The consequences of the international financial crisis on the Croatian economy will primarily be reflected in the increase in interest rates for borrowing abroad and the decrease in Croatian exports of goods and services, which will in turn affect the slowdown of economic activity in the country, estimate analysts from the Croatian National Bank.
Given that the Croatian economy, including the state, banks, and enterprises, is significantly indebted abroad and has a high share of exports of goods and services in Croatian GDP, it can be expected that the consequences of the international financial crisis on the Croatian economy will primarily be reflected in the increase in interest rates for borrowing abroad and the decrease in Croatian exports of goods and services, state analysts from the central bank in their assessment of the impact of the crisis on the international financial market on the Croatian economy, which was published in the latest Bulletin of the HNB. The assessment is based on a simulation conducted at the end of October based on then-current data, with the HNB noting that these are indicators of the direction of movement, not precise quantitative indicators. Therefore, the quantitative results of the model simulation, which are sensitive to changes in parameter values, should be taken with a certain reserve. The main contribution of the model simulation, namely, relates to explaining the mechanism of shock transmission in the economy and the direction of change of certain variables.
The results of the model simulation are expressed as deviations of the growth rates of certain variables from their long-term levels (average values achieved in the period from 2000 to 2007). The model assumes that due to the international financial crisis, there will be stagnation in Croatian exports of goods and services. The model incorporates the assumption that the cost of foreign borrowing for Croatian banks, enterprises, and the state increases by 4 percentage points due to the international financial crisis (but in the meantime, this increase has fallen to two percent). According to the model, after the increase in foreign rates, domestic interest rates rise as the cost of foreign borrowing for banks increases. This results in lower demand from households and enterprises for loans, and thus lower demand for goods and services, which will ultimately lead to a slowdown in domestic economic activity, imports, and a drop in prices. Due to reduced domestic production, the growth of investments, employment, and wages slows down. On the other hand, stagnation in exports directly causes a slowdown in economic activity, which over time results in reduced income, lower demand for goods, services, and loans, which in turn affects the reduction of economic activity and a drop in prices, imports, investments, and employment. Due to the combined effect of two negative shocks, it could be expected that total economic activity (measured by GDP) in the mentioned scenario would slow down by 2.6 percentage points – from a long-term average growth rate of 4.6 percent to approximately 2 percent. Reduced demand for goods and services is the main cause of the drop in inflation by 1.5 percentage points (to 1.6 percent), personal consumption by 4.8 percentage points (to 0 percent), and imports by 6.5 percentage points (to 1.1 percent), state analysts from the HNB. At the same time, according to the simulation, due to more expensive foreign sources of financing, commercial banks raise domestic interest rates (by 5.8 percentage points on loans to households and 5.9 percentage points on loans to enterprises), which ultimately results in a drop in loans to households by 28 percentage points and a drop in loans to enterprises by 10 percentage points.
