GDP growth on healthy foundations

Published: 25/4/2016

Governor of the Croatian National Bank was interviewed on Dnevnik 2, the evening news programme of the Croatian Television, by the Host, Branimir Farkaš.

Joining me at the studio is the Governor of the Croatian National Bank.

Mr Vujčić, good evening and welcome to the Dnevnik.

Good evening to you too.

We have heard good news from Washington. However, is the GDP growth below 2% sufficient for the Croatian economy and debt sustainability? If the interest rate goes up, the situation might become critical.

Well, I would say that this is not something we should be satisfied with. In comparison with other Central and Eastern European countries this is still a relatively low GDP growth rate. However, what is good about it is that this growth rate, although relatively low, is a healthy rate, i.e. it is based on healthy foundations. Why? It is primarily a result of the growth of exports, and not, as we have seen before the crisis, of the growth of consumption which increases debt. De facto, apart from the public debt, all other debts are decreasing, both that of households and of enterprises, and GDP is growing again.

Does this mean that growth is for the first time based on healthy foundations?

On healthy foundations, although it is low. However, what may and must be done, and what Croatia is expected to do is press ahead with structural reforms in order for the potential GDP growth rate to accelerate over the years to come because, as you have already mentioned, of the very high level of public debt.

The Government has announced reforms, reforms of the health care, sale of state property.  The increase in the working age has faced opposition from the trade unions. Are these measures good, is this a good path?

Absolutely, structural reforms in Croatia have no alternative. I have been saying this for years. Reforms are late and this is why we are faced with such slow recovery of the gross domestic product. We have to implement these reforms, in all sectors. This means, from health care, labour market, education, judiciary, efficient state administration, in order to turn Croatia into a better business destination in the future, make it more attractive to investors and increase productivity and GDP growth.

Croatia is still under the Excessive Deficit Procedure. Can the Government lower the deficit below 3% and will this raise the credit rating and improve the situation?

According to our estimates, yes. The deficit will fall below 3% this year and continue falling. However, in order to exit the Excessive Deficit Procedure there are two things we have to do: reduce deficit and reduce public debt. The public debt should be reduced at the rate of approximately 1.5 percentage points of GDP per annum in order for us to exit the procedure. Therefore, efforts on the fiscal side alone are not enough. Moreover, it is key to work on the GDP, to increase the GDP growth rate because it will then be easier to accomplish the required fiscal adjustment to exit the EDP. This will have a positive effect on the credit rating as well. However, it should not be expected that the credit rating will improve very fast.  This means, it should be stabilised by the end of the year. A positive outlook would already be a success. We are now two grades below investment grade, so it will take a while to get it back to investment level.

Does this mean that there is no fear that if we exit the Excessive Deficit Procedure this could lead to populist measures and to giving up reforms which you say are necessary?

I sincerely hope not. We have often seen that good news from rating agencies or other sources have led to abandoning some things that are thought of as unpopular. I think that the majority of structural reforms should not at all be unpopular. Moreover, deregulation, fostering greater competition, better supply to consumers is something that will become popular already in the medium term.

Strengthening of the kuna... It is not the peak of the tourist season, why is this happening?

At this moment, the main reason for the strengthening of the kuna is Croatia's foreign trade surplus. This means that we are exporting more than we are importing at this moment. There is an inflow of capital to Croatia on one side, and on the other the inflow of funds from the EU has started and will accelerate, EU funds coming through different channels, through the European Investment Bank, at the moment though EU structural funds, and this will continue to increase appreciation pressures on the kuna in the future as well. However, the policy of the Croatian National Bank will remain consistent, the stability of the kuna exchange rate.

And my last question. Do banks have too strong an influence in Croatia? Although it may be sad that this is not the case only in Croatia and that it is the trend across Europe. However, measures have been taken in Europe to limit their influence.

Well, over the last few years the banking sector has been so heavily regulated in comparison to the period before the crises that it may be said that now this is a sector with much less influence, if you will, than it once was, or rather that it is much less dynamic, its profitability is much lower than it was once the case. In Croatia this was a tightly regulated sector by the Croatian National Bank even before the crisis. In fact, we have now relaxed some of our regulations in order to enable the banking sector to continue its lending activity and it is good that at the beginning of this year we finally witnessed a rise in credit activity, in the first quarter. It is too early to say whether this is a sign of a trend, but this could be a sign of a trend reversal leading to a stronger credit growth in the future.

We hope the recovery will continue and news will continue to be good. Thank you for joining us in the Dnevnik.

Thank you.