Croatia economic developments and outlook. Boris Vujčić 16 December 2015

Transcription

1 Croatia economic developments and outlook Boris Vujčić 16 December 215

2 International environment and raw material prices GDP (real rates of change, in %) 214 Current projection Δ Previous projection Current projection Δ Previous projection World Euro area Main trading partners of the RC Italy Germany Slovenia Austria Bosnia and Herzegovina Serbia Real imports of trading partners a index, 28 = Oil price index (Brent, USD/barrel) - left Raw materials prices (excluding energy), HWWI index - left Food prices, HWWI index - left Euro area HICP - right index, 28 =1 Sources: IMF (World Economic Outlook, WEO), October 215. a IMF (Global Economic Environment, GEE), June 215. Note: Q4 215 data refer to October. Sources: Eurostat, HWWI, Bloomberg and ECB projections.

3 Benchmark interest rates and exchange rates % Euribor 3M - left ECB - left FED - left EMBI spreads for European emerging market countries - right EMBI spread for Croatia - right basis points CNB midpoint exchange rate EUR/CHF EUR/USD Source: Bloomberg, 17 November 215. Source: Projections of Foreign Exchange Consensus Forecasts (November 215).

4 Unexpected sharp rise in economic activity in Q3 rates of change, % index, 21 = Annual rates of change in GDP (original values) - left GDP level (seasonally adjusted values) - right 9 Sources: CBS; CNB (seasonal adjustment).

5 GDP is expected to grow at a relatively high annual rate in Q4 Short-term economic indicators Indicators of business and consumer optimism index, 21 = Volume index of industrial production Volume index of construction works Real retail trade turnover BO Construction (seasonally adjusted values) BO Industry (seasonally adjusted values) BO Trade (seasonally adjusted values) CCI Consumer Confidence Index (seasonally adjusted values) Long-term average = 1 Note: Quarterly data are calculated as an average of monthly data. Q4 data for industry and trade refer to October. Sources: Eurostat, Ipsos and European Comission (seasonal adjustment). Sources: Eurostat, Ipsos and CNB (seasonal adjustment).

6 Real growth assessment and projection: 1.7% in 215 and 1.8% in 216 percentage points Personal consumption Government consumption Gross fixed capital formation Changes in inventories Goods and services exports Goods and services imports Gross domestic product - right % annual rates of change, % Q2/9 Q3/9 Q4/9 Q1/1 Q2/1 Q3/1 Q4/1 Q1/11 Q2/11 Q3/11 Q4/11 Q1/12 Q2/12 Q3/12 Q4/12 Q1/13 Q2/13 Q3/13 Q4/13 Q1/14 Q2/14 Q3/14 Q4/14 Q1/15 Q2/15 Q3/15 Q4/15 Q1/16 Q2/16 Q3/16 Q4/ annual rates of change, % Sources: CBS and CNB. Sources: CBS and CNB calculations.

7 GDP growth projection for Croatia and peer countries in 216 Real GDP trends in Croatia and peer countries Real GDP trend projection for Real GDP (index 28 =1) % Croatia (EC estimate) Croatia (CNB estimate) Baltic countries (average) Bulgaria and Romania (average) Other new EU member states (average).5. HR (EC) BG HR (CNB) SI HU CZ EE SK LT LV PL RO Sources: AMECO and CNB. Sources: AMECO and CNB.

8 Recovery in real activity had a positive impact on the labour market Total employment and contributions of individual sectors to the quarterly change in employment Registered and survey unemployment rates 1. 1,65 25 percentage points Public administration, education and health Other Industry Construction Trade Total employment, seasonally adjusted - right 1,6 1,55 1,5 1,45 1,4 thousand 2 15 % Registered unemployment rate Survey unemployment rate Sources: CPII, CBS and CNB (seasonal adjustment).

9 Croatia has the highest unemployment rate among peer countries Unemployment rate Croatia and peer countries European Commission s unemployment rate projection for unemployment rate (%) % Baltic countries (average) Bulgaria and Romania (average) Other new EU member states (average) Croatia (CNB estimate) Croatia (EC estimate) CZ EE RO HU PL LT SI BG LV SK HR (EC) HR (CNB) ES EL Sources: AMECO and CNB. Sources: AMECO and CNB.

10 General price level to edge down by.4% in 215 and inflation to rise to.9% in 216 Price indicators Inflation projection /215 9/215 1/ 215 Consumer Price Index and its components Total index Energy Unprocessed food Processed food Industrial non-food without energy Services annual rates of change, % Q2/9 Q3/9 Q4/9 Q1/1 Q2/1 Q3/1 Q4/1 Q1/11 Q2/11 Q3/11 Q4/11 Q1/12 Q2/12 Q3/12 Q4/12 Q1/13 Q2/13 Q3/13 Q4/13 Q1/14 Q2/14 Q3/14 Q4/14 Q1/15 Q2/15 Q3/15 Q4/15 Q1/16 Q2/16 Q3/16 Q4/ annual rates of change, % Source: CBS. Sources: CBS, CNB calculations.

11 Inflation a comparison HICP, in % Inflation trends in Croatia and peer countries Average inflation rate projection for 216 (HICP) % Croatia (EC estimate) Croatia (CNB estimate) Baltic countries (average) Bulgaria and Romania (average) Other new EU member states (average) -.5 RO LT BG SI HR (CNB) HR (EC) CZ SK LV PL EE HU Note: CNB estimate for 215 and 216 refers to CPI inflation. Sources: Eurostat and CNB. Note: CNB estimate for Croatia refers to CPI inflation. Sources: Eurostat; CNB.

12 Current account surplus increased in 215 primarily due to the conversion of CHF loans and tourism revenue growth Structure of the current and capital account balance Global market share of goods and services exports billion EUR Goods Services Primary income Secondary income Current account (right) Current and capital account (right) as % of GDP index, 27 = * Old member states (EU 15) New member states (EU 12) Baltic countries Bulgaria and Romania Hungary and Slovenia Czech Republic, Poland, Slovakia Croatia Source: CNB. Note: Baltic countries include Estonia, Latvia and Lithuania. * The assessment of Croatia s market share in 215 is based on the IMF s projection of global trade growth in 215 and the CNB s assessment of Croatia s goods and services export growth. Sources: Eurostat, IMF and CNB.

13 Projected Croatia s and peer countries current account balances for 216 Current account balance current account balance current account balance (as % of GDP) as % of GDP Croatia (EC estimate) Croatia (CNB estimate) Baltic countries (average) Bulgaria and Romania (average) Other new EU member states (average) -4 CZ LV RO SK PL LT EE BG HR (CNB) HR (EC) HU SI Note: Baltic countries include Estonia, Latvia and Lithuania. The source of estimates for 215 and 216 for other countries is the European Commission. Sources: Eurostat, EC and CNB. Sources: EC and CNB.

14 Financing conditions have been improving slightly, but corporate debt has been stagnating on an annual level Financing costs Corporate financing % 4 billion EUR.4. 5 % Average weighted interest rate on long-term corporate loans Average weighted interest rate on long-term household loans Weighted interest rate on housing loans Weighted interest rate on other long-term household loans, excl. housing loans Average weighted interest rate on short-term corporate loans 364-day T-bills HRK 364-day T-bills (indexed to f/c) Yield on generic 1-year German bond + EMBI Croatia Change in the balance of other corporate debt - left Change in the balance of placements of domestic credit institutions - left Annual rate of change in total corporate debt (in %) - right Sources: MF, Bloomberg and CNB. Notes: Other financing includes corporate borrowing from domestic leasing companies and the CBRD as well as foreign borrowing. The changes exclude the exchange rate effect, a transfer of claims to another company, the bankruptcy of Centar banka and methodological changes in the recording of fees. Sources: Hanfa, CNB and CNB calculations.

15 Continuation of expansionary monetary policy Bank liquidity and overnight interbank interest rate Surplus liquidity Croatia vs. the euro area % billion HRK as share in GDP (%) Croatia - surplus f oreign currency liquidity Croatia - surplus kuna liquidity Euro area - surplus liquidity as share in GDP (%) Surplus liquidity (including overnight deposits with the CNB) - right /15 Overnight interbank interest rate - left Source: CNB. Note: Surplus liquidity in the euro area is the amount of excess reserves in relation to required reserves. Sources: ECB, Eurostat, CBS and CNB.

16 Structural repo operations The potential introduction of structural repo operations in 216 could further strengthen CNB s expansionary monetary policy. The aim is to provide banks with longer-term sources of kuna liquidity at an interest rate lower than the market rate. Structural repo operations could contribute to: the lowering of the kuna yield curve at the medium/long end of the maturity spectrum; the development of the domestic government securities market; encouraging banks to increase lending in kuna. The use of this instrument could potentially be adjusted in line with the dynamics of fiscal adjustment and loan demand depending on the strengthening of economic growth.

17 Snowball effect could remain the key driver of general government debt growth percentage points of GDP Primary balance Snowball effect Other Change in general government debt General government debt - right 1 in % of GDP Sources: CBS and CNB.

18 Thank you for your attention.

19 Selected issues (Boxes)

20 Box 1 Has the Croatian economy exited recession?

21 Has the Croatian economy exited recession? How to identify an exit from recession? The use of year-on-year (YOY) GDP growth rates is wrong it fails to reflect the current dynamics. The ad hoc rule of two positive quarter-on-quarter (QOQ) GDP growth rates. The committees such as the NBER s US Business Cycle Dating Committee or the CEPR s Euro Area Business Cycle Dating Committee identify the phases of the business cycle based on a wider range of economic indicators. The work of such committees is simulated for the Croatian economy by means of the factor Markov-switching model. The probability of being in recession is estimated for 11 different models based on a wide range of monthly economic indicators.

22 Estimated probability of being in recession for 11 different models Q2/1998 Q4/1998 Q2/1999 Q4/1999 Q 2/2 Q 4/2 Q 2/ 21 Q 4./ 21 Q2/ 22 Q 4/22 Q2/23 Q4/23 Q2/24 Q4/24 Q2/25 Q4/25 Q2/26 Q4/26 Q2/27 Q4/27 Q2/28 Q4/28 Q2/29 Q4/29 Q2/21 Q4/21 Q2/211 Q4/211 Q2/212 Q4/212 Q2/213 Q4/213 Q2/214 Q4/214 Q2/215 The first signs of coming out of the several-year recession appeared in late 214 and continued throughout 215. However, these findings are surrounded by considerable uncertainty. Too early for a final conclusion about a turning point in the business cycle.

23 Box 2 Tax wedge and income tax progressivity in Croatia

24 Tax burden on labour income High tax burden placed on labour income may have an adverse effect on the labour market and, in turn, on economic growth. International institution, such as the European Commission, the IMF and the OECD recommend countries to reduce the tax burden on labour and, if necessary, to increase the taxation of consumption or property. The tax wedge as a measure of the tax burden shows which portion of the overall cost of labour for the employer goes to the state and how much it remains at the disposal of the worker.

25 Tax burden alleviation for lower income levels in the 21 to 215 period Tax wedge at different income levels in Croatia (21 215) for single persons (figure to the left) and a two children family* % % ** 1% 67% 167% ** 1% 67% 167% Note: The percentage represents the level of income in relation to the wage of an average worker (AW). The tax wedge for 21 does not include the special tax on salaries, pensions and other receipts given the temporary nature of this measure. * As regards families with two children, the income of one earner varies from 67% to 167% of AW while the income of the other is fixed to 67% of AW. ** The tax wedge value in 215 after the amendments to the Income Tax Act. Source: Authors calculations.

26 Croatia s tax wedge is relatively low at lower and medium income levels, but one of the highest at higher income levels Tax wedge at different income levels in Croatia and in selected EU countries* 6% 55% 5% 45% 6% 55% 5% 45% 4% 4% 35% 35% 3% 3% 25% 25% 2% Poland Croatia** Slovenija Slovakia Estonia Czech Republic Italy 67% 1% 167% Hungary Germany Austria 2% Slovenia Czech Republic Hungary Germany Estonia Poland Slovakia Croatia** 1%-% 1%-33% 1%-67% Austria Italy Note: The percentage represents the level of income in relation to the wage of an average worker. * The values of the tax wedge in the figure to the left refer to 214 and in the figure to the right to 212. ** The tax wedge value in 215 after the amendments to the Income Tax Act. Sources: OECD Taxing Wages 214, OECD Taxing Wages 215 and authors calculations.

27 Box 3 Ease of doing business in Croatia

28 Doing Business ranked Croatia in 215 as the 4th out of 189 countries Croatia was at the 65th position in the previous Report the ranking improvement is primarily due to changes in the methodology. a Comparison of Croatia with EU-15 and Central and Eastern European countries by area Resolving insolvency Starting a business Dealing with construction permits According to comparable data, Croatia fell by one position relative to 214 (39th). Enforcing contracts Trading across borders Getting electricity Registering property Compared with EU-15, Croatia lags the most in resolving insolvency. Paying taxes Protecting minority investors Getting credit CEE countries Croatia EU-15 Note: A higher number represents better performance. Source: Doing Business.

29 Croatia and Hungary at the rear of the peer country group Croatia deviates unfavourably from peer countries in the following areas: Comparison of Croatia with individual CEE countries by area Croatia Bulgaria Czech Republic Estonia Hungary Latvia Lithuania Poland Romania Slovakia Slovenia starting a business dealing with construction permits registering property 5 45 resolving insolvency 4 35 getting credit Note: A higher number represents better performance. Source: Doing Business. Source: Doing Business.

30 Getting credit An assessment of the transparency of data on credit users and collateral laws and bankruptcy regimes. Croatia and Slovenia at the rear of the group of peer countries. Possible changes in the regulatory framework that affect credit availability: an integrated or unified legal framework for secured transactions in movable assets; the modernisation of the collateral registry for movable assets; strengthening the rights of secured creditors in the collection.

31 Some structural reforms to improve the ease of doing business An indicator of the ease of doing business for Croatia can reveal areas where there might be room for structural reforms. Croatia is relatively expensive for doing business due to high parafiscal fees and other administratively imposed fees in the economy. due to the relatively higher costs of dealing with construction permits, getting electricity, registering property and claims in the collection by creditors through courts. There is a relatively high degree of bureaucratisation, coupled with lower efficiency of the central and local government. a relatively higher number of procedures in dealing with construction permits and starting a business; a relatively higher number of days to register property and deal with construction permits, a longer period of collection by creditors through courts.

32 Box 4 Trade in services between Croatia and the rest of the world

33 Significant comparative advantage in travel services Croatia s share of services exports in GDP exceeds the European and world average (although by a considerably lower degree than that of Luxembourg, Malta, Cyprus and Ireland). A larger share of travel services and a slightly smaller share of transport services and other services in GDP compared with the European average. A strong comparative advantage in the exports of travel services and, to a lesser extent, in goods-related services. Relative specialisation in services exports Government services Personal services (culture, Other business services Telecom., computer and information Charges for intell. property Manufacturing services Financial services Repairs Insurance services Transport Travel Construction Bulgaria and Romania Slovakia, Czeh Rep, Hungary and Slovenia Baltic countries Note: Baltic countries include Estonia, Latvia and Lithuania. The index represents an average for the data in the 21 to 214 period. The average manufacturing services index for Bulgaria and Romania is 6.5. The figure shows the relative specialisation of countries in comparison with the average specialisation at the European level (Balassa s revealed comparative advantage index). Sources: Eurostat and CNB.

34 Global market share of services exports An ongoing decline of Croatia s market share in the 23 to 212 period. Stagnation in 213 and 214. Such trends are due to the specialisation and slower growth of all types of services exports compared to the world average. The market share could recover in 215, but it is unlikely to continue growing significantly. 28=1 28= Czech Republic Croatia Hungary Poland Slovenia Slovakia Bulgaria Estonia Croatia Latvia Lithuania Romania Source: Eurostat

35 Box 5 Debt sustainability of non-financial corporations

36 Almost a third of corporate sector debt is excessive It is assessed that 31.6% of corporate sector debt cannot be financed from current operations. Should interest rates increase and GDP fall, 4% of corporate debt would be excessive. The activities with the highest excessive debt burden include construction, electricity supply and tourism. debt structure of sample corporations 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % Sustainability of corporate sector debt 1.% Debt (214) 68.4% 67.4% Sustainable debt (217, baseline scenario) 31.6% 32.6% 37.9% 4.2% Sustainable debt (217, interest rate rise scenario) 62.1% 59.8% Sustainable debt (217, GDP fall scenario) Sustainable debt (217, both shocks scenario) Note: The data next to the brackets show assessed deleveraging needs, expressed as % of corporate sector debt. A baseline scenario assumes projected GDP growth and interest rate stagnation. Alternative shocks include: (a) a 1 percentage point annual increase in interest rates, (b) an approximate 2 percentage point annual fall in GDP and (c) a combination of both shocks. Sources: Amadeus; FINA.

37 Small enterprises and exporters have a lower excessive debt burden debt/assets Debt sustainability by enterprise size 5 4,5% 17,6% 22,1% 22,4% 8% 8,4% 15% 11,1% Small Medium-sized Large Sustainable debt left Debt overhang left 21% Share of overindebted enterprises in total assets of the group right share of overindebted enterprises in total assets of the group (%) debt/assets Sustainability of corporate sector debt depending on participation in exports 4% 35% 3% 25% 2% 15% 1% 5% % 6.9% 15% 15.8% 22.7% 2.9% Exporters Sustainable debt left Debt overhang left 27% Not exporters 4% 35% 3% 25% 2% 15% 1% Share of overindebted enterprises in total assets of the group right 5% % share of overindebted enterprises in total assets of the group Note: The categorisation by size was obtained from Amadeus. Sources: Amadeus, FINA and authors calculations. Sources: Amadeus, FINA and authors calculation.

38 Corporate deleveraging will probably continue The assessed corporate sector s excessive debt points to a possible continuation of corporate deleveraging in the medium term. Large deleveraging needs weigh on investment recovery. Implications for economic policy more active measures to: stimulate debt restructuring for prospective corporations; simplify the liquidation process for non-sustainable corporations.

39 Box 6 SMEs access to finance survey findings

40 Institutional environment is the greatest hindrance to doing business for small and medium-sized enterprises The greatest problem to doing business results from the frequency of changes in regulations and their complexity. The second important problem is the difficulty in collecting claims. The access to financing also makes business operation more difficult for small and medium-sized enterprises, but to a lesser extent than other factors. SMALL ENTERPRISES MEDIUM- SIZED ENTERPRISES REGULATIONS FREQUENCY OF CHANGE REGULATIONS COMPLEXITY AND LACK OF COORDINATION IMPOSSIBILITY OF COLLECTION OF CLAIMS COMPETITION COST OF PRODUCTION OR LABOUR FINDING CUSTOMERS ACCESS TO FINANCE AVAILABILITY OF SKILLED STAFF REGULATIONS FREQUENCY OF CHANGE REGULATIONS COMPLEXITY AND LACK OF COORDINATION IMPOSSIBILITY OF COLLECTION OF CLAIMS COMPETITION COST OF PRODUCTION OR LABOUR FINDING CUSTOMERS ACCESS TO FINANCE AVAILABILITY OF SKILLED STAFF 18% 14% 14% 25% 21% 24% 27% 28% 24% 26% 47% 43% 5% 5% 47% 49% 31% 31% 46% 46% 46% 39% 56% 5% 43% Makes business operations considerably more difficult Partly makes business operations more difficult Does not affect business operations 3% 59% 35% 39% 35% 37% 34% 54% 54% 11% 17% 25% 16% 2% 28% 33% 14% 12% 16% 22% 26% 28% 32% I do not know

41 Lack of collateral is the main obstacle to obtaining loans The financing of small and medium-sized enterprises is primarily based on own sources and only partially on loans, which in turn leads to small investment capacity and slow enterprise growth. Lack of collateral is the main obstacle to obtaining loans a potential for a more intensive use of guarantee schemes to offset the lack of collateral. Enterprises need better support in the use of EU funds and more diverse sources of funding, including venture capital funds. Limitations to a more dynamic recovery in lending to small and medium-sized enterprises are largely beyond the reach of monetary policy.

42 Box 7 Fiscal impacts of population ageing in Croatia

43 According to Eurostat projections, Croatia faces adverse demographic trends Population by age groups and gender The population is expected to decrease sharply in the period. The share of elderly population could increase markedly in the same period. As a result, for each person above 65 years of age there would be two working age persons, while the current ratio is approximately one to four. Source: Eurostat

44 Despite fiscal pressures caused by population ageing, Croatia s age-related expenditures are expected to fall In general, population ageing puts great pressure on public finances as a result of increased pension and health care expenditures. In most EU member states agerelated expenditures are expected to increase. However, due to the mixed pension system currently in force, pension expenditures in Croatia are expected to decrease significantly and more than offset the expected increase in health care expenditures. Change in age-related expenditures and unemployment benefits (213 26) percentage points of GDP HR EL LV FR DK CY IT ES BG PT EE SE HU PL EU28 IE RO LT UK FI AT CZ NL SK DE BE LU MT SI Pensions Health care Long-term health care Education Unemployment benefits Total Source: 215 Ageing Report, EC.

45 However, Croatia could encounter problems related to pension adequacy (sufficiency) The replacements rate measures the ratio between the first pension and the last wage and as such serves as an approximation of the impact of retirement on living standard of an individual (the so-called pension adequacy). The replacement rate in Croatia is expected to fall from an already low level in 213. The fall is the result of the fall in the replacement rate in the first pillar of pension insurance, which should only partially be offset by income from the second pillar. The replacement rate could be one of the lowest in the EU. % Net replacement rates in the EU in 253 for a hypothetical worker a scenario of 4 yrs to the retirement age prescribed by law pl ro hr* hr el lv se ee cz fi si fr sk de ie cz lt dk mt be uk pt hu it bg at es nl lu men and women if replacement rates are the same, if not, men women Note: hr* refers to the net replacement rate for Croatia in 213. Source: 215 Pension Adequacy Report.