HNB Analysis: Such Dynamics of Public Debt Growth Will Nullify Everything Done Since 2014.

The coronavirus pandemic and the introduction of epidemiological measures that included restrictions on free work and movement to combat it had a strong negative impact on real and financial movements in the country, states  the latest publication of the Croatian National Bank.

Therefore, the Government, HNB, and Hanfa undertook coordinated activities to mitigate the negative economic consequences of the pandemic and maintain stable conditions in the domestic financial market. Below is a systematic overview of the most important measures that contributed to the preservation of financial stability:

The Government of the Republic of Croatia (The measures listed are only a part of the extensive aid package for the economy during the coronavirus epidemic, which was adopted at the 214th and further expanded at the 222nd session of the Government of the Republic of Croatia):

• Support from the Croatian Employment Service for preserving jobs in sectors affected by the coronavirus for companies that experienced a revenue drop of 20% (3250 HRK for March and 4000 HRK for April and May) along with exemption from contribution costs; the payment of support continues in June, but the revenue drop must be greater than 50%.
• Write-off of tax liabilities if the company’s revenues have decreased by more than 50% and deferral of tax liabilities for companies whose revenues have decreased in the range of 20% to 50% due to the pandemic.
• Deferral of VAT payment until the invoice is collected.
• Deferral of payment of various public levies.
• Agreement with commercial banks to allow clients affected by the pandemic a moratorium on the repayment of credit obligations for a period of at least three months.
• Suspension of enforcement measures for all debtors for a period of three months.
• Approval of guarantees from HBOR for exporters and economic entities that indirectly export or are suppliers of direct exporters and companies operating in tourism for additional liquidity funds, as well as the expansion of the maximum guarantee rate and ensuring favorable loans for micro, small, and medium-sized enterprises by HAMAG-BICRO.

Croatian National Bank – monetary policy measures:

• Interventions in the foreign exchange market.
• Establishment of a currency swap with the ECB.
• Conducting structural and regular (weekly) operations in the open market.
• Reduction of the required reserve rate from 12% to 9%.
• Maintaining auctions for direct purchase of Croatian securities.
• Expanding the list of potential participants in the purchase and sale of securities operations to pension and investment funds and insurance companies.

Croatian National Bank – supervisory measures:

• Allowing temporary use of the liquidity coverage ratio below the prescribed minimum amount of 100%.
• A more flexible approach to supervisory rules that allows for the introduction of reprogramming by credit institutions for designated clients through an expedited process without reclassification to a status of non-fulfillment of obligations.
• Retention of profits earned by banks in 2019.
• Temporary suspension of certain supervisory activities (e.g., stress testing).

Croatian Financial Services Supervisory Agency:

• Prohibition of dividend payments to insurance companies.
• Decision to exempt payment of fees for issuers listed on the regulated market for 2020.
• Recommendation for granting moratoriums to clients of leasing companies.

Public debt could increase to 86.7% of GDP in 2020, according to the adopted Amendments and Supplements to the Budget for 2020, which would significantly increase the level of public debt compared to the previous year, when it amounted to 73.2% of GDP, which is higher than previously recorded levels of the public debt to GDP ratio in Croatia. The strong growth of the public debt to GDP ratio arises from the high amount of deficit during 2020 and the simultaneous strong contraction of GDP. Such dynamics of public debt will nullify the trend of decreasing public debt to GDP ratio present since 2014, during which the share of public debt in GDP decreased by about 11.5 percentage points.

The increase in financing needs in the first half of 2020 further strengthened the connection between the state and the banking sector. In April 2020, 22% of total bank assets related to placements to the state (an increase of 2 percentage points compared to the end of 2019). Regardless of the issuance of a 2 billion euro bond on the international market in June, the state continues to rely mostly on domestic sources of financing, and the latest available data on the structure of public debt (for April 2020) shows that 67% of total public debt was issued domestically, while only 33% was on the foreign financial market.

The currency, interest rate, and maturity structure of public debt continued to improve, but the crisis was met with a share of public debt in euros that remains exceptionally high. Although the share of public debt in foreign currency has been continuously decreasing over the last five years, 71.4% of public debt is still denominated in euros, which increases the vulnerability of the state to potential weakening of the kuna against the euro and increases risks to financial stability. In this context, the strong and rapid responses of the HNB at the beginning of the pandemic were particularly important, calming depreciation pressures in the foreign exchange market.

On the other hand, the structure of public debt continues to be dominated by long-term debt and fixed interest rates (about 90% of public debt is linked to fixed interest rates), which facilitates the management of public debt and reduces interest and maturity risk, thereby reducing potential risks to the stability of the financial system.

{embed_digitalno_izdanje}{/embed_digitalno_izdanje}