand for loans. Combined with the fact that the standard vulnerability indicators of NFCs have improved since mid-2013,14 deleveraging may already have come to an end for some companies, particularly exporters.15
12. Balance sheets of Croatian households are slowly being repaired, but debt levels remain high compared to peers. During the boom, income and the value of real state, functioning as collateral, increased and facilitated new borrowing. As the recession hit, households focused on repaying debt, and boosted their precautionary savings. Debt of Croatian households, of which about 95 percent are bank loans, is still high compared to peers. Total bank debt of households when adjusted for the Swiss franc conversion is now estimated at about 35 percent of GDP. During the recession and the moderate recovery, bank deposits of households increased. The financial position of households, and hence their ability to borrow, have thus on average improved.
Unconsolidated Loans of Households in Central and Eastern Europe, 2001-15
(in percent of GDP)
Citation: IMF Staff Country Reports 2016, 188; 10.5089/9781498321587.002.A002
Note 1: ESA1995 definition is used until 2004, whereupon ESA2010 definition is used, except for Estonia, when it is 2008.Note:2: New EU Member States, excluding Cyprus, comprise Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, and Slovenia.Source: Eurostat (financial balance sheet data)and IMF’s World Economic Outlook (nominal GDP).Unconsolidated Loans of Households in Central and Eastern Europe, 2001-15
(in percent of GDP)
Citation: IMF Staff Country Reports 2016, 188; 10.5089/9781498321587.002.A002
Note 1: ESA1995 definition is used until 2004, whereupon ESA2010 definition is used, except for Estonia, when it is 2008.Note:2: New EU Member States, excluding Cyprus, comprise Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, and Slovenia.Source: Eurostat (financial balance sheet data)and IMF’s World Economic Outlook (nominal GDP).Unconsolidated Loans of Households in Central and Eastern Europe, 2001-15
(in percent of GDP)
Citation: IMF Staff Country Reports 2016, 188; 10.5089/9781498321587.002.A002
Note 1: ESA1995 definition is used until 2004, whereupon ESA2010 definition is used, except for Estonia, when it is 2008.Note:2: New EU Member States, excluding Cyprus, comprise Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, and Slovenia.Source: Eurostat (financial balance sheet data)and IMF’s World Economic Outlook (nominal GDP).13. Consumer confidence is slowly improving, hence the willingness to borrow may gradually increase and the deleveraging could approach the end. Disposable income for the average household has begun to increase, facilitated by the increase of income tax thresholds, effective 2015; slightly higher nominal wages; improved purchasing power due to deflation; and modestly improved employment prospects. The conversion of Swiss franc loans has significantly reduced the currency risk for many borrowers—although it is in part being converted to interest risk. The standard vulnerability indicators of households have improved, particularly since mid-2014,16 and are now close to their levels before the collapse of Lehman Brothers. The willingness to borrow seems to have improved somewhat, according to recent lending surveys, although recent figures could be distorted by the Swiss franc conversions.17 Further improvement of employment prospects and of businesses profitability would, however, be needed to support this emerging trend.
Annex I. Data Issues
The data used in this paper were aggregates to facilitate country comparisons. For deeper country analysis, it would be preferable to use loan at data adjusted for exchange rate effects and write-offs of non-performing loans (NPLs), etc. In January 2015, the Croatian National Bank (CNB) implemented the 2010ESA definitions for monetary statistics, which triggered several reclassifications, and data series were recalculated back to January 2011.1 Using changes in banks’ stocks of claims on a gross basis can be misleading. First, loans shown on the asset side of a bank’s balance sheet are not reduced by the appropriate provisions, which are shown under liabilities. Secondly, exchange rate changes vis-à-vis the kuna can also affect the stock, particularly of non-euro foreign currencies, like the Swiss franc. Finally, there are many one-offs, including: the fall in gross placements as the Croatian Ministry of Finance took-over guaranteed debt of shipyards; transfer and sales of loans to non-banks, which have become increasingly important since 2013; and the bankruptcy of the small Centar Banka in 2013. The CNB has taken these factors into account in the reported “transaction” data. The methodology was further improved in early 2016,2 with a view to better take into account write-offs that have become increasingly important. 3 The chart shows the change in banks’ claims on households comparing gross stocks and adjusted for the above mentioned factors (dotted line), as calculated by the CNB.
Croatian Bank Claims on Households
(Annual percentage change)
Citation: IMF Staff Country Reports 2016, 188; 10.5089/9781498321587.002.A002
Sources: Croatian National Bank, Haver, and IMF staff estimates.1/ Dotted line adjusted for exchange rate changes and write-offs of NPLs. For details, see Annex 1 in CNB Monthly Bulletin No. 221, February 2016, Croatian National BankCroatian Bank Claims on Households
(Annual percentage change)
Citation: IMF Staff Country Reports 2016, 188; 10.5089/9781498321587.002.A002
Sources: Croatian National Bank, Haver, and IMF staff estimates.1/ Dotted line adjusted for exchange rate changes and write-offs of NPLs. For details, see Annex 1 in CNB Monthly Bulletin No. 221, February 2016, Croatian National BankCroatian Bank Claims on Households
(Annual percentage change)
Citation: IMF Staff Country Reports 2016, 188; 10.5089/9781498321587.002.A002
Sources: Croatian National Bank, Haver, and IMF staff estimates.1/ Dotted line adjusted for exchange rate changes and write-offs of NPLs. For details, see Annex 1 in CNB Monthly Bulletin No. 221, February 2016, Croatian National BankReference
Abiad, Abdul; Giovanni Dell’Ariccia; and Bin Li, 2011, “Creditless Recoveries,” IMF Working Paper WP/11/58, International Monetary Fund, Washington DC.
Aiyar, Shekhar; Wolfgang Bergthaler; Jose M. Garrido; Anna Ilyina; Andreas Jobst; Kenneth Kang; Dmitriy Kovtun; Yan Liu; Dermot Monaghan; and, Marina Moretti, 2015, “A Strategy for Resolving Europe’s Problem Loans,” IMF Staff Discussion Note, EDN/15/19, September, International Monetary Fund, Washington DC.
Benazić, Manuel, 2012, “Monetary Conditions Index for Croatia,” Economic Research-Ekonomska IstraŽivanja, Vol. 25, SE 1.
Croatian National Bank, Monthly Bulletins, various issues, Zagreb.
Croatian National Bank, Financial Stability Reports, various issues, Zagreb.
HUB, 2016, “Krediti, Dug I Gospodarski Rast: Izlaz Iz Začarangoga Kruga,” HUB Analize Broj 57, Croatian Bankers’ Association, Zagreb. It is only available in Croatian.
International Monetary Fund, 2015, Regional Economic Issues: Central, Eastern, and Southeastern Europe—Mind the Credit Gap, May 2015, International Monetary Fund, Washington DC.
Kannan, Prakash; Alasdair Scott; and Marco E. Terrones, 2013, “From Recession to Recovery: How Soon and How Strong?” chapter 8 in Financial Crises: Causes, Consequences and Policy Responses edited by Stijn Claessens, M. Ayhan Kose, Luc Laeven, and Fabián Valencia, International Monetary Fund, Washington DC.
Osborne-Kinch, Jenny and Sarah Holton, 2010, “A Discussion of the Monetary Condition Index,” Quarterly Bulletin 01, 2010, Central Bank and Financial Services Authority of Ireland. (https://core.ac.uk/download/pdf/6377749.pdf)
Pintarić, Martin, 2015, “Which Factors are Weighing on Credit Recovery? Evidence from the Croatian Bank Lending Survey,” Working Paper, Croatian National Bank, Zagreb.
Prepared by Tonny Lybek.
Peers considered in this paper are the new EU member states: Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, and Slovenia.
Kannan et al. (2013) find that recessions associated with financial crises, following credit booms and real estate booms, typically are more severe and last longer. However, in their sample, the median of recessions is only three quarters, while five quarters for financial recession, hence much shorter than in Croatia.
Abiad et al. (2011) find that about one out of five recoveries are credit-less, but that growth during the recoveries are a third lower than so-called other recoveries.
See for instance, HUB (2016), Pintarić (2015), and Box 3 in CNB Monthly Bulletin No. 216. The latter concludes (page 23): “Credit growth reacts faster to changes in credit demand, while the changes in credit standards affect credit growth with a somewhat greater lag. The analysis also indicates that it is difficult to expect a recovery of credit activity without some improvement in the economic outlook and in demand, despite the high liquidity of the monetary system supported by the CNB.”
According to IMF’s classification, Croatia’s de jure exchange rate is a managed float without a predetermined path, while the de facto exchange rate arrangement is a crawl-like arrangement.
In 2015, effective October 31, the Lombard rate was halved from 5.0 percent to 2.5 percent, the CNB discount rate reduced from 7.0 percent to 3.0 percent, the rate on short-term CNB liquidity credits cut from 6.0 percent to 4.0 percent, and the penalty rate on required reserves was lowered from 12.0 percent to 8 percent. The CNB overnight deposit rate has been zero since April 24, 2013.
Effective October 7, 2015, the CNB revoked the regulation relating to compulsory CNB bills. Effective January 13, 2016, the requirement to maintain part of the statutory reserves in foreign exchange was abolished, hence providing banks more flexibility in managing their liquidity and reducing their regulatory costs.
For a discussion of the MCI, see, for instance, Osborne-Kinch and Holton (2010). For a more advanced application of the MCI to Croatia, see Benasić (2012).
We use the annual change of the real effective exchange rate (REER) index adjusted for consumer prices, as calculated by the CNB, compared to the average annual change during the period; and the 3-month ZIBOR monetary market rate deflated by core inflation, as defined by the CNB, compared to the average for the period under analysis (2003 – March 2016). The respective weights of the two components are 0.25 and 0.75.
Econometric studies often point to the correlation between the NPL ratio and credit growth without fully acknowledging such correlation does not necessarily mean causality and ignoring the fact that the potential capital constraint for new lending is the un-provisioned part of the NPLs.
In 2012, the Pre-Bankruptcy Settlement Law was adopted with a view to restructure the debt of viable but over-indebted companies. It did help some companies, but the legislation was not optimal, reportedly gamed, and challenged. In 2015, this law was merged into the normal bankruptcy legislation.
The relatively high debt of Croatian NFC could in part be because leasing of buildings and equipment is not that common in Croatia and in part because of a large share of tangible assets, for instance due to the prominence of tourism. For details, see (page 44–45) the CNB Financial Stability Report No. 16, 2016.
The liquidity position; solvency risk; and interest payments compared to the change in earnings before interest, tax, depreciation, and amortization (EBITDA) have all improved since mid-2013. See CNB’s Financial Stability Reports for details.
Like in many other countries, many small and medium-sized enterprises (SMEs) feel credit rationed. They are typically the most risky borrowers, with the least collateral, and the shortest track record. The Croatian Developing Bank (HBOR) and Croatian Agency for SMEs, Innovations and Investments (HAMAG-BICRO) have developed programs to alleviate this challenge. For instance, recently a new €2.5 million capital fund was launched to secure co-financing for small innovative enterprises.
The liquidity position, solvency risk, and interest payments compared to the change in disposable income have all improved since mid-2014. See CNB’s Financial Stability Reports for details.
The results of the lending surveys are regularly reported by the CNB. For more details on the surveys, see, for instance, Box 3 in Monthly Bulletin No. 216, Croatian National Bank.
For details, see Annex 1 in CNB Monthly Bulletin No. 211, February 2015, Croatian National Bank.
For details, see Annex 1 in CNB Monthly Bulletin No. 221, February 2016, Croatian National Bank.
In 2015, write-offs reportedly amounted to HRK 3.9 billion.
