july 2010 regular economic report croatia supporting recovery
DESCRIPTION
Financial linkages and concerns about debt dynamics call for faster safeguarding policies Source: World Bank Global Prospect Group, staff calculations. Interest rates remain volatile as recovery takes hold and risk-aversion gets heightened due to concerns about European bank-exposures to bad debt, and an increase in funding demand Faster efforts in safeguarding the recovery through shoring up fiscal sustainability and creating fiscal space to support private sector growth Capital inflows to Eastern Europe, USD billions Asset class performance in the EU10 region, percent change Source: Reuters, Bloomberg, World Bank staff calculationsTRANSCRIPT
THE WORLD BANKTHE WORLD BANK
July 2010
Regular Economic Report
CROATIA
Supporting Recovery
THE WORLD BANK
Bottoming up continues; fragile and slower than expected
Still weak domestic demand; with strong investment drop Net exports remained the key contributor to growth Outlook for 2010 is weaker than expected (-1 percent
compared to expected zero growth); with downward risks due to rising fiscal concerns and sluggish EU recovery
Source: CROSTAT
60
70
80
90
100
110
120
130
140
2005 2006 2007 2008 2009 2010
Latest observation: Apr-10
Seasonally adjusted index
Index
Volume of Construction Works, 2005=100
95
100
105
110
115
2005 2006 2007 2008 2009 2010
ManufacturingLatest observation: May-10
Total
Total industrial production and manufacturing, 2005=100, seasonally
adjusted, 3MA
THE WORLD BANK
Financial linkages and concerns about debt dynamics call for faster safeguarding
policies
Source: World Bank Global Prospect Group, staff calculations.
Interest rates remain volatile as recovery takes hold and risk-aversion gets heightened due to concerns about European bank-exposures to bad debt, and an increase in funding demand
Faster efforts in safeguarding the recovery through shoring up fiscal sustainability and creating fiscal space to support private sector growth
0
5
10
15
20
25
30
35
40
1Q 0
8
1Q 0
9
1Q 1
0
Jan-
10
Feb-
10
Mar
-10
Apr-
10
May
-10
bonds equity and banks
Capital inflows to Eastern Europe, USD billions
Asset class performance in the EU10 region, percent change
0102030405060708090100
-900-800-700-600-500-400-300-200-100
0100
2008 peak 2009 trough 2010 peak current
Banks 5Y CDS spreads Sovereign 5Y CDS spreads
Interbank rates spreads Stocks market performance (RHS)
Source: Reuters, Bloomberg, World Bank staff calculations
THE WORLD BANK
Unemployment on decline in 2011 Increase in unemployment still less than in most EU countries, as the
informal sector cushioned the adverse employment impact of the crisis (likely shift towards grey economy more than 50% compared to Q108);
Continued pressure on the private sector to improve its profitability and restore balance sheets
(Potential) restructuring of the public sector
Difference between ILO and Registered Employment, in thousands
Wage adjustments in private sector continues
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
Q1/
05Q
2/05
Q3/
05Q
4/05
Q1/
06Q
2/06
Q3/
06Q
4/06
Q1/
07Q
2/07
Q3/
07Q
4/07
Q1/
08Q
2/08
Q3/
08Q
4/08
Q1/
09Q
2/09
Q3/
09Q
4/09
Q1/
10Q
2/10
Industry
Public sector
THE WORLD BANK
Financial sector stability key to recovery..
Private sector credit growth, y/y, in percent
Credit activity to corporate sector slightly recovered (loans rescheduling in construction and real estate sectors)
Interest rates decline due to ample liquidity and low demand Currency risk heightened with FX placements rising back to
almost two-thirds of the total and FX deposits to near 80 percent.
Still some uncertainties on the level of potential losses hidden in banks' balance sheets
Share of NPLs in total loans
-5
0
5
10
15
20
Jan-
08
Apr
-08
Jul-0
8
Oct
-08
Jan-
09
Apr
-09
Jul-0
9
Oct
-09
Jan-
10
Apr
-10
Toatal bank loans
Loans to enterprises
Loans to households
4.9
7.5
4.0
7.8
12.8
5.8
9.0
13.9
6.2
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
Total Corporate Households2008 2009 Q1 2010
THE WORLD BANK
..while credible fiscal response is a precondition
Revenue shortfall due to early withdrawal of stimulus measures and slower than expected growth
Rebalancing through expenditure cuts to help reduce borrowing requirements and help improve sustainability
Without aging costs and contingent liabilities, primary balance to improve by over two percent of GDP to stabilize public debt at 2009 level
General Government Deficit, % of GDP
-8.0
-7.0
-6.0
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
EU10 EU15 Croatia
2009
2010
2011
0
20
40
60
80
100
120
140
160
180
2005 2006 2007 2008 2009 Apr-10
GuaranteesForeign debtDomestic debt
Public debt, in HRK billion
THE WORLD BANK
Policy response - determined implementation of the Economy
Recovery Program ERP presents a solid basis for safeguarding recovery. This would require structural changes in public finances,
social sectors, education, innovation, and business climate. However, slower growth in Croatia than in the best
performing EU10 countries points to a lack of confidence in the recovery.
This reinforces the need for the early and determined implementation of the ERP.
2009 2Q 09 3Q 09 4Q 09 1Q 10
Slovakia -4.7 -5.5 -4.9 -2.6 4.8Poland 1.7 1.2 1.2 3.5 2.9Czech Republic -4.1 -5.0 -5.0 -2.9 1.1Hungary -6.3 -7.5 -7.1 -4.0 0.1Slovenia -7.8 -9.2 -8.3 -5.5 -1.2Estonia -14.1 -16.1 -15.6 -9.5 -2.0Croatia -5.8 -6.3 -5.7 -4.5 -2.5Romania -7.1 -8.7 -7.1 -6.5 -2.6Lithuania -14.8 -19.5 -14.2 -12.1 -2.8Bulgaria -5.0 -4.9 -5.4 -5.9 -3.6Latvia -18.0 -18.1 -19.1 -16.8 -6.0
Real GDP growth, (% change, y/y)