Hrvoje Stojić: The corporate sector in Croatia is one of the most indebted in the region

In the last few months, Croatia’s risk premium has drastically fallen by about 60 basis points.

– Markets are betting on a rating improvement of one or two notches. Why is that rating important? Everyone likes cheaper capital, investors like their investments to be attractive. By entering the investment grade, as Portugal recently did, it attracts higher quality investors. Some investors automatically bypass countries with poor ratings, said Hrvoje Stojić, director of the Economic Research Department at Addiko Bank at the Macroeconomic Outlook. Next year, he expects continued growth of the Croatian economy by 3 percent.

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– Besides domestic demand, exports significantly contribute to this growth, as do investments. Exporters who have increased their presence abroad must invest more to remain competitive. Financing conditions are stimulative for investment financing. Next year, we expect another record tourist season. This year, much has been said about Agrokor, but those risks have not yet manifested. It was wise to buy time for the restructuring of the group to see what the sustainability of the business is. In a number of business areas, Agrokor will attract investors, Stojić said.

He also spoke about the gradual recovery of credit activity.

– The corporate sector in Croatia is one of the most indebted in the region. The movement of NPLs shows that this debt is decreasing, now at 13 percent. A level of 10 percent is desirable because then capital becomes even more favorable. Recent research from Europe shows that the conditions for lending to small and medium-sized enterprises have improved significantly, Stojić emphasized.

He noted that Croatia pays the highest price for its debt in Europe. This cost must be reduced through fiscal consolidation.

– It should be sought in public sector wage expenditures and subsidies. These segments are very high compared to other countries. Savings can be achieved through the informatization of the public sector, putting some public services and activities on the market. The tax reform is not finished and will continue as Croatia can strengthen its price competitiveness through this reform. Countries that, for example, have property taxes have lower income taxes. Such an income tax harms the competitiveness of companies, Stojić noted.

What do rating agencies look at? After a deficit below 1 percent of GDP, public debt can fall by two percentage points annually. In the next seven years, we can meet the Maastricht criteria, Stojić said.

The crisis is sleeping, it is not over

Is the crisis in Europe behind us? Five years ago, the ECB leadership said it would do everything to resolve the crisis. Now there has been some calm.

– No, the crisis is not over, it is sleeping, Thomas Mayer, former chief economist of Deutsche Bank, clearly stated. He pointed out that in the last year to year and a half we have witnessed an excellent recovery, but China is responsible for that.

– At the beginning of 2016, we had the worst stock market start of any year as far as I remember. Everyone was worried about China. Half a year later, China recovered and pulled the US along. A little later, Europe joined in. In that recovery, there was no increase in inflation, which is unusual. Inflation stubbornly remains below one percent. Central banks cannot reach the inflation target of two percent, which shows that something is wrong. The ratio of employment and inflation supports this, older economists used that ratio which should show that as unemployment falls, inflation rises. That is not happening now. Today the direction is the opposite, which shows that central banks do not know what they are doing, Mayer warned.

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With very low reference interest rates, which are now in effect and even negative, the amount of debt is increasing again. In Europe, it is at a high level.

– Wherever we look, Japan, the US, or the UK, the level of debt is significantly higher than it was a few decades ago. In the eurozone, who has the largest credit? Financial institutions and the general government have the most. This debt is used for investments. In the eurozone, we suffer from chronically high debt of financial institutions and the financial sector. Who is at risk in the eurozone? Greece, of course, but it is a special case because it has been removed from the market. Greece is not at risk of a capital shortage because it is financed by the EU. Portugal, Italy, Spain, and France have rising debt, above 90 percent of GDP. If an external shock occurs, people flee to safe havens – typically US debt and German bonds. The term “sudden stop” is when the market decides to suddenly exit something. Central banks (of Japan, the US, Germany) will buy corporate sector debt, who will buy the debt of France, Italy, or Spain, while the ECB cannot? Mayer said. Therefore, what risks threaten the global economy? Mayer calls them known unknowns.

– The first is a financial shock from China. They have pumped their economy with credit. Not only do they have 200 percent debt relative to GDP, but they have done what we and the US did – outsourced funding sources – they created something similar to CDOs. They have created various financial products that many do not understand. If the Chinese bubble bursts, their households will suffer. And I am talking about the second largest economy in the world on which Germany, the US, and even Croatia depend, Mayer said.

The second risk is political, that in Italy. Elections in Italy will be held at the beginning of next year. The problem is that various parties have almost identical percentages in the polls.

– No one in Italy could answer me how an efficient government will be formed in Italy. If there is no such government, no one will buy government bonds. Some parties are talking about introducing a parallel currency alongside the euro, there is talk of exiting the euro. As an investor, I would be concerned about that, Mayer emphasized.

The third risk is the digital disruptor – such as fintech companies. Companies are not sure which technology is the future. Is the electric car the car of the future or something else?

– No one is sure and investments are slowing down. It is possible that this digital disruption will lead to such uncertainty that companies will stop investing, which will lead to a halt in growth, Mayer said.