EU10 Regular Economic Report

Transcription

1 The World Bank EU1 Regular Economic Report Croatia Supplement February 29 Key Messages Although international financial markets have calmed somewhat recently, the risk aversion, and in some countries freezing of interbank markets, led to a strong private capital flows contraction. Paralleled with the weakening foreign and domestic demand, economic activity is forecasted to contract significantly in all of the EU1 countries and Croatia in 29. A technical recession has commenced in two of the Baltic countries, and based on high frequency indicators, at least two more will follow suit in Q1 29. Croatian economy has been hit by recession with one-quarter lag due to relatively lower openness of Croatian economy. Global growth weakening affected world commodity prices to fall dramatically, thus easing inflationary pressures across the region. This was also supported by a moderation of credit activity as well as higher joblessness rates which will increasingly put downward pressure on wages in countries with more flexible labor market. The mounting pressure on wage increases was replaced by concerns to preserve existing jobs across the region with manufacturing, construction, retail and finance sectors already facing downsizing. A deceleration of economic activity, coupled with a ban on Sunday work effective from January 29 and gas crisis, has already led to higher unemployment growth in Croatia in early 29. Current account balances mostly deteriorated in Q4 28 across the EU1 countries and Croatia, as export performance declined dramatically, not followed by proportional imports decline. The region s ability to finance high external imbalances has already been limited late last year, but will be additionally put at test as countries compete with developed countries for limited capital available. Financial sector bailouts as well as antirecession packages adopted across developed world will additionally limit available funding for the countries in the region. As growth continues to decelerate and capital market remains risk-averse, the Croatian budget revision based on expenditure-restraint policies is necessary. Cutting the unproductive costs and finding sources for renewed factor productivity growth, through deepening structural reforms, would secure investors interest, including for debt refinancing, and would facilitate economic recovery.

2 External Environment EU1 and Croatia are being affected by the global financial crisis, which has been quickly transformed into a real economy crisis. Being small open economies, no country in the region is immune to the crisis. But it is easier to face the severe repercussions of the global crisis, in particular a meltdown of external demand, for countries with better initial positions - macroeconomic fundamentals and policies. The prospects for the region look particularly bleak, given, variously, large external deficits, reliance on crisis-hit Western European banks, high foreign currency loan exposure or high exposure to exchange rate risk via derivative contracts. Financial markets in the EU1 have been affected by global investors sentiment and are even more volatile than those in advanced economies, leading to significant pressure for exchange rate depreciation (except for Slovakia and Slovenia which are in the eurozone) and/or a decline in foreign reserves or huge fluctuations in prices of equity and fixed-income instruments. The market value of all securities registered with the Croatian Central Depository Agency (SDA) at the end of 28 was down 42.5 percent compared with the end of 27, while the stock exchange index dropped by 63 percent y/y by mid-february (which is close to an average of EU1 which ranges from 53 percent in Hungary to 81 percent in Bulgaria). Furthermore, looming recession in core markets is further affecting prospects for emerging markets, including EU1 through the sharp slowdown in trade and private capital inflows. This is undermining growth prospects also in the EU1, until recently seen as one of the safest regions across emerging markets but now it is increasingly exposed to credit worries, recession in the euro zone and increased banking problems. As a result, long-term foreign currency ratings and outlooks for EU1 countries have been cut in recent months. International financial markets have calmed somewhat in recent months, as conditions in interbank markets as well as equity and bond markets appear to be stabilizing. Rates have fallen sharply after massive monetary easing and liquidity injection by major central banks. However, bank lending and capital market Table [1]. Croatia: Cost of Protection Against Default for Sovereigns, 5- financing for nonfinancial borrowers on week on month on year year CDS spread (in basis points), on February 16, 29 have slowed CDS: Sen 1 yr, USD substantially in both US CDS: Sen 3 yr, USD and the Euro area due CDS: Sen 5 yr, USD CDS: Sen 1 yr, USD to risk aversion and 1 yr Eurobond Spread over bund tightened credit standards and Sources: Datastream, World Bank Staff calculations weakening demand. In fact, funding shortages have begun to push up corporate default swap rates after the sovereign default swap rates increased by double-digit change in spread. Croatia was not an exception (Table 1). Prospects for global growth in 29 continue to weaken: economic activity is forecasted to contract significantly in developed economies, with the worst performance likely in the euroarea. The most striking development of the last quarter remains the degree of synchronization across the global economy, reflected by the particularly sharp declines in manufacturing activity and trade volumes. The industrial production indices dived by doubledigit rates across the major eurozone economies as well as EU1 in late 28 and resulted in deterioration of prospects for 29. The global economy is expected to stagnate in the year ahead and growth is not expected to resume before the year-end, when demand is expected to gather steam under the impetus of the fiscal and monetary stimulus. 2

3 Output Developments The recession spillover from the old to the new EU member states, after an initial slowdown last year, will further cut the EU1 average growth rate in 29. A combination of fast weakening domestic demand and deteriorating external environment already pushed two Baltic countries (Estonia and Latvia) into recession in the third quarter. Hungary and Lithuania are expected to follow in Q1 29. Economic sentiment and prospects are deteriorating rapidly in Croatia s export markets making the 29 growth outlook subject to further downside adjustments from the current Bank s forecast of -1.5 percent in 29. This is based on a scenario of an early EU recovery at the year-end. The real GDP growth decelerated to 1.6 percent y/y in Q3 from 3.4 percent y/y in Q2 which leads to a cumulative growth of 3 percent. This has been the lowest rate of economic growth since Q1 25. The deceleration in growth was broad-based: household consumption rose only by.2 percent y/y, following 2.2 percent y/y in Q2; investments increased by 6.6 percent y/y versus 12.6 percent y/y in Q2; government consumption rose by 1.3 percent y/y, slowing down from 3.2 percent in Q2; exports growth was also week in Q3, reaching 1.7 percent y/y versus 4.6 percent y/y a quarter earlier. Imports remained high posting growth of 6.3 percent y/y versus 8.1 percent y/y a quarter ago. On the supply Figure [1]. GDP growth rates (in %) and relative contribution of demand categories, in percentage points side, the biggest contribution to overall economic growth had construction, which posted one of its fastest growth rates in the past several years albeit decelerating from Q2. All other sectors experienced slowdown on quarterly basis, except agriculture due to favorable weather conditions and yields this year % Q1/6 Q2/6 Source: CSOs. Q3/6 Q4/6 Q1/7 Q2/7 Gross capital formation Government consumption GDP Q3/7 Q4/7 Q1/8 Q2/8 Personal consumption Net foreign demand Q3/8 Figure [2]. Industrial production in EU1 and Croatia, percent y/y Figure [3]. Croatia: Industrial production and its GVA, percent, y/y Q 8 2Q 8 3Q 8 4Q 8 BG CZ EE HU LV LT PL RO SK SI HR y/y rate of change Q1/4 Q2/4 Q3/4 Industrial production Value added in industry Q4/4 Q1/5 Q2/5 Q3/5 Q4/5 Q1/6 Q2/6 Q3/6 Q4/6 Q1/7 Q2/7 Q3/7 Q4/7 Q1/8 Q2/8 Q3/8 Q4/8 Source: CBS Real sector is confronted with a sharp demand slowdown from trading partners and decelerating households consumption. High frequency data point to a contraction of growth in Q4, although not as strong as in most of the EU1 countries. In November 28, construction output in Croatia was still up 7.8 percent y/y. A cumulative growth by November of the physical volume of construction work was up 11.5 percent y/y. Industrial production declined by 1.5 percent y/y in December, leading to the annual growth in 28 of mere 1.6 percent. Retail sales dropped by real.5 percent in 28, and in December alone, by real 2.9 percent 3

4 y/y, which is the third consecutive decline. The 28 annual GDP growth is estimated to be around 2.1 percent. A rebound of investment and consumption will be the key determinants of any recovery in the region and Croatia; these were on a steep decline over the last two quarters. The outlook for 29 Croatian growth is subject to high uncertainty, mostly on the downside, due to various magnitude of influence of the main global crisis channels on the economy: external demand for Croatian goods and tourism services, and foreign capital inflow, including of the mother banks to domestic commercial banks. Domestic policies will be thus an important element in preventing stronger contraction. Box 1. Correction of Croatia s GDP for Non-Observed Economy The non-observed economy could be defined as productive activities that are not covered by the national statistical system either due to socio-economic (underground, illegal, and informal activities) or statistical reasons (non-responding, misreporting and the like). Exclusion of such activities results in underestimation of GDP and overestimation of economic indicators expressed as a share of GDP. Therefore, the European Commission under the Eurostat Exhaustiveness Program requires all EU member states to include an estimate of the non-observed economy in their official GDP data. All the new member states corrected their official GDP figures for the value of the non-observed economy, with adjustments in 2 varying from 5.8 percent in the case of Malta to 18.9 percent in the case of Lithuania. The Croatian statistics published a revision of GDP data in January 29 for the estimation of grey (nonobserved) economy, imputed rents (estimate of rent for owner occupied flats) and financial intermediation services indirectly measured (FISIM). The main purpose of this revision was to align the estimated GDP with the European System of Accounts (ESA 95). Two-third of the GDP correction came from the part relating to the grey economy. The real growth rates of the revised GDP are not significantly different from the previous ones, with differences ranging from -.5 to +.2 percentage points. The table below shows the changes that the correction for non-exhaustiveness has on the main macroeconomic indicators for Croatian economy. The gap in GDP per capita, in purchasing power standard terms, between Croatia and the EU-25 got reduced from 41 to 33 percent. Furthermore, the share of total public expenditures in GDP declines, placing Croatia below the average level of the EU15, but still some 3 percentage points above the average for EU1 member states. In terms of the Maastricht convergence criteria, the adjustments of GDP level do not change anything significantly. The public sector deficit as well as public debt, although would fulfill the criteria, remain high nonetheless, and the policy implications remain the same. Adjusted Macroeconomic Indicators for Croatia, 27 Without adjustments for With adjustments for non-exhaustiveness non-exhaustiveness GDP per capita, euro, PPS 14,6 16,559 GDP per capita, PPS, EU-27= General government expenditures, as % of GDP General government deficit, as % of GDP Public debt, as % of GDP Current account balance, as % of GDP External debt, as % of GDP Note: General government (GG) excludes HBOR, pensioners debt and covers only 53 LGUs. Public debt figure includes GG debt, guarantees and HBOR debt. Source: World Bank Public Finance Review (28), CROSTAT, MOF Yearbook 27 4

5 Labor market developments The significant slowdown in economic activity has already started affecting EU1 and Croatia s labor market. Unemployment was significantly up in last months of 28, and such trends are expected to continue in the whole 29, based on employment expectations of businesses in the region. Construction, textiles and car industries will be hardest hit. Falling inflation and rising unemployment rates have affected wage pressures, which should lessen significantly across the region depending on labor market rigidities. Negative trends observed in the real sector have been transmitted on the labor market developments. The latest available data on the newly registered unemployment showed a sharp increase by 25.1 percent y/y in December 28 and 18.2 percent y/y in January 29. Thus, after seasonal unemployment pick-up after the summer season, Q4 and early 29 have been already affected by economic contraction coupled with the introduction of the Sunday work ban and gas crisis outburst that led to temporary shut-down of production. Figure [4]. Economic Sentiment Index Trend estimate Bulgaria Czech R. Poland Romania Slovakia Croatia 6 5 Latvia Lithuania Slovenia Estonia Hungary 6 Q4 27 Q1 28 Q2 28 Q3 28 Q / 1 4 Q4 27 Q1 28 Q2 28 Q3 28 Q / 1 Sources: EUROSTAT, Faculty of Economics Zagreb The latest labor force survey (LFS) for Q3 showed a decline of the unemployment rate to 7 percent y/y, down by 1.4 percentage points compared to the same period last year. The unemployment rate is still higher among women (8.3 in Q3 following 9.5 percent a year ago) than men (5.9 percent in Q3 after 7.4 percent a year ago). Accordingly, the employment rate has increased by.7pps q/q to 45.5 percent in Q3, on the back of higher employment in manufacturing, agriculture, wholesale and retail trade. This trend is expected to reverse in Q4 led by declining economic climate sentiment and announced layoffs across the sectors. Figure [5]. Unemployment rate and GDP trends Figure [6]. Average real net wage in public sector and industry, percent, y/y 8% 7% 6% 5% 4% Industry Public sector 3% 2% 1% Unemployment rate GDP grow th (t-1) % 1. -1% -2% -3%. -1. Q1/5 Q2/5 Q3/5 Q4/5 Q1/6 Q2/6 Q3/6 Q4/6 Q1/7 Q2/7 Q3/7 Q4/7 Q1/8 Q2/8 Q3/8 Q4/8 Q1/4 Q2/4 Q3/4 Q4/4 Q1/5 Q2/5 Q3/5 Q4/5 Q1/6 Q2/6 Q3/6 Q4/6 Q1/7 Q2/7 Q3/7 Q4/7 Q1/8 Q2/8 Q3/8 Q4/8 Sources: CES, CROSTAT 5

6 The average net wage increased by real.3 percent y/y in January-November period, mostly driven by wage restraints policies in the business sector that started in early 28. In nominal terms, though, Q2 28 saw notable wage growth. In the third quarter, the average net wage increased 8 percent y/y, which is the highest nominal increase since 21. This was mainly due to amendments to the Personal Income Tax Act, by which the basic personal tax exemption was increased by 12.5 percent to HRK1,8. In addition, according to the Minimum Wage Act, the minimum wage was raised to HRK 2,747. The real wage growth was weak though, due to still high inflation in Q3. At the same time, labor productivity growth in industry slowed down to 3.6 percent in 28 from 5.1 recorded in 27. The highest growth in productivity was seen in production of non-durable consumer goods and intermediate goods, while the highest growth in real wages was registered in public sector. Given no revision of public sector collective agreement took place ahead of the 29 budget approval, such a trend is likely to continue in 29. Inflation and monetary policy With GDP growth weakening in late 28 and into 29, and world commodity prices falling, current inflation and expectations for future inflation have eased dramatically across the region. After reaching its peak in mid-summer 28, consumer inflation started to fall back quickly. It has been pushed down by its all sub-components: core inflation (which is related to weakening domestic demand and restricted credit expansion), energy prices (especially of fluid fuels), and lower food pressure (due to relatively good harvest and lower demand internationally). The economic crisis is now beginning to feed through to higher joblessness rates, which will increasingly reduce cost-push factors, also supported by a rapid deceleration in domestic credit from a more limited access to external funding from parent foreign banks. The recent large depreciations in countries with flexible exchange rate regimes, spurred by foreign capital outflow from debt and equity markets in late 28, limit the scope for monetary policy easing thus keeping interest rates high. Croatia's annual inflation rate has been slowing down for five months in a row, dropping to 2.9 percent y/y in December 28, before it swung again to 3.4 percent in January 29. The core inflation dropped to 2.9 percent as well by December from its peak of 4.7 percent in July 28. The main contributors to the fall in December consumer prices were lower prices of clothing and footwear and of transport. Overall, the average inflation was 6.1 percent in 28, compared to 2.9 percent in 27. January inflation was driven by a correction of administrative prices in gas/heating industry and health sector, while oil prices and clothing and footwear recorded a decline. The industrial PPI inflation decelerated markedly to 4.7 percent y/y in December from 6.5 percent y/y the previous month. According to the main industrial grouping classification, the main contributors for the deceleration were producer prices of energy and of durable consumer goods. On annual basis, producer prices rose by 8.4 percent y/y in 28. Figure [7]. Developments in prices Figure [8]. Contributions to CPI growth CPI PPI -2 1/8. 2/8. 3/8. 4/8. 5/8. 6/8. 7/8. 8/8. 9/8. 1/8. 11/8. 12/8. Agriculture Administrative prices Core inflation CPI Sources: CNB, CROSTAT 6

7 The Government intention to reduce some of the quasi-fiscal fees and taxes during 29 (water contribution, tourism fee, and the Chamber of Commerce fee which has already been reduced by some 25 percent) should help in offsetting the inflationary impact of recently raised gas and district heating prices. The central bank is confronted with ensuring the stability of domestic currency and boosting liquidity of commercial banks. It has reduced the required reserve rate from 17 to 14 percent, and has delayed full liberalization of the capital account fearing from capital flight. After a period of intensive capital inflow and low capital prices, capital is now becoming scarce. The problem is no longer how to limit the capital inflow impact on currency appreciation, but attract enough of the capital to finance external requirements. The M4 growth rate declined to 4.3 percent y/y in December in lieu of corporate deposit outflows to service foreign debts and high base effects. Still, since end-october, nonresident deposits and loans rose sharply, by HRK4.1bn and HRK3.5bn respectively, funding liquidity gaps after the October s deposit flight and cross-border corporate credit crunch. Private sector credit grew by 1.5 percent Balance - right 5 y/y - left 5 y/y in 28 on the back of rising housing loans and weaker currency at the end of 28. As international financial market conditions impeded the access to foreign capital, enterprises increasingly turned to domestic sources for funding. The annual Sources: CNB, CROSTAT growth rate of placements to enterprises continued to rise and stood at 12.3 percent at end-28. At the end of December 28, the annual growth rate of retail loans was 12.3 percent, while the growth rate of housing loans, which account for 4.4 percent of total loans, dropped to 15.7 percent. Banks placement to the central government increased by 16.6 percent in December 28 due to increased government financing needs. This, together with a slight decrease of government deposits, resulted in an increase of banks net placements to the central government by more than HRK 8bn (around 2.4 percent of GDP) in December alone. In 28, the annual growth rate of banks net placement to the central government was 41.6 percent. High liquidity of the banking system in late 28 was followed by volatility and liquidity shortage at the interbank market at the beginning of 29. By revising the decision on 4. the reserve requirement, through an increase 3. of the foreign exchange component of the 2. reserve requirement allocated in kuna from 5 1. to 75 percent, the CNB aimed to maintain the %. exchange rate stability and ease the -1. depreciation pressure on kuna vis-à-vis the -2. euro. This was accompanied by a CNB FX -3. intervention in January 29, selling EUR million. In order to reduce the volatility of the interbank money market rates, and to Source: CNB stabilize the liquidity supply, the central bank maintained its regular repo auctions fixing the rate at 6 percent. Figure [9]. Banks placements to the private sector In February 29, following the government quest for servicing external obligations domestically, the CNB lowered the ratio of minimum required reserves on foreign currency In % Jan-5 Jun-5 Nov-5 Apr-6 Sep-6 Feb-7 Jul-7 Dec-7 May-8 Oct Figure [1]. CNB midpoint exchange rate, eop, m/m I 24 V IX I 25 V IX I 26 V IX I 27 V appreciation of the kuna IX I 28 V In bn HRK IX I 29 7

8 liabilities from 28.5 to 25 percent thus releasing some EUR 84mn to commercial banks which extended a 2-month EUR 75 million syndicated loan at 6.9-percent interest rate (at 48 basis points above LIBOR). Official FX reserves are still at favorable levels covering approximately 4.9 months of imports at end-28. The foreign reserves of the central bank declined slightly by 2 percent y/y to EUR 9.1bn at end-december, following a 6.3 percent y/y increase a month ago. The decline in the foreign reserves came mainly on the back of currency and deposits, which dropped by significant 55.8 percent y/y, while bonds and notes increased substantially by 49.2 percent. As for commercial banks, their foreign reserves were up by 5.8 percent y/y to EUR 4.6bn. Public finance Budget deficits have widened in all countries in the region but Bulgaria, Croatia and Hungary in 28. A further deterioration of fiscal balances is expected in all EU 1 countries in 29 on the back of both cyclical and structural factors. Due to the economic downturn revenue collection is likely to worsen in countries that face recessions or a rapid deceleration in economic growth, expected fall in employment, weakening export activity and declining consumer confidence. Given initial fiscal conditions and financing constraints, countries in the region have little or no room for discretionary fiscal impulses. The limited room for fiscal stimuli in some countries results also from high vulnerabilities related to external and internal imbalances. The Croatian Parliament adopted the 29 budget with a consolidated general government (CGG) deficit equivalent to 1.4 percent of new GDP (without the Croatian Highway Agency). This compares with the likely outturn for 28 CGG deficit at 1.7 percent of GDP. The 29 budget includes funds for a 6-percent increase in salaries of civil servants and state employees, which will cost HRK 1.8 billion (this includes also a two percent increase in salaries of workers in the education sector as of mid-29) and financial support to the health sector in lieu of its reform. As adverse global economic trends further spillover the Croatian economy, it will be hard to keep the budget deficit within the planned limits. The Government has based its 29 revenue projections on an assumption of a 5.6-percent nominal GDP growth rate. This assumption by now appears overly optimistic. A budget revision might be triggered sooner than in previous years, not only to maintain the targeted budget deficit, but also for the reasons of restructuring financing strategy. Namely, the government planned new borrowing of 5 percent of GDP, out of which 3.7 percent of GDP pertains to payments of maturing existing loans. The government is planning to refinance part of its debts on foreign capital markets (2 percent of GDP) towards the end of Q2, which may prove to be difficult given the tightened capital markets. If corrected for revenue underperformance of at least 1 percent of GDP, estimated fiscal deficits of HAC-Croatian Highways (at.3 percent of GDP), pensioners' debt (at.2 percent of GDP) and HBOR (at.5 percent of GDP), overall public sector deficit will likely decline from 3.7 percent of GDP in 28 to around 3.5 percent of new GDP in 29. This would require additional public sector borrowing of at least 2 percent of GDP, without repayment costs for maturing debt of HAC and HBOR. Given the authorities are strongly committed to maintaining the existing stable exchange rate, this would require stronger domestic adjustment policies, including wage restraint and fiscal consolidation. 8

9 Figure [11]. Fiscal stance Table [2]. Public sector deficit, percent of GDP CGG Deficit, incl HAC CCG Financing External Expansive fiscal policy Repa yment Disbursement Domestic Repayment (incl deposit change) Disbursement Capital revenues Restrictive fiscal policy LG Financing.3.3 Pensioners' debt HBOR Deficit Fiscal stance Output gap Overall fiscal position Memo: Interest payments Memo: Figures recalculated based on the new GDP figures. Source: MoF, staff calculation External vulnerability Most recent trends suggest external positions have even deteriorated further in Q4 (except in the Baltic countries) as export performance weakened more quickly than imports. Prospects for further adjustment of current account deficits to be driven by exports are increasingly bleak, undermined by the looming global slowdown. The expected improvement in 29 in most of the EU1 will be based on import contraction. The financing of external positions has proved more difficult for emerging markets in recent months on the back of weakening investor sentiment. In many cases, EU1 central banks have, therefore, had to reach into their reserves. Meanwhile, in several EU1 countries and Croatia, the stock of external debt remains very large, reflecting the heavy dependence in recent years on debt flows to finance large external shortfalls. By September 28, current account deficit increased to 9.3 percent of new GDP on a 4- quarter rolling basis, after registering surplus of EUR1.85 billion in Q3 which is 1.7 percent less y/y. Despite substantial downfall in oil prices since mid-july, the goods deficit owed mostly to still high food prices, robust capital imports, and weakening foreign demand. The ongoing rise in the income deficit owed to higher dividend outflows and interest payments intensified amid rising risk aversion and also greater short-term corporate indebtedness. FDI sank on a 4-quarter basis to EUR2.9bn, halving the net FDI to CAD cover to 65 percent. The FDI inflow in the country dropped by 25.6 percent y/y mainly due to the decline in net equity investments, which account for 7.7 percent of total FDI inflow in the country. Other capital declined too, by 22.4 percent y/y, as intercompany liabilities towards foreign owners fell significantly in Q3 and was negative for the first time since Q4 26. Weaker demand from the EU, amplified by the global financial crisis, led to export growth turning negative in Q4 28. Goods exports recorded a 5.1-percent decline y/y, which is the first quarterly fall in exports in the past six years. The fall was broad-based, with significant weight from production of oil derivatives, production of chemicals and chemical products, production of metals, motor vehicles, trailers and semi-trailers and production of furniture. Similar trends were also recorded over the last quarter of 28 on the imports side, which declined by 11.1 percent, due to imports of intermediary products, energy and capital products. Trade deficit recorded a slight rise of.4 percent in 28, due to faster growth of imports (1.5 percent compared with 6.4 percent exports growth) and the coverage of imports by exports fell to 46 from 47.8 percent as recorded in 27. 9

10 Figure [12]. Foreign trade Figure [13]. External debt, percent of GDP bill. EUR Q1/23 Q3/23 Q1/24 Q3/24 Trade deficit Foreign Trade Q1/25 Q3/25 Q1/26 Q3/26 Q1/27 Q3/27 Q1/28 Q3/28 Imports/exports coverage rate % Direct investment Banks Other sectors Government Nov-8 Sources: CNB, CROSTAT Gross foreign debt increased to 81.4 percent of new GDP from 78.2 at end-27 (EUR38.3bn at end-november). On a monthly basis, the highest contribution to the increase had the debt of banking sector, which rose by 7.8 percent m/m to EUR 9.5bn and that of government, which registered an increase of 1 percent m/m and 5.1 percent ytd to EUR 7.1bn at end-november. Compared with the same period in 27, foreign debt growth accelerated from 1.1 to 15.3 percent by November 28. An increase was recorded in all sectors, especially in other domestic sectors, mostly corporate (EUR 3.3 billion). Unlike the situation in 27, banks foreign debt was also increased considerably, by EUR 63 million, while state increased its debt by EUR 345 million. In 29 alone, the debt service amounts to 21 percent of GDP, a steep rise from 8.9 percent of GDP in 28. Strong efforts will be needed this year in servicing and refinancing the external debt, in light of the tight financial conditions, a scarcity and cost of external financing. 1