The Crisis in Europe Will Affect the Decline of Exports, Tourism, and Foreign Investments in Croatia

Eastern Europe and Central Asia are not immune to the turbulence of the current global financial crisis, and most countries in the region are likely to experience slower economic growth, officials from the World Bank (WB) have assessed.

"In this rapidly moving global crisis, the countries of Eastern Europe and Central Asia are feeling the effects along with the rest of the world," said Shigeo Katsu, Vice President of the World Bank for Eastern Europe and Central Asia, in a conversation with journalists on Friday."The structural reforms implemented in the region in recent years, aimed at strengthening macroeconomic policies, have helped to mitigate the crisis to some extent. These countries are more resilient today than they were 10 years ago, but no country is immune to the effects of the crisis," Katsu added. The prolonged economic slowdown in Western Europe, according to him, will reduce demand for imports from Eastern European and Central Asian countries, especially those with significant trade volumes with the 15 original EU member states.

Additionally, the decline in Western Europe, as well as in Russia, Kazakhstan, and Ukraine, will harm the economies of lower-income countries due to reduced remittances from their citizens working in those countries. He recommended that governments pay more attention to protecting vulnerable categories of the population from the effects of rising food and fuel prices and increase allocations for social assistance. Assessing the situation in Southeast European countries, including Croatia, Katsu stated that they have, overall, "relatively coped well with the global financial crisis" so far, thanks to the implementation of significant reforms in the financial sector. He pointed out the importance of preparing for the longer-term effects of the crisis.

"It is not a question of whether, but when these countries will be more affected, and therefore it is important that they prepare, which means maintaining healthy public financing policies and continuing with structural reforms." He also emphasized that, due to the fact that banks in the region are mostly subsidiaries of Western European banks, "the health of the parent banks should be of particular concern." When asked about Croatia’s position in this context, Katsu said that "Croatia depends in many ways on developments in the large EU market." The prolonged slowdown in Western Europe would have an impact on the decline of exports, tourism, and foreign investments in Croatia. Katsu emphasized that to some extent, there is also Croatia’s dependence on European liquidity. "The rollover of debt obligations is something we want to monitor closely," Katsu added. One of the common phenomena in financial crises of emerging economies is the liquidity risk or so-called ‘rollover.’ If a country has a large amount of short-term debt maturing and investors do not want to refinance such debt, then a liquidity crisis or ‘rollover’ of debt can occur, noted American economist Nouriel Roubini.

When asked about Croatia’s foreign debt, which has reached 35.4 billion euros or 90 percent of GDP, Katsu stated that it is "clean and Croatia will continue to repay it as it has so far." Regarding Croatia’s current account deficit, which according to HNB data reached 10.5 percent of GDP in the second quarter of 2008, Katsu said that with a "double-digit current account deficit, you always want to be cautious." Pradeep Mitra, Chief Economist of the WB for Eastern Europe and Central Asia, assessed that despite tightening financial markets, adjustments have so far proceeded smoothly, except for a severe ‘hard landing’ in Estonia and Latvia, where economic growth was halted in the second quarter. He also warned that inflation is rising across the region, driven by rising food prices and pressure from domestic demands. According to WB data, the inflation rate for the Western Balkans in the EU10 (new EU members) is over eight percent this year.

"The message for the countries of Eastern Europe and Central Asia is that policymakers must be ready to respond quickly to rapid changes in the international financial environment. Authorities need to provide liquidity support to address issues of insufficient capital, problematic assets on balance sheets (where it is important), and the financing difficulties that banks are facing," he said. Pradeep Mitra recommended that governments do everything to ‘pump’ liquidity into banks and strengthen confidence in the financial system. Perceptions of risk in the countries of the region, as measured by financial markets, have increased significantly in some cases, he added. "The most serious short-term danger is that shocks in the global financial system will create a ‘rollover’ risk for a number of countries with high current account deficits and significant reliance on borrowing from banks," Mitra said. Such refinancing risk, he noted, is particularly pronounced in countries with a high share of short-term debt relative to foreign exchange reserves. (Hina)