Rohatinski: In 2009, GDP growth of 2 percent, inflation at 3.5 percent

Croatia can expect a gross domestic product (GDP) growth of around 2 percent in 2009, a decrease in the average annual inflation rate to 3.5 percent, a current account deficit of 9.2 percent of GDP, while foreign debt would reach 38.5 billion euros or about 89 percent of GDP, projections presented today by the governor of the Croatian National Bank, Željko Rohatinski.

"This is not something that would make us happy, but it is far less bad than in some other countries, and that could also happen here if we do not wake up in time. In that case, even an arrangement with the IMF would probably not be sufficient to prevent the country from entering stagnation or even recession," Rohatinski stated at the Croatian Exporters’ meeting titled "Export in Times of Crisis." The central bank governor told exporters that the HNB can only assist them by maintaining the overall liquidity of the domestic financial system and price stability, rather than through any special selective measures.

He announced that in 2009, all measures that contributed to the resilience of the banking system, such as capital adequacy and limiting the growth of placements, would remain in force, and that these would be further tightened if necessary regarding currency-induced credit risk. He also announced a new decision from the HNB Council regarding short-term liquidity loans and simplifying their approval for solvent banks based on the collateral of treasury bills, as well as bonds of the Republic of Croatia.

For now, there are no indications suggesting a spillover of risks from parent banks to their branches in Croatia (e.g., withdrawal of supplementary capital and deposits), but as a precaution, the HNB is preparing measures to prevent this, based on the Foreign Exchange Operations Act. The HNB will also propose an amendment to that Act to postpone the anticipated liberalization in the area of capital transactions with foreign countries from the beginning of 2009 for at least another year.

In his speech about the consequences of the current financial crisis and its impact on Croatia, the governor particularly warned about the problems of external trade imbalance and high dependence on foreign sources of financing. In 2009, the repayment of the principal of foreign debt of 9.4 billion euros and interest of 1.7 billion euros is due, which is 27 percent more than this year, he warned, adding that for these payments it will also be necessary to engage to some extent the own liquidity reserves and significantly increase the efficiency of their use.

"The HNB is ready to conduct a very active policy of maintaining the liquidity of the financial system to the limits that will not encourage inflation, using all available instruments as needed," he emphasized, mentioning, as a last line of defense, the possibility of engaging the HNB’s foreign exchange reserves. However, he also outlined a number of necessary conditions, especially maintaining exchange rate stability. "If it does not become a concern for everyone, the HNB would have to defend it alone, in which case, choosing the lesser evil, instead of issuing, it would withdraw kuna liquidity," he stated.

He listed as conditions the balancing of the consolidated general government budget, including all payment delays that reduce the liquidity of the real sector, as well as the contribution of trade unions towards reducing pressures on liquidity. State Secretary of the Ministry of Finance Zdravko Marić announced that the government continues with the policy of reducing the budget deficit, next year to 0.8 percent of GDP. This does not necessarily mean postponing projects that the government has started, from infrastructure to incentives for entrepreneurship, Marić said, assuring exporters that they can still count on government support in promoting entrepreneurship. He announced that the government would present a budget proposal for the next year in a few days, and economic growth in 2009 is estimated at 2.5 to 3 percent, while budget revenues will grow by about 4, at most 5 percent. (H)