Macro Croatia 0709

download Macro Croatia 0709

of 20

Transcript of Macro Croatia 0709

  • 7/31/2019 Macro Croatia 0709

    1/20

    RaiffeisenResearch Report

    9002yluJ43.oNhcraeseRaitaorCknabnesieffiaR5049-2331NSSI

    Few reasons for optimism,many for changes

    The strong fall in economic activity at the beginning of 2009 shouldnot have come as a surprise considering the real sector indica-tors and the intensity of GDP fall in other countries of the region.Continued strong fall in domestic economy in the next quartersshould also not surprise us. In view of the numerous insecurities asregards this years tourist season, we should not discard the pos-sibility of even stronger-than-expected GDP fall. Only slightly morefavourable developments may be seen in the second half of nextyear, which will reflect themselves on the domestic labour marketwith an additional time delay, not earlier than 2011. The reactionsof the economic policy-makers to the crisis were more or less inline with expectations. The central bank continued implementingthe stable exchange rate (price) policy, which was, considering thespecifics of the domestic economy, a justified choice. At the sametime, the fiscal authorities failed to find an appropriate solution,both economic and political, to reduce the rising public spending

    during the major part of this year. Under such circumstances thelargest burden was carried by the corporate sector. We have notseen any efficient anti-recession measures as yet. The characterof the current state subsidies system is more that of an instrumentof social policy and less of economic policy, therefore its positiveinfluence on the economy is limited. Moreover, the necessity to cutthe budget deficit will probably lead to the increase in tax burdenand/or excise duties, creating additional pressures on the decliningeconomic activity. The exceptionally strong role of the state in thedomestic economy has resulted in a fact that budget deficit leads toa substantial deterioration in the liquidity of the real economy. Thesaid problem is additionally underlined by the fact that corporate

    sector demand for loan exceeds supply, since a substantial portionof the banks lending potential this year was used to finance gov-ernment needs.

    A decline in foreign direct investments and a slowdown in thegrowth of external debt show that the recovery in capital flows to-wards the fast-growing economies in the region will take time. Ex-cept pressures on national currencies and on the stability of thefinancial market in the region, reduced inflow of foreign capital willlimit the room for recovery of domestic spending. For this reason,more export-oriented countries of the region could see a faster andeasier recovery. Croatia is faced with a period for large changes ineconomic policy because if we continue to rely primarily on stimuli

    from the external environment, recession will be followed by eco-nomic stagnation, not to exclude the possibility of stagflation.

    Gross domestic product,real annual growth rates

    %

    6

    4

    2

    0

    2

    46

    8

    2008 2009e

    dnalo

    P

    yragnu

    H

    hcez

    C

    cilb

    ub

    eR

    aik

    avol

    S

    ainevol

    S

    aitaor

    C

    airaglu

    B

    ainamo

    R

    aibr

    eS

    aina

    blA

    .H

    .aainso

    B

    enozoru

    E

    ASU

    Sources: Raiffeisen Research, Bloomberg

    Movements in the balanceof payments

    0

    1

    2

    3

    4

    5

    6

    7

    8

    9

    10

    PDGf

    o%

    2000

    2001

    2002

    2003

    2004

    2005

    2006

    2007

    2008

    2009

    e

    2010f

    Current account deficit

    Foreign direct investments

    Sources: CNB, CBS

    Total loans by sectors

    507090

    110130150170190210230250

    Loans to government

    Loans to households Loans to enterprisesQ

    4.0

    5

    Q

    1.0

    6

    Q

    2.0

    6

    Q

    3.0

    6

    Q

    4.0

    6

    Q

    1.0

    7

    Q

    2.0

    7

    Q

    3.0

    7

    Q

    4.0

    7

    Q

    1.0

    8

    Q

    2.0

    8

    Q

    3.0

    8

    Q

    4.0

    8

    Q

    1.0

    9

    KRH

    noilli

    b

    Sources: CNB, Raiffeisen Research

  • 7/31/2019 Macro Croatia 0709

    2/20

    22

    Contents

    INDICATORS

    Selected macroeconomic indicators ............................................................................... 3

    GDP AND INFLATION

    Strong GDP fall, weaker inflationary pressures ................................................................ 4

    INDUSTRIAL PRODUCTION AND EMPLOYMENT

    Recurring problems in the domestic labour market .......................................................... 5

    TRADE AND TOURISM

    Tourism does not bring recovery .................................................................................... 6

    INTEREST RATES AND MONETARY AGGREGATES

    Expected decline in M1 .................................................................................................. 7

    EXCHANGE RATE

    A temporary break ........................................................................................................ 8

    BALANCE OF PAYMENTS, TRADE AND EXTERNAL DEBT

    External debt growth halted ........................................................................................... 9

    GOVERNMENT BUDGET

    In expectation of third budget revision ...........................................................................10

    FINANCIAL SYSTEM

    Growing risk of placements ......................................................................................... 11

    WORLD TRENDS

    Price recovery spurred by expectations of growing demand ............................................12

    BANKING SECTOR

    Global financial crisis and banking systems of New Europe .........................................13

    BONDS

    First Eurobond issue since 2004 ....................................................................................16EQUITY

    Optimistic quarter ........................................................................................................1710 shares account for 70% of turnover ..........................................................................18In line with global sentiments ........................................................................................19

  • 7/31/2019 Macro Croatia 0709

    3/20

    Indicators

    33

    Selected macroeconomicindicators

    2001 2002 2003 2004 2005 2006 2007 2008 2009e 2010f GDP & production

    Gross domestic product, % (constant prices) 4.4 5.6 5.0 4.2 4.2 4.7 5.5 2.4 4.5 0.4GDP at current prices (EUR million) 25,539 28,110 30,014 32,759 35,720 39,102 42,832 47,390 45,495 47,083GDP per capita at current prices (EUR) 5,756 6,327 6,756 7,375 8,045 8,817 9,675 10,724 10,271 10,843Retail trade, % real annual changes 10.0 12.5 3.7 2.6 2.8 2.1 5.3 0.5 9.1 0.6Industrial production, % annual changes 6.0 5.4 4.1 3.7 5.1 4.5 5.6 1.6 5.1 1.7

    Prices, employment and budget

    Consumers prices1, %, eop 2.4 1.9 1.7 2.7 3.6 2.0 5.8 2.9 4.2 4.3%, avg 3.8 1.7 1.8 2.1 3.3 3.2 2.9 6.1 3.2 4.4

    Producers prices, %, eop 3.1 2.3 1.0 4.8 2.7 1.9 5.8 4.7 1.9 3.9%, avg 3.6 0.4 1.9 3.5 3.0 2.9 3.4 8.4 0.4 4.0

    Unemployment rate2 (official rate, eop) 23.1 21.5 19.1 18.5 18.0 17.0 14.7 13.7 14.5 14.4Average net wage, in HRK, eop 3,582 3,839 4,045 4,312 4,473 4,735 4,958 5,410 5,150 5,200General government balance3, % of GDP 6.8 4.9 6.2 4.8 4.0 3.0 2.3 2.4 3.4 2.5

    Balance of payment and external debt

    Goods export, EUR million 10,809 11,128 13,141 14,243 15,273 16,992 18,317 19,835 16,621 18,068% change 14.8 3.0 18.1 8.4 7.2 11.3 7.8 8.3 16.2 8.7

    Goods import, EUR million 12,10113,80115,17916,19917,47319,63221,48523,73919,19522,336% change 15.9 14.0 10.0 6.7 7.9 12.4 9.4 10.5 19.1 16.4

    Current account balance, % of GDP4 3.2 7.5 6.3 4.4 5.5 6.9 7.6 9.4 6.7 7.9Official international reserves, EUR millon,eop

    5,334 5,651 6,554 6,436 7,438 8,725 9,307 9,121 8,000 7,600

    Official international reserves, in terms ofmonths of imports of goods and services, eop4

    5.3 4.9 5.2 4.8 5.1 5.3 5.2 4.6 5.0 4.1

    Foreign direct investment, EUR million 1,467 1,138 1,762 950 1,468 2,765 3,667 2,930 1,000 1,800Tourism nightstays, % change 10.9 3.0 4.3 2.5 7.6 3.1 5.6 2.0 8.5 3.0External debt, EUR billion 13.6 15.1 19.9 22.9 25.7 29.3 33.3 39.3 40.8 42.0External debt, as % of GDP4 53.3 53.9 66.2 70.0 72.1 74.9 77.6 82.4 89.7 89.2External debt, as % export of good andservices4

    125.9 136.1 151.3 161.0 168.6 172.3 181.5 196.8 245.5 232.5

    Monetary and financial data

    Exchange rate, eop, USD/HRK 8.35 7.15 6.12 5.64 6.23 5.58 4.99 5.16 5.03 4.93avg, USD/HRK 8.34 7.87 6.70 6.04 5.95 5.84 5.36 4.94 5.25 5.21

    Exchange rate, eop, EUR/HRK 7.37 7.44 7.65 7.67 7.38 7.35 7.33 7.32 7.65 7.50avg, EUR/HRK 7.47 7.41 7.56 7.50 7.40 7.32 7.34 7.22 7.46 7.55

    Money (M1), HRK billion, eop 23.7 30.9 33.9 34.6 38.8 48.5 57.9 55.2 50.9 52.0% change 30.1 30.2 9.8 2.0 12.3 25.0 19.3 4.6 7.8 2.1

    Broadest money (M4), HRK billion, eop 106.1 116.1 128.9 139.9 154.6 182.5 215.8 225.0 230.6 241.9% change 45.2 9.5 11.0 8.6 10.5 18.0 18.3 4.3 2.5 4.9

    Credits, HRK billion 75.0 97.5 111.7 127.3 149.2 183.4 210.8 233.0 253.7 281.6% change 23.1 30.0 14.6 14.0 17.2 22.9 15.0 10.5 8.9 11.0

    ZIBOR 3m, %, avg 7.9 4.6 5.5 7.3 5.2 4.3 5.7 7.2 10.5 8.0Treasury bills rate 12m, %, avg 3.7 4.8 6.3 5.0 3.9 4.2 6.0 7.8 6.7

    1 RPI (retail price index) was used for the period 199720012 Survey of labor force by ILO methodology shows unemployment rate of 8.4% for 20083 Without capital revenues (privatization)4 In euro termse estimate; f forecast; eop end of period; pa period averageSources: CNB, MoF, CBSForecasts: Economic Research Department Raiffeisen Consulting

  • 7/31/2019 Macro Croatia 0709

    4/20

    4

    GDP and inflation

    4

    Strong GDP fall,weaker inflationary pressures

    The beginning of the year confirmed expectationsof a strong GDP growth, registering the most size-able contraction of the economy since the end of1993 (-6.7%). The outlook for the remainder of theyear is not optimistic. The most important growthgenerators thus far, personal consumption andgross fixed capital formation had the most impor-tant influence on unfavourable developments, as areflection of the adjustment of households to newdevelopments and postponement of investmentprojects. An even stronger fall was softened by thegrowth of government spending and a stronger fallof imports than exports. The latter is to the great-est extent a consequence of the decline in pricesof crude oil and food products in the worlds com-modities markets. The decline in trade turnover,stagnation of credit activity, decline in employ-ment and only a mild growth of real wages feedinto expectations of further decline of householdspending. The lack of capital to finance govern-ment investments paired with a reduction, in gov-ernment spending could cause a greater decline inGDP than the expected 4.5% in 2009. The start ofa recovery, accompanied by modest growth rates,

    is expected not sooner than in the second half ofnext year. In the long-term, sustainable growth anddevelopment can be achieved only by increasingcompetitiveness, i.e. aligning spending and pro-duction, and implementing structural changes.

    Although the beginning of the year brought aboutan increase in individually administratively deter-mined prices and weaker demand for goods andservices did not result in more substantial pressureon the decline of prices, 2009 will certainly see amore sizeable decline in the prices. This is con-

    firmed by the data for the first five months of theyear, during which the annual inflation rate stoodat 3.6%. Further reduction of inflationary pressureswill be a consequence of last years high base butalso of a strong fall in domestic demand. Expectedrecovery of developed economies in the end of theyear accompanied by the growth in energy pricesin commodity markets could create certain (exter-nal) pressures. Less familiar are the internal fac-tors, such as the adjustment of administratively de-termined prices against market levels (utilities andenergy), the adjustment of the tax system and theexcise duty system to EU standards, the increase in

    tax rates, the introduction of new taxes and finallylow competitiveness, i.e. structural problems in thedomestic economy.

    GDP growth rates2006 2007 2008 2009e

    Croatia 4.8% 5.5% 2.4% 4.5%Bulgaria 6.3% 6.2% 6.0% 3.5%Slovakia 8.5% 10.4% 6.4% 4.5%

    Poland 6.2% 6.7% 4.9% 0.8%Hungary 4.1% 1.1% 0.6% 6.0%Slovenia 5.7% 6.8% 3.5% 3.0%Czech R. 6.9% 6.1% 2.8% 3.2%Romania 7.9% 6.2% 7.1% 6.0%EMU 2.9% 2.7% 0.6% 4.3%USA 2.8% 2.0% 1.1% 3.0%

    Sources: WIIW, Raiffeisen research, Bloomberg

    Gross domestic product, real annualgrowth rates

    %

    7.0

    5.0

    3.0

    1.0

    1.0

    3.0

    5.0

    7.0

    9.0

    Q4

    .05

    Q1

    .06

    Q2

    .06

    Q3

    .06

    Q4

    .06

    Q1

    .07

    Q2

    .07

    Q3

    .07

    Q4

    .07

    Q1

    .08

    Q2

    .08

    Q3

    .08

    Q4

    .08

    Q1

    .09

    2010f

    Sources: CBS, Raiffeisen Research

    Consumer price index, in %, annual

    level

    0

    1

    2

    3

    4

    5

    6

    7

    8

    9

    %

    5.0

    6

    7.0

    6

    9.0

    6

    11.0

    6

    1.0

    7

    3.0

    7

    5.0

    7

    7.0

    7

    9.0

    7

    11.0

    7

    1.0

    8

    3.0

    8

    5.0

    8

    7.0

    8

    9.0

    8

    11.0

    8

    1.0

    9

    3.0

    9

    5.0

    9

    Source: CBS

  • 7/31/2019 Macro Croatia 0709

    5/20

    Industrial production and employment

    55

    Recurring problemsin the domestic labour market

    The reduction in domestic and external demandpaired with the growth in inventories resulted inthe continued strong fall of industrial production inthe second quarter. While the fall in production atthe beginning of the year was cushioned by stronggrowth of production in the energy segment (due toinelastic demand and colder weather), the remain-der of the year saw a fall in this segment. How-ever, it was paired with a slowdown in the declineof other sectors. Signs of euro zone recovery andthe last years lower base will contribute to slightlymore favourable future movements. Substantialreductions in capacity, cuts in the number of theemployed and reduction in productivity will be onlysome of the direct consequences of unfavourabletrends. However, there is hope that the actual crisiswill result in the necessary fast restructuring of theindustrial sector, especially its key segments for thedomestic economy (shipbuilding, textile and woodindustry). The government subsidy system that isstill being restructured, undergoing value adjust-ments and redirection of assets from the so-calledvertical to horizontal subsidies, should, after theinitial shock, contribute to a more competitive in-

    dustrial sector.

    Developments in the labour market during theQ2 were marked by the continuation of the risein the number of unemployed persons and nega-tive growth rates of employed persons. Low seasontourism data indicate that favourable seasonal in-fluences will be less intensive this year. Negative in-fluences from the real sector are expected to reachthe labour market with a certain time delay. Exceptthe mentioned cyclical movement, one should notforget the structural problems of the labour mar-

    ket. The unemployment in Croatia may primarilybe classified as s tructural, meaning that it is aboveall a consequence of the imbalance between sup-ply and demand from the aspect of profession,education, knowledge and expertise of job seek-ers and requirements of the labour market. There-fore, a high number of registered unemployedpersons is concurrent with an increased demandfor workers. This imbalance, in the short run, leadsto upward pressures on wages, which reduces in-ternational competitiveness and in the long run itjeopardises the stability of the fiscal system. Underthese circumstances, there is a growing need for

    new employment measures, in order for the supplyof workers to respond to changes in the structure ofthe economy once the recovery starts.

    Basic indicies of industrial production,2005 = 100

    85

    90

    95

    100

    105

    110

    115

    120

    5.0

    6

    8.0

    6

    11

    .06

    2.0

    7

    5.0

    7

    8.0

    7

    11

    .07

    2.0

    8

    5.0

    8

    8.0

    8

    11

    .08

    2.0

    9

    5.0

    9

    Source: CBS

    Construction, yoy change

    10

    5

    0

    510

    15

    20

    25

    %

    4.0

    5

    7.0

    5

    10

    .05

    1.0

    6

    4.0

    6

    7.0

    6

    10

    .06

    1.0

    7

    4.0

    7

    7.0

    7

    10

    .07

    1.0

    8

    4.0

    8

    7.0

    8

    10

    .08

    1.0

    9

    4.0

    9

    Source: CBS

    Unemployed persons, unemployment

    rates

    %

    200

    220

    240

    260

    280

    300

    320

    6

    810121416

    1820

    Unemployed persons (left scale)

    Unemployment rate, official (right scale)Unemployment rate ( ILO methodology)

    thousan

    d

    6

    810121416

    1820

    5.0

    6

    8.0

    6

    11

    .06

    2.0

    7

    5.0

    7

    8.0

    7

    11

    .07

    2.0

    8

    5.0

    8

    8.0

    8

    11

    .08

    2.0

    9

    5.0

    9

    Sources: CBS, CES

  • 7/31/2019 Macro Croatia 0709

    6/20

    6

    Trade and tourism

    6

    Tourism does notbring recovery

    Mild growth of real wages, an increase in unem-ployment, stagnation of bank lending activity andfinally the prohibition of work on Sundays were thedominant factors contributing to the strong fall ofpersonal consumption and retail trade turnoverin the H12009. The annual real rate of declinein trade maintained high two-digit levels, reflect-ing a strong decrease in the purchasing power ofhouseholds and indicating the strongest contrac-tion of the largest GDP component. We expectthe decline in retail trade turnover to continue, butit is expected that the dynamics of the fall couldloose in intensity in the remainder of the year. Asa result, the annual real rate of decline in turnoverfor the entire 2009 will draw closely to a two-digitfigure. Domestic consumer optimism is still at verylow levels and the continuation of the crisis in thereal sector, deterioration in the labour market andrelatively slow recovery of the capital market pairedwith reduced lending activity of banks do not feedinto expectations of a pending recovery. A recoveryin retail trade is expected to be seen in the secondhalf of next year, however, with prior recovery ofother segments of the domestic economy, such as

    the industrial production and tourism.

    Preliminary data on the number of arrivals andtourist overnight stays confirmed our expectationsof a noticeable decline of physical indicators in tour-ism. Economic downturn in our emitive markets,stressed a decline in overnight stays and arrivals offoreign guests, who usually dominate the high sea-son. The unfavourable situation will probably beseen at its worst when data on revenues from tour-ism come in, as they are the most important factorin softening the C/A deficit. Amid the current situ-

    ation of reduced investments with omnipresent in-security, it cannot be expected that old problems inthe activity under review will be solved. Outspokenseasonality, low average level of accommodationquality, outdated technology, and unfinished hotelprivatisation process, low presence of internationalbrands and lack of qualified work force will remainthe main weaknesses of this exceptionally impor-tant segment of the economy. However, under thecircumstances of low profitability of the tourist sec-tor and limited access to external sources of financ-ing it is difficult to expect the restructuring processstarted in the tourism sector to continue with the

    opening of new or the refurbishing of the existingaccommodation capacities.

    Retail trade, real growth, yearly

    %

    20

    16

    12

    8

    4

    0

    4

    8

    12

    5.0

    6

    8.0

    6

    11

    .06

    2.0

    7

    5.0

    7

    8.0

    7

    11

    .07

    2.0

    8

    5.0

    8

    8.0

    8

    11

    .08

    2.0

    9

    5.0

    9

    Source: CBS

    Tourist overnight stays, yoy change

    %

    68

    42024

    68

    1012

    2001

    2002

    2003

    2004

    2005

    2006

    2007

    2008

    2009e

    2010f

    Source: CBS

    Revenues from travel

    0

    1

    2

    3

    4

    5

    6

    7

    8

    billion

    EUR

    200

    0

    200

    1

    200

    2

    200

    3

    200

    4

    200

    5

    200

    6

    200

    7

    200

    8

    200

    9e

    201

    0f

    Sources: CNB, CNTB, Raiffeisen research

  • 7/31/2019 Macro Croatia 0709

    7/20

    Interest rates and monetary aggregates

    77

    Expected declinein M1

    Following a period of high tensions and conse-quently high interest rates, in the second quarterof the year tensions in the domestic money marketeased. The precondition for this was the softeningof depreciation pressures on the kuna, althoughthe central bank continued implementing a restric-tive monetary policy. However, banks ensured theirkuna liquidity by selling foreign exchange in themarket and structural illiquidity of the system sig-nificantly reduced. Thus, overnight yields mostly re-mained at the level close to the Lombard rate (9%)in the beginning of the period of maintaining themandatory reserve requirement, while towards theend of the period they reduced to minimum levels.

    At the same time, the need for Lombard loans toensure sufficient liquidity sizeably reduced. Weak-ening economic activity, especially in tourism andtrade, created lower pressure on the growth ofcurrency outside banks relative to previous years.However, the widening budget deficit resultedin continued intensive short-term borrowing bythe government, creating liquidity pressures. Thetrends in the domestic money market are not ex-pected to change much during the tourist season.

    However, in autumn tensions and interest ratescould rise again, as confirmed by the fact that theCNB is has pressed ahead with its current policy.The intensity of these pressures will primarily de-pend on the s trength of the downward pressures onthe kuna, on this years budgetary deficit as well ason ways in which the government will (re)finance itsliabilities. The decline in monetary aggregate M1,as well as further slowdown in the annual growthof the monetary aggregate M4, continued throughthe second quarter. The decline in M1 at two-digitrates is primarily a consequence of the expected

    reduction in demand deposits, considering the nar-rowed credit and investment activity in the domes-tic economy. Total liquid assets continued growingyear-on-year, primarily as a result of rising depos-its with commercial banks. However, despite thestill high interest rates and insecurity in the capitalmarket, the growth of savings with banks sloweddown in the last few months. In the coming period,we expect further decline of the monetary aggre-gate M1, again primarily influenced by the reduc-tion in demand deposits. In turn, a slowdown inthe growth of deposits due to the reduction in theavailable income of households, rising illiquidity in

    the real economy and lower tourism income willcreate downward pressures on the monetary ag-gregate M4.

    Interest rates

    %

    3456789

    101112

    T-bil ls 364d ZIBOR 3m

    19.4

    .07

    21.6

    .07

    23.8

    .07

    26

    .10

    .07

    3.1

    .08

    6.3

    .08

    9.5

    .08

    11.7

    .08

    16.9

    .08

    19

    .11

    .08

    27.1

    .09

    31.3

    .09

    4.6

    .09

    Sources: reuters.hr, CNB, MoF

    Loan growth, in %, annual level

    %

    0

    5

    10

    15

    20

    25

    30

    35

    40

    Loans to enterprisesLoans to householdsHousing loans Others to households

    5.0

    6

    7.0

    6

    9.0

    6

    11

    .06

    1.0

    7

    3.0

    7

    5.0

    7

    7.0

    7

    9.0

    7

    11

    .07

    1.0

    8

    3.0

    8

    5.0

    8

    7.0

    8

    9.0

    8

    11

    .08

    1.0

    9

    3.0

    9

    5.0

    9

    Source: CNB

    Monetary aggregates and domestic

    loans (growth rates, annual level)

    %

    1510

    505

    1015202530

    %

    1510

    505

    1015202530

    M4M1 Domestic loans

    5.0

    6

    7.0

    6

    9.0

    6

    11

    .06

    1.0

    7

    3.0

    7

    5.0

    7

    7.0

    7

    9.0

    7

    11

    .07

    1.0

    8

    3.0

    8

    5.0

    8

    7.0

    8

    9.0

    8

    11

    .08

    1.0

    9

    3.0

    9

    5.0

    9

    Source: CNB

  • 7/31/2019 Macro Croatia 0709

    8/20

    8

    Exchange rate

    A temporary break

    Downward pressures on the kuna started weaken-ing already early in the second quarter, which re-sulted in the fall of the EUR/HRK FX rate from al-most HRK 7.50 to HRK 7.23 for euro. The softeningof depreciation pressures was a consequence oftypical seasonal developments and the narrowingin the balance of payments current account deficit.However, corporate sector demand continued to beprominent amid the need to finance due foreign li-abilities. However, possibly the most important in-fluence on exchange rate developments came fromthe government borrowing in the foreign market.In addition, at a particular moment a significantinfluence on the domestic market came from theindicators of foreign borrowing by the CBRD, ex-tra budgetary funds and state-owned enterprises.In the period in question, there was no need for theCNB to intervene in the foreign exchange marketaiming at stabilising the exchange rate. Ample sup-ply of foreign exchange from tourism should keepthe FX rate ranging between HRK 7.30 to HRK 7.45for euro during most of the tourist season. However,when autumn approaches we expect depreciationpressures on the kuna to gain strength. This years

    positive trend of declining trade deficit is expected toreverse late in 2009, since strong fall in imports wasalso a consequence of lower prices of crude oil andintermediary goods. Weaker income from tourismwill also have an impact. At the end of this year, weexpect the EUR/HRK FX rate to stand at some HRK7.65 for euro, not excluding even slightly higher lev-els at times. With the strengthening of seasonal in-fluences, we expect the said depreciation pressuresto be present also at the beginning of the next year.

    A significant influence on the exchange rate devel-opments will come from the governments need to

    finance the budget deficit but also the ability of thedomestic sector to refinance external liabilities thatfall due in the foreign markets. While it is expectedthat banks will manage to refinance most of theirliabilities, the government and the corporate sectorcould have their work cut out for them. The centralbank reaffirmed its commitment to price, i.e. ex-change rate, stability regardless of the strong fall ineconomic activity. The rationale for such a decisionmay be found in the fact that Croatia is a highly eu-roised country with high foreign indebtedness andthat it is dependant on the imports of energy andintermediary goods. The increase in competitive-

    ness should be sought through structural reformsand fiscal policy, while exchange rate policy shouldbe used for fine tuning.

    Middle exchange rate of the CNBMiddle

    exchangerate

    Change compared to:31.12.2008

    Currency 30.6.2009 Exch. rate Move-ments

    %

    EUR 7.2920 7.3244 0.44

    USD 5.2045 5.1555 0.95

    CHF 4.7744 4.9111 2.78

    GBP 8.5960 7.4845 14.85Source: CNB

    Exchange rate forecast2009e 2010f

    EUR/HRK, avg 7.46 7.55

    EUR/HRK, eop 7.65 7.50USD/HRK, avg 5.25 5.21

    USD/HRK, eop 5.03 4.93

    Middle exchange rate of the CNB

    EUR/HRK (left scale) USD/HRK (right scale)5

    .08

    6

    .08

    7

    .08

    8

    .08

    9

    .08

    10

    .08

    11

    .08

    12

    .08

    1

    .09

    2

    .09

    3

    .09

    4

    .09

    5

    .09

    6

    .09

    7

    .09

    7.107.057.00

    7.157.207.257.307.357.407.457.50

    4.40

    4.60

    4.80

    5.00

    5.20

    5.40

    5.60

    5.80

    6.00

    Sources: CNB, Raiffeisen research

    CNB operations and exchange ratemovements

    EUR/HRK

    012

    34

    5678

    billion

    HRK

    Creation(+)/Destruction() of kuna liquidity*EUR/HRK average (right scale)

    7.10

    7.15

    7.20

    7.25

    7.30

    7.35

    7.40

    7.45

    6.0

    7

    8.0

    7

    10

    .07

    12

    .07

    2.0

    8

    4.0

    8

    6.0

    8

    8.0

    8

    10

    .08

    12

    .08

    2.0

    9

    4.0

    9

    6.0

    9

    * Effect of FX interventions and reverse repo auctions of T-bills on moneysupply. Sources: CBS, Raiffeisen research

  • 7/31/2019 Macro Croatia 0709

    9/20

    Balance of payments, trade and external debt

    9

    External debtgrowth halted

    The balance of payments current account deficit to-talled EUR 1.8bn, or 7.9% of GDP in the Q12009.

    Although in absolute and relative amounts i t regis-tered a sizable fall, the deficit structure and futureexpectations do not feed into expectations that thedeclining trend could continue in the next periods.Moreover, the most favourable way of financingdeficit, FDI, fell substantially short in the f irst quar-ter. The cumulative data for the entire year are ex-pected to indicate that they are insufficient to coverthe current account deficit. This could result in pres-sures to reduce international reserves. The mostimportant influence contributing to the decline inthe deficit came from the reduction in the deficit onthe goods account, since the reduction in the valueof exports amid the decline in the prices of energyon the worlds commodity exchanges was strongerthan the reduction in the value of imports. Despitethe expected continuation of the strong contractionin domestic consumption in the second half of theyear and partial recovery of external demand, inthe remainder of the year we do not expect the lat-est, favourable, developments in foreign trade tocontinue, especially taking into account the rising

    tendency of energy prices. On the other side, themost ample current account revenues, those fromtourism, could see two-digit rates of decline.

    The beginning of 2009 brought about a fall in ex-ternal debt but also indications of changes in thestructure of foreign borrowing. The fall was pri-marily a consequence of a decrease in bank andgovernment liabilities towards foreign creditors.However, considering the governments latest bor-rowing on the international capital market and pos-sible further f inancing of the budget deficit through

    new issues, we expect the external debt of this sec-tor to widen in 2009. Even when the crisis peaked,domestic banks were able to increase their foreignborrowing and thus significantly contributed to thestability of the overall financial and fiscal system.Therefore it is to be expected that foreign liabilitieswill continue growing this year. At the same time,more difficult access to sources of financing in linewith conditions on financial markets will certainlyreign in corporate demand for foreign assets. Weexpect the absolute amount of foreign debt to see arelatively modest increase in 2009, especially rela-tive to previous years. However, its share in GDP is

    expected to exceed 90%.

    External debt and ratios

    QuartersExternal

    debt(EUR mn)

    External debt as % of:Internationalreserves (% ofexternal debt)GDP

    Exports ofgoods and

    servicesQ4.05 25,748 72.0% 168.6% 28.9%Q1.06 26,654 72.6% 168.9% 30.3%Q2.06 27,716 73.9% 172.1% 31.5%Q3.06 27,372 71.3% 165.9% 29.7%Q4.06 29,274 74.9% 172.3% 29.8%Q1.07 30,149 75.4% 175.9% 31.6%Q2.07 31,058 75.9% 175.9% 29.5%Q4.07 31,227 74.5% 172.2% 28.2%Q4.07 33,253 77.6% 181.5% 28.0%Q1.08 34,967 79.5% 188.3% 28.1%Q2.08 35,409 78.3% 185.4% 28.1%Q3.08 36,259 77.9% 183.1% 27.1%

    Q4.08 39,300 82.4% 198.0% 23.2%Q1.09 39,128 83.2% 201.1% 22.7%

    Source: CNB

    Current account balance, % of GDP

    %

    10

    8

    6

    4

    2

    0

    2000

    2001

    2002

    2003

    2004

    2005

    2006

    2007

    2008

    2009e

    2010f

    Source: CNB

    Foreign trade of goods

    15

    10

    50

    5

    10

    15

    20

    25

    b

    illi

    on

    EUR

    Export Import Balance of foreign trade

    2000

    2001

    2002

    2003

    2004

    2005

    2006

    2007

    2008

    2009

    e

    2010f

    Source: CBS

  • 7/31/2019 Macro Croatia 0709

    10/20

    10

    Government budget

    In expectation ofthird budget revision

    In line with strong decline in economic activity, theQ1 of the year also saw a nominal fall in budgetrevenues. The strong fall in domestic consumptionresulted in the two-digit fall of the most importantsource of budget revenues, the VAT, as well as inexcise duties. Further, there was a substantial fall inrevenues from direct tax (income and profit tax). Atthe same time, social benefits and employee com-pensation grew, resulting in the two-digit growthrate of the annual budget expenditures. In the H1,the increase in the budget deficit was mostly cov-ered by the Eurobond issue, and on the domesticmarket, through T-bill auctions and growth of loansto the government. According to the current indica-tors, retail trade and tourism expect a continueddecline in tax revenues from consumption of goodsand services, as well as in excise duties. In addition,the expected continuation of the reduction in thenumber of the employed and wage cuts will resultin further decline of revenues from income tax. Un-der these circumstances, an unfavourable expendi-tures structure and slow adjustment of governmentconsumption will result in mounting pressures onthe widening of the budget def icit. At times of unfa-

    vourable economic developments pressures on thegrowth of subsidies and social benefits are grow-ing. However, this years second visit to the foreigncapital markets will probably be a far riskier andmore expensive endeavour. In addition, inabilityto further substantially reduce foreign exchangereserves of the banking system and the slowdownin deposit growth suggest there is far less roomfor the governments domestic borrowing. Due tomore difficult conditions of financing its budgetdeficit, Croatia is unable to implement an expan-sive fiscal policy aimed spurring economic activity.

    After this years second budget revision, aimed atredistribution of assets on the expenditures side,the announced third revision of the 2009 budgetshould result in more sizable cuts. The intensity andstructure of expenditure cuts will be influenced alsoby certain political factors, but it is evident that itwill come to a further halt in government invest-ments. In addition, the inability to efficiently reduceexpenditures in the short-term will probably lead toa certain increase in the tax burden and excise du-ties, which is necessary, regardless of unfavourableeconomic effects. However, such measures shouldnot be used to delay reductions in public expendi-

    tures. Considering everything that has been said,this years budget deficit is expected to be main-tained at levels of 3.5% of GDP.

    General government expensesaccording to revised budget 2009

    Cost ofemployees

    26%

    Materialexpenses

    7%

    Financialexpenses 4%

    Grants 5%

    Subsidies 4%

    Social transfers47%

    Expenditures fornon-financial assets

    2%

    Other expenses5%

    Sources: MoF, Raiffeisen Research

    Central government expenditures

    0

    20

    40

    60

    80

    100

    120

    140

    billion

    HR

    K

    2002

    2003

    2004

    2005

    2006

    2007

    2008

    2009e

    Sources: MoF, Raiffeisen Research

    Public debtmil.HRK

    Generalgovernment

    debtCBRD Guarantees Total

    % in GDPwithout

    guarantees

    % inGDP

    2002 72,454 3,825 16,079 92,358 36.6% 44.4%

    2003 81,222 4,925 15,419 101,566 37.9% 44.7%

    2004 92,795 5,842 12,262 110,899 40.2% 45.2%

    2005 101,185 7,139 12,455 120,780 41.0% 45.7%

    2006 102,210 7,686 14,188 124,084 38.4% 43.3%

    2007 104,069 9,662 17,399 131,130 36.2% 41.7%

    2008 99,332 10,814 33,307 143,453 32.2% 41.9%

    Source: MoF, CBS, Raiffeisen Research

  • 7/31/2019 Macro Croatia 0709

    11/20

    Financial system

    11

    Growing riskof placements

    After the last years bank asset growth of 7.5%, asa result of investors fleeing from the domestic capi-tal market at the beginning of the year and banksincreasing their foreign debt at the end of the year,in the first five months of 2009 bank asset growthhalted, with bank assets stagnating at HRK 370bn.In the observed period, the level of deposits withbanks remained unchanged, as well as the level ofloans granted. Only government loans went up, pri-marily thanks to the releasing of the foreign liquid-ity reserves to banks. Of the CNBs more restrictivemeasures, only the limitation of bank credit growthat 12% per year remained in place. However, inview of the stagnation in the volume of loans it islikely that it too will soon be done away with. In linewith global trends, domestic banks became moresensitive to the risk of their placements. Conditionsfor assessing clients creditworthiness have beentightened, as well as those for assessing the qual-ity of collateral. Banks closely monitor their collec-tion rates and carry out organised placement re-structuring activities with clients that have growingloan repayment problems. At the end of last year,the years-long trend of narrowing participation of

    problem placements in total placements, whichmarked the previous period of economic prosper-ity and loan expansion, was reversed. As a directconsequence of two-digit loan growth rates, theaverage age of loans reduced and thus did the ra-tio of unpaid claims to total claims. However, it isevident that due to recession the average age oftheir portfolios will grow, as well as losses on valueadjustment of their loan portfolios. Therefore bankactivities are directed at increasing income, increas-ing the level of capitalisation and optimisation oflosses on portfolio valuation. Although the decision

    on the increase of the minimum capital requirementtogether with the abandonment of the share of thecapital requirement for currency-induced credit riskwill not be implemented this year, banks businesspolicies are to be adjusted to future capital require-ments as of the beginning of the year. The amend-ments to bank policies are reflected in the increaseof the capital adequacy ratio, which in the firstquarter went up to 15.4%. There is also the generaltrend of keeping profits in bank capital, as well asof the abandonment of competitive but more riskycredit products such as long-term loans indexed tothe Swiss franc. In addition, there is the increase in

    the interest spread from which additional bank rev-enues are formed and which will cover the expectedlosses of the loan portfolio.

    Foreign liabilities and deposits growth,annual level

    20

    10

    0

    10

    20

    30

    %

    Demand deposits Time and avings epositss dBanks foreign liabilities

    5.06

    7.06

    9.06

    11

    .061

    .073

    .075

    .077

    .079

    .07

    11

    .071

    .083

    .085

    .087

    .089

    .08

    11

    .081

    .093

    .095

    .09

    Source: CNB

    Capital adequacy ratio

    %

    0

    5

    10

    15

    20

    25

    1998

    1999

    2000

    2001

    2002

    2003

    2004

    2005

    2006

    2007

    2008

    12.7

    20.6 21.3 18.5

    17.216.2

    15.3 14.6 14.016.4

    14.2

    Source: CNB

    Problem loans share and assets

    increase

    %

    5

    0

    5

    10

    15

    20

    25

    30

    35

    1998

    1999

    2000

    2001

    2002

    2003

    2004

    2005

    2006

    2007

    2008

    Problem loans share Assets increase

    Source: CNB

  • 7/31/2019 Macro Croatia 0709

    12/20

    12

    World trends

    Price recovery spurredby expectations of growing demand

    Was the growth of crude oil prices in the secondquarter a preliminary indicator that the globaleconomy has started recovering or was it just aconsequence of market speculations by the larg-est players? In June, the price of crude oil on theworlds commodities exchanges exceeded USD 73per barrel, which was its eight-months high andmore than double the figure seen in February.However, the IEA warned that the price revisiononly signalled a shift up from the deepest end ofthe crisis and by no means indicated a start of theglobal economic recovery. Further the IEA warnedthat the crude oil price has not recovered due tooptimism in expectation of a financial recovery butdue to concrete demand and supply fundamentals.Long-term deliveries, with delivery set for Decem-ber 2017 grew to above USD 90 per barrel, sig-nalling to investors that there was room for furtherprice growth. According to the latest data, the IEAsestimates of global demand for oil in 2009 havebeen raised by 120 thousand bpd based on indi-cators from OECD countries which showed moremovement than analysts had expected. Thus, ac-cording to the latest data, global demand for crude

    oil totalled 83.3 million bpd, which was a reductionof 2.9% relative to 2008. The said positive indica-tors are not necessarily to be understood as signsof economic recovery, but show a slowdown in thestrong fall that has been seen thus far. The sup-ply by non-OPEC members has been increased by330 thousand bpd, spurred by the growth of newwells in Russia. Further, the growth of supply wasalso seen by OPEC members, which account for40% of the global production of crude oil. Crudeoil supply totalled 83.7 bpd. In the quarter underreview, the price of crude oil in the worlds com-

    modities exchanges moved around USD 59 perbarrel (WTI). Historically, one of the consequencesof economic recovery has always been a spike inthe demand for crude oil. We expect the same inthis economic cycle. Viewing the production trends,it is clear that OPEC members that have absorbedthe decline in production during the current eco-nomic downturn are ready to meet a large por-tion of global needs with their production capacityand, to a degree, meet the growing global demandfor oil once the world economy recovers. However,considering that significant investments in the in-crease of production and transport capacity have

    been postponed it is very likely that increased de-mand will result in the growth of oil prices.

    Crude oil price

    30

    50

    70

    90

    110

    130

    150

    USD/barre

    l

    WTI Brent

    7.08

    8.08

    9.08

    10

    .08

    11

    .08

    12

    .081

    .092

    .093

    .094

    .095

    .096

    .097

    .09

    Source: Bloomberg

    Crude oil price (Brent), quarter average

    30405060708090

    100110120130 124

    117

    57

    46

    60

    66 70 70 72

    58

    6575

    91

    98

    USD/barre

    l

    Q.10

    7

    Q.20

    7

    Q.30

    7

    Q.40

    7

    Q.10

    8

    Q.20

    8

    Q.30

    8

    Q.40

    8

    Q.10

    9

    Q.20

    9

    Q.30

    9

    Q.

    f

    40

    9

    Q1.1

    f0

    Q2.1

    f0

    Sources: Bloomberg, Raiffeisen Research

    World oil demand and supply, mnb/d2006 2007 2008 2009f 2010f

    OECD 49.6 49.2 47.5 45.8 45.8 OECD Europe 15.7 15.3 15.2 14.6 14.4 North America 20.7 20.7 19.4 19.0 19.2

    China 7.2 7.5 8.0 8.2 8.4Total demand 85.1 86.0 85.7 84.3 85.2

    OECD 20.0 19.8 19.3 19.0 19.0 OECD Europe 5.2 5.0 4.7 4.2 North America 8.3 8.5 8.5 8.9 9.1TOTAL Non-OPEC 51.2 50.1 49.8 50.8 51.2OPEC 35.8 35.4 35.7 28.7 35.4Total supply 84.6 84.4 85.5 83.5 85.4

    Source: IEA

  • 7/31/2019 Macro Croatia 0709

    13/20

    Banking sector

    13

    Global financial crisis andbanking systems of New Europe

    The collapse of the Lehman Brothers, one of theUS largest investment banks, in September lastyear strongly affected banking systems all overthe world and consequently in Central and East-ern Europe. What fallowed was a period of sud-den fall in exports, foreign direct investments and,in general, increased aversion of investors to risksin the region. The banking industry in the regionwas faced with exceptionally limited liquidity andmounting bad placements. However, the measuresagreed by the leading politicians and economistsof the international community at the G-20 meet-ing in London in April 2009 restored confidencein the market providing assurance that countries inthe region will be able to service their debts. Ad-ditional measures that have been taken by supra-national institutions like the IMF, the World Bankand the EBRD, as well as governments of individualcountries, strengthened the credibility of the bank-ing system, while the majority of foreign-ownedbanking groups stressed their commitment towardsthe continuation of operation in the region and incountries generally thought of as risky.

    The Croatian financial system (both the regulatorand commercial banks) showed extreme resilienceand maturity in facing new circumstances. Aimingat releasing additional liquidity and stabilising themarket, the CNB loosened its restrictive monetarypolicy since September. The Croatian banking sys-tem survived the first impact of the crisis withoutdirect government help or help from other supra-national institutions. However, under these new cir-cumstances the lending activity of banks directed atthe private sector reduced, or rather almost cameto a halt. The widening of budget deficit and larger

    financial needs of the government pushed othersectors away from the sources of financing as wellas led to the piling up of overdue claims and deep-ening of system illiquidity. Since in accordance withboth economic theory and empirical analyses qual-ity financial intermediation ensures optimum allo-cation of resources, ultimately contributing to eco-nomic growth through both direct but also indirectpositive effects, the conclusion arises that furthercontinuation of this situation could have negativeeffects on general economic growth and develop-ment. Just the direct, measurable, influence of thefinancial sector on the creation on the GVA totals

    as much as 4.5%, while indirect and multiplicativeimpacts are far larger (rising unemployment, largercontributions to the state budget, risk dispersion,

    IMF/EU support for CEE (USD bn)

    0 5 10 15 20 25 30

    17.1

    15.8

    20.5

    16.5

    2.3

    4

    2.4

    1.5

    9.3

    9.4

    7.5

    Romania

    Hungary

    Poland (FCL)

    Ukraine

    Latvia

    Serbia

    Belarus

    Bosnia a. H.

    IMF EU, World Bank and others

    Sources: Thomson Reuters, IMF, Raiffeisen Research

    Total assets in % of GDP

    0

    50

    100

    150

    200

    250

    300

    %

    CEE SEECroatia Eurozone

    2004 2005 2006 2007 2008

    Sources: Local central banks, Raiffeisen Research

    Return on Assets and Return on Equity,

    2008

    %

    0

    5

    10

    15

    20

    25

    30

    ROA ROE

    Po

    lan

    d

    Hungary

    Czec

    h

    Repu

    blic

    Slova

    kia

    Sloven

    ia

    Croatia

    Roman

    ia

    Bu

    lgaria

    Serb

    ia

    Bo

    sniaan

    d

    Herzegov

    ina

    Sources: Local central banks, Raiffeisen Research

  • 7/31/2019 Macro Croatia 0709

    14/20

    14

    Banking sector

    cost reduction, etc.). However, as of 2004 bankshave been registering a noticeable decline in ROEand consequently of the share of the banking sec-tor in total GVA.

    By reviewing the figures on bank profit before tax in

    absolute terms (profit after tax grew also in the f irst

    quarter 2009), one is under impression that in con-trast to the real sector the Croatian banking systemmanaged to realise exceptionally good operatingresults even at a time of crisis (although one shouldwait for what 2010 will bring, i.e. for the data forthe entire 2009). However, profit has an economic

    meaning only when put in relation to the economicsize participating in its creation. Therefore, duringa bank profitability analysis profit should be viewedagainst the capital engaged so the only measureused in capturing banking system profitability isROE. Profitability ratios determine the perceptionon the success of investments and the behaviour ofowners in deciding on profit distribution and newinvestments. Over the previous years, the bankingsystem was characterised by a high rate of profitreinvestment, thanks to the expected return on cap-ital which indirectly contributed to the developmentof the economy. Croatian banks had record highreturn on capital in 2004 but since then the indica-tor remained at the average in transition countries.Since the end of 2004, bank profitability was de-clining so the rate of return on capital was drawingcloser to European, relatively low, levels, decliningto 10.1% in 2008, one of the lowest level in Europe(among comparable countries in Central Europeonly Slovenia had a lower ROE of 7.3% in 2008).The trends followed by ROA are only slightly morefavourable than the trends followed by ROE. Fur-ther, the cost/efficiency indicator, i.e. the averageratio between operating costs and income (C/I) has

    continued reducing, indicating better cost manage-ment.

    The analysis of the development, size, structure andactivity of financial sectors in transition countriesshows that even today, after almost two decades,all of the CEE and SEE countries are dominated bybanks as the most important financial intermediar-ies. This is not surprising considering that all thesecountries entered the transition process withouta capital market to speak of and with insurancecompanies as the only non-banking institutions.

    Despite significant progress, the size of financialsystems and even the banking systems in transi-tion countries continue to lag behind the developedcountries. By the ratio of total bank assets to GDP,at the end of 2008 Croatia had one of the larg-est banking systems among the countries in transi-tion. This indicator for euro zone countries totalleda high 262%, while the average of CEE countrieswas 100.3% or 79.8% of GDP. Since 2005, Slov-enia has been the country with the largest degreeof bank intermediation, while the said indicator hasbeen the lowest in Kosovo and Romania. In numer-ous SEE countries, including Bulgaria, Croatia and

    Serbia, this level actually reduced during 2008.The banking sectors of CEE countries could headfor a serious fall in assets in 2009, considering that

    Total loans (% of total deposits)

    020406080

    100120140160

    2007 2008

    %

    Po

    lan

    d

    Hungary

    Czec

    h

    Repub

    lic

    Slovak

    ia

    Sloven

    ia

    Croat

    ia

    Roman

    ia

    Bu

    lgar

    ia

    Serb

    ia

    Bosn

    iaan

    d

    Herzegovin

    a

    Eurozon

    e

    SE

    E

    CE

    E

    Sources: Local central banks, Raiffeisen Research

    Non-performing loans (% of total

    loans), 2008

    0

    2

    4

    6

    8

    10

    12

    %

    Po

    lan

    d

    H

    ungary

    Czec

    h

    R

    epu

    blic

    S

    lova

    kia

    S

    loven

    ia

    Croatia

    Roman

    ia

    B

    ulgaria

    Serb

    ia

    Bosn

    iaan

    d

    Herzegov

    ina

    SEE

    CEE

    Sources: IMF, Raiffeisen Research

    Total deposits in % of GDP

    0

    20

    40

    60

    80

    100

    120

    140

    160

    2004 2008

    %

    Eurozone Croatia SEE CEE

    Sources: Local central banks, Raiffeisen Research

  • 7/31/2019 Macro Croatia 0709

    15/20

    Banking sector

    15

    growth started slowing down already in the lastquarter of 2008. In 2010, assets are again expect-ed to grow by some 10%.

    Due to scarce and expensive foreign financing,ever since mid-2008 deposits have become the

    primary source of financing of bank lending activ-ity. After the confidence in the banking system hadshaken which caused a deposit outflow in the lastquarter of 2008, the timely reaction of the gov-ernment, which increased the amount of insureddeposits, prevented a bank run. On annual level,SEE countries recorded a stagnation of the shareof deposits in GDP, while in CEE this ratio grew.Slovenia continues to be the country with the mostfavourable ratio of deposits to GDP. The ratio ofdeposits to GDP in Croatia slightly reduced, from73.3% in 2007 to 71.5% in 2008. The loan to de-posit ratio, which in SEE totals some 121% and inCEE some 108%, indicates an increase in the useof deposits for lending activity in the region. How-ever, there are still substantial differences amongcountries. In Croatia, the said ratio exceeded 100%in 2008. The countries in which the said ratio re-mained below 100% in 2008 are the Czech Re-public, Slovakia, Slovenia, Bosnia and Herzegovi-na, Albania and Kosovo (largely due to the modestlending activity). The said ratio in the euro zonetotals 86.4%. And while thus far lending activityhas been predominantly financed through borrow-ing abroad and increasing capital, in the upcom-

    ing period it may be expected that banks will turntowards attracting deposits so the ratio of loans todeposits is sure to decline. Since daughter banksin the region are faced with much weaker chancesfor raising funds for their operation and the abil-ity of their parent companies to provide financingnarrowed, activities directed at increasing depositlevels grow in importance. Finally, the crisis andthe fall in external sources of f inancing indicate thenecessity to manage both the liabilities and the as-sets side of banks balance sheets. Therefore, inthe period to come deposits will continue to be the

    so-called necessary evil in that they are a moreexpensive and more difficult source of financing.Nevertheless, other sources are growing as well,like corporate bonds, which could help balance thefinancing costs.

    Under current circumstances, bank problem place-ments have been taking the spotlight. Generallyspeaking, at times of credit expansion, the shareof problem placements in total placements fallsonly to rise in the next period. The factors havingthe most influence on the growth of such place-ments are strong depreciation of individual curren-cies in combination with the share of foreign loanswithout hedges, serious economic recession andconsequent increase in the number of bankruptcyand unemployment, as well as the decline in theprices of real estate. Although the exchange ratesof CEE countries stabilised after the G-20 summitmeeting, other economic adjustments will requiretime until well in 2010. According to the compara-ble IMF methodology, the 4.8% share of problemplacements in Croatia at the end of 2008 was wellbelow the SEE average of 6.9% but also above theCEE average of 3.6%.

    In the upcoming period, bank managements willdirect their attention to active risk management,liquidity management and ensuring funds for fu-ture expansions. The optimisation of assets and li-abilities by using sophisticated management tech-

    niques and further improvement of cost efficiencywill mark the next period. However, one should notexpect substantial changes in asset growth andbank profitability until the end of 2010. Currentlyno one knows the prices for possible acquisitionsthat could be agreed between potential buyers andsellers. Current market prices generally reflect asubstantial deterioration in asset quality, earningpotential and economic outlook in the medium-term. Ever so long as these factors are unforesee-able in the longer term there will only be few po-tential bank buyers.

  • 7/31/2019 Macro Croatia 0709

    16/20

  • 7/31/2019 Macro Croatia 0709

    17/20

  • 7/31/2019 Macro Croatia 0709

    18/20

    18

    Equity

    10 shares account for70% of turnover

    sion. HT was again the most traded share, account-ing for 19.6% of total turnover, followed by Atlantskaplovidba with 16.3% and Institute IGH with a 9.1%share. The transport, storage and communicationssector again accounted for most of the trading witha share of over 45%, followed by shares of the con-struction sector with over 25% and of the food andbeverages sector with almost 12%. The ten most liq-uid shares made up 70% of the total turnover, whichin comparison with the previous period represents alower trading concentration. Altogether 211 shareswere traded in the Q2. By comparing the domesticmarket with the region, although it belongs amongthe larger markets by its market capitalisation, theCroatian market is among the least liquid by itsdaily turnovers. In comparison with Hungary, whichhas a slightly lower market capitalisation, averagedaily turnovers in the Croatian market are severaltimes lower.

    Regular CROEMI revision. Based on the analy-sis of trading in the Q2 2009, CROEMI underwenta regular revision. All criteria were met by 49 is-suers, which is more in comparison with the prior

    revision, when 45 issuers fulfilled CROEMI criteria.Of the current CROEMI components, all membershave satisfied the CROEMI criteria. In addition, thechange has been made in free float calculation inline with new Rules set by ZSE. Weights of all indexcomponents will remain at 100%of free float. In theCROEMI index shares of HT (HT-R-A) will have themaximum weight of 15%, while preferred shares of

    Adris Group (ADRS-P-A) and ordinary shares of At-lantska Plovidba (ATPL-R-A) will weight 13.74 and12.47%, respectively. This new index constitutionwill be valid until October 15th, 2009.

    Comparative indicators. The median of the P/Eratio of the CROEMI constituents amounts to 9.54and the EV/EBITDA ratio 9.24. If we compare thesemedium values with the indicators grouped by in-dustry, we may see that shipyard shares are belowaverage, although the prices of Atlatnska plovidbaand Tanskerska plovidba shares outgrew the CRO-EMI in the Q2 of 2009. This relatively low valuationis a consequence of the higher fall of prices of theirshares over the past year relative to the market andis a reflection of the outspoken cyclical nature of theshipbuilding industry. On the other hand, constitu-

    ents from the food sector hold the highest value.In view of the deteriorating economic conditions,the majority of companies decided to retain their

    CROEMI constitution by sector

    Consumer23 8%.

    Tourism4 2%.

    Telecom15 0%.

    Transportation14 4%.

    Financials7 0%.

    Construction13 0%.

    IT9 6%.

    Oil & gas11 3%.

    Chemicals1 8%.

    Sources: ZSE, Raiffeisen Research

    Performance of CROEMI constituents inQ2 2009

    20

    10 0

    10

    20

    30

    40

    50

    60

    70

    %

    80

    Atlantska plov.Dom holding

    KonarPetrokemija

    PBZAdris grupa (P)Tankerska plov.

    Viro TZagrebaka b.

    BeljePodravka

    Institut IGHINA

    CROEMIAtlantic grupa

    DalekovodEricsson NT

    HTIstraturist

    MagmaIngra

    Sources: ZSE, Raiffeisen Research

    Structure of equity investors and Mcap

    0

    10

    20

    30

    40

    50

    60

    70

    80

    90

    100

    180

    198

    216

    234

    252

    270

    288

    306

    324

    342

    360

    0

    6.

    08

    7.

    08

    8.

    08

    9.

    08

    10

    .08

    11

    .08

    12

    .08

    1.

    09

    2.

    09

    3.

    09

    4.

    09

    5.

    09

    Domestic investors Foreign investorsOthers* Total M. Cap.

    HRK

    bn

    %

    * Custody and portfolio accounts.Note: For shares that are not t raded, nominal value is used.Sources: Central Depository Agency, Raiffeisen Research

  • 7/31/2019 Macro Croatia 0709

    19/20

    Equity

    19

    In linewith global sentiments

    profits so dividends will be paid out only by com-panies with largest cash assets. In accordance withthe Capital Market Act, the Zagreb Stock Exchangeadopted a new set of rules to be applied as of 20July 2009. One of the novelties is related to the def-inition of shares distributed to the public which donot include treasury stock and shares of individualinvestors exceeding 5%. The required percentageof shares distributed to the public for listing in theRegular market is at least 15%, while the Officialmarket and the Prime market require at least 25%.Less than 15% of available shares have Belje, INA,

    Zagrebaka banka and PBZ, and thus they fail tomeet the conditions for inclusion. However, the ZSEmay approve listing to companies with large marketcapitalisation or number of shares.

    Market Valuation and Outlook. Relative to equitymarkets in the CEE, the Croatian market, viewedagainst the CROEMI, ended last year at relative fairvalues, following strong price corrections and oper-ating results still unscathed by recession. This yearwe expect valuation for all CEE markets to go upfor two reasons: the growth of share prices and a

    fall in net profits of companies whose aggregateddecline could cut 30%-50% in the most regionalmarkets. The expected share growth is based pri-marily on investor optimism. However, periods ofgrowth could be interrupted due to participantscashing in profits, as was seen at the beginning ofthe Q3. Growth could also be halted by the declinein investor confidence in global economic recovery,while the domestic capital market will mostly followmovements in international markets, as it did thusfar. The recovery of investor confidence will receivea boost when stability in the country is restored and

    concrete measures are adopted to fight the crisis.However, the strongest positive impulse to shareson the stock exchange would come from the con-tinuation of negotiations with the EU. On the otherhand, great attention should be given to domesticmacroeconomic indicators. Therefore, we expectthe market to remain volatile at current high lev-els. In 2010 we expect shares to continue on theirupward path, paired with recovery in the operatingresults of companies. In addition, we do not expectnew share issues and the continuation of the proc-ess of privatisation any sooner than next year.

    Atlantska plovidba (12 months)

    0

    6

    12

    18

    24

    30

    36

    pr

    ice

    Close 20 daily mov. avg.50 daily mov. avg. Turnover (right scale)

    mil

    lion

    HRK

    0

    500

    1,000

    1,500

    2,000

    2,500

    3,000

    30

    .6

    .08

    28

    .7

    .08

    28

    .8

    .08

    25

    .9

    .08

    24

    .10

    .08

    21

    .11

    .08

    19

    .12

    .08

    23

    .1

    .09

    20

    .2

    .09

    20

    .3

    .09

    21

    .4

    .09

    20

    .5

    .09

    18

    .6

    .09

    Sources: ZSE, Raiffeisen Research

    CROEMI constituents dataCROEMI mem-ber issuer

    MCap (inbn HRK)

    P/E EV/EBITFreefloat

    Adris grupa 4.04 8.07 5.6 54.4%Atlantska plov. 1.43 3.89 7.2 80.4%Zagrebaka b.* 12.42 9.10 n.a. 4.0%Belje 0.69 134.55 29.48 9.5%Dalekovod 0.88 10.42 8.5 82.4%Dom Holding 0.34 n.a. n.a. 40.4%Ericsson NT 1.65 7.30 9.1 40.9%HT 17.89 7.63 5.4 42.0%Institut IGH 0.59 9.22 9.2 81.9%

    INA 13.64 n.a. 18.10 8.0%Ingra* 0.30 n.a. 35.30 68.5%Istraturist 1.36 n.a. 32.20 19.5%Konar EI 0.99 9.87 n.a. 32.2%Magma 0.34 n.a. n.a. 15.9%PBZ* 10.08 9.33 n.a. 2.2%Podravka 1.26 35.61 12.8 33.5%Petrokemija 0.42 4.75 4.6 45.0%

    Atlantic grupa 1.27 16.62 11.13 24.1%Tankerska plov. 1.23 4.37 7.34 17.1%

    Viro T 0.44 n.a. 115.95 34.0%

    * Based on uncosolidated results.Note: Calculations are based on 12M trailing business results and prices

    as at 30.6.2009.Sources: ZSE, Raiffeisen Research

  • 7/31/2019 Macro Croatia 0709

    20/20

    Impressum

    RaiffeisenResearch

    Raiffeisen Consulting Economic Research DepartmentZdeslav ant i, Acting Head of Depar tment; Fixed Income Market, Macroeconomics, Politics, MM and Exchange Rates;

    tel: + 385 1/61 74 337, email: [email protected] ivkovi Matijevi, MSc, Senior Economic Analyst; Macroeconomics, MM and Exchange Rates; tel: + 385 1/61 74 338,

    email: [email protected] Sabolek, Economic Analyst; Macroeconomics, MM and Exchange Rates; tel: 01/61 74 338,

    email: [email protected] Harambai, MSc, Senior Financial Analyst; Equity Market; tel + 385 1/61 74 870, email: [email protected] Franin, Financial Analyst; Equit y Market; tel: + 385 1/61 74 388, email: [email protected] veljo, MSc, Real Estate Analyst; tel: + 385 1/61 74 359, email: [email protected]

    Raiffeisen Consulting Directorate for EU Fundsand Business Consulting

    Ivona Vegar, Head of EU Department; tel: + 385 1/61 74 312, email: [email protected]

    Raiffeisenbank AustriaAnton Starevi, MSc, Chief Economist; tel: + 385 1/61 74 210, email: [email protected]

    Treasury and Investment Bank Division

    Ivan ii, Executive Director; tel: +385 1/46 95 076, email: [email protected]

    Abbreviations

    DISCLAIMER

    This publication is issued by and at the responsibility of Raiffeisenbank Austria d.d. Zagreb. The publication or any part of itcannot be considered an offer or invitation to purchase of any asset or right. Information, opinions, conclusions, forecasts andprojections presented in this publication are based on public statistic and other information from resources, the completenessand accuracy of which Raifeisenbank Austria d.d. Zagreb relies on, but which it does not guarantee. Therefore, information,opinions, conclusions, forecasts and projections presented in this publication are liablie to changes depending on the changesof the information source, as well as to the changes which occurred from the moment of writing the text to the ac tual reading of

    it. All securities and other assets mentioned in this document can be an issue for taking a position by Raiffeisenbank Austria d.d.Zagreb. All such asset s and rights can bear the risk on the assessment of which the stands presented in this document cannotinfluence. The document or its parts cannot be copied, or reproduced in any other way without quoting the source.

    CBRD Croatian Bank for Reconstruc tion andDevelopment

    CBS Croatian Bureau of StatisticsCEE Central and Eastern EuropeCES Croatian Employment ServiceCNB Croatian National BankCNTB Croatian National Tourist Boarde estimateEBRD European Bank for Reconstruction and

    DevelopmentEMU Economic and Monetary UnionEU European UnionEUR Eurof forecastFDI foreign direct investmentGDP Gross Domestic Product

    GVA gross value addedH1, H2 firs t/second half of the yearIEA International Energy AgencyILO International Labour OrganizationIMF International Monetary FundMoF Ministry of FinanceOECD Organization for Economic Cooperation and

    DevelopmentOPEC Organization of the Petroleum Exporting

    CountriesQ quarterSEE South East EuropeUSD Dollar

    VAT value added taxZSE Zagreb Stock Exchange

    PublisherRaiffeisenbank Austria d.d. Zagreb, Petrinjska 59, 10000 Zagreb, www.rba.hr, tel. +385 1/45 66 466, fax: +385 1/48 11 626

    Publication finished on 20 July 2009