The link between credit growth and GDP growth is not as strong as previously thought

What is the state of the Croatian banking industry and can it engage more actively to support economic growth through credit?

This was discussed by the chief economists of banks, supported by the Deputy Governor of the Croatian National Bank, Relja Martić, at an event organized by the monthly magazine Banka. As former governor Rohatinski has reiterated countless times, Martić confirmed that monetary policy is unable to solve the problems of the real sector, especially those of a structural nature. Large chronic loss-makers cannot be saved even by budget subsidies, let alone monetary policy.

According to Martić, monetary policy has been and remains counter-cyclical, ensuring high liquidity in the system throughout the crisis. Moreover, while corporate loans across Europe were declining, in Croatia they were increasing – at the end of December 2012, compared to the same time in 2008, they were up by 15.2 percent. During this period, loans grew more only in Poland (26.9 percent), Slovakia (21 percent), and Bulgaria (16.8 percent). With the exception of a decline in the second half of last year, loans to the real sector are also growing this year, although not as much as to the state. The state of treasury bills amounts to about 30 billion kuna, and they are being issued at historically low rates, said the Deputy Governor.

Milan Deskar Škrbić presented data from Arhivanalitika indicating that crises are practically a constant state of the global economy. From 1970 to 2011, there were 147 banking crises, 218 currency crises, and 66 sovereign debt crises worldwide, averaging: 4 banking crises, 5 currency crises, and 1 sovereign debt crisis per year. What varies by country is the impact of these crises on GDP decline, which is greatest in developed countries (33 percent), followed by emerging markets (26 percent), and only 1.6 percent in developing countries.

Hrvoje Dolenec, chief economist of Zagrebačka banka, showed that the link between credit growth to companies and GDP growth is significantly weaker than the public perceives, while Anton Starčević, the chief economist of Raiffeisen Bank, pointed out the general decline in banks’ profit rates across the CEE region, where the average profit for banks is 16 percent, while in Croatia it is only 4.8 percent. Speaking about the state of non-performing loans, he showed that with 13.8 percent, Croatia is somewhere in the middle – Ukraine has the highest rate with 37.5 percent of non-performing loans, Slovenia has 15 percent, while the lowest rates are in Russia (4.8 percent) and Belarus (0.5 percent).

Zdeslav Šantić warned that in the first quarter of this year, the gross amount of loans to companies fell by more than ten percent, which will continue until the end of the year, although with better access to alternative sources of financing. Corporate deposits are also declining, which is a result of increasingly weaker business results and the absence of a long-term investment cycle. The profitability of banks will also decline, along with reduced interest income, and further deterioration in the quality of already approved loans is expected, especially in the corporate sector. With the entry into the EU, we can expect an acceleration of mergers and acquisitions, especially of small banks that are currently struggling to meet the required capital adequacy, concludes Šantić.

So, to summarize – the Croatian National Bank and monetary policy cannot do anything, the link between credit growth and GDP growth is not as strong as previously thought, but liquidity is excellent. Bless the state!