CNB Council: 5.9 percent GDP growth in 2021

Published: 12/4/2021

At its session today, the Croatian National Bank Council discussed current economic and financial developments and adopted the monetary policy projection for the 2021 to 2024 period. The agenda also included the report on the banking system condition in 2020 and the decision on the 2020 financial statements of the CNB. The Council also enacted several other decisions on matters falling within its competence.

Taking into account relatively favourable recent indicators of economic activity, the CNB has revised upward the GDP growth projection for 2021 to 5.9 percent. Domestic demand is expected to rebound vigorously, whereas expectations about foreign demand growth have been revised slightly down in response to the deteriorating epidemiological situation in most European countries over the past months and the relatively slow progress in vaccination. The estimate for real growth in 2021 is surrounded by strong downside risks related mostly to the assumption of a relatively successful tourist season with a sharp increase in revenues from tourism consumption of foreign guests relative to the previous year. For this reason, in addition to the baseline scenario, the CNB also assessed an alternative (pessimistic) scenario that assumes a much worse epidemiological situation in Croatia and the world and a longer enforcement of restrictive measures. With the negative impact on personal consumption, investments and tourism revenues, the adverse scenario assumes that real GDP growth in 2021 might be 2.8 percent.

Labour market recovery is expected to be subdued in 2021 as the negative response of the labour market to the sharp economic downturn in 2020 was much less pronounced.

A one-off acceleration of the average annual consumer price inflation is expected in 2021, spurred by the rise in the prices of oil and other energy products, so that the average inflation rate might reach 1.7 percent.

Against such a macroeconomic background, the CNB will continue to strengthen the expansionary character of its monetary policy while ensuring the stable exchange rate of the kuna against the euro. This policy and exchange rate stability will be supported by the maintenance of a positive balance in the current and capital account, notwithstanding the sharp drop in revenues from tourism consumption of foreign visitors relative to 2019. 

The 7.3 percent increase in the assets of credit institutions in 2020 was financed by the rise in the deposits of households and non-financial corporations and sources from domestic financial institutions. Asset growth was mostly channelled to liquid assets, predominantly in settlement accounts with the CNB, and lending activity. Loans to government units grew the most, while the rise in loans to non-financial corporations mostly took place in the first quarter. The growth in loans to households was driven solely by the increase in household loans fuelled by the government’s housing loans subsidy programme.

The impact of the COVID-19 pandemic is mirrored in the substantial increase in credit portfolio risk. This mostly relates to the rise in loans not yet in default, for which a significant increase in credit risk was identified (stage 2 loans), and the noticeable increase in non-performing loans. Nevertheless, the NPL ratio edged down, from 5.5 percent in late 2019 to 5.4 percent, owing to the rise in high-quality assets and the continued sale of non-performing claims.

At the end of 2020, the stock of the remaining loan deferrals stood at HRK 24.5bn, or 6.3 percent of total loans and advances. Deferrals to households and non-financial corporations accounted for HRK 3.3bn and HRK 11.5bn respectively, while HRK 9.7bn related to deferrals granted to other sectors. In the period from the end of September, loan payment deferrals decreased by HRK 11.2bn (31.5 percent), which was slightly less than the amount scheduled to fall due in the fourth quarter. Almost the entire amount of the remaining deferrals to non-financial corporations and households falls due by the end of June 2021, whereas deferrals to other sectors fall due by end-September 2021. While the share of stage 2 loans in exposures covered by deferrals decreased slightly from September, to 29.8 percent, the quality of such exposures deteriorated, as indicated by the increase in the share of stage 3 (non-performing) loans, from 2.8 percent at end-September to 5.1 percent at end-December 2020.

The costs associated with recognition of credit risks and smaller operating income more than halved the profits of the banking system and significantly reduced its profitability relative to 2019. System liquidity increased further due to measures for its preservation, while the transformation of time deposits to transaction deposits continued. System capitalisation was strengthened by the CNB’s order to include the 2019 profits in capital, and it was preserved by the impact of targeted changes to the prudential regulatory framework (the CRR “quick fix”).

The CNB Council granted approval to the Supervisory Board of Karlovačka banka d.d. to appoint Željka Surač as Chairperson and Marino Rade as Member of the bank’s Management Board.