Can a stronger dollar increase the competitiveness of Croatian exports to the US?

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When it comes to awarding currencies, the dollar would take the title of winner this year, as it has been recording record values in recent months. However, if this choice had no impact on the economy, the award ceremony might be entertaining, but the sudden strengthening of the dollar has significant economic implications for almost all countries, given the currency’s dominance in international trade and finance.

Since May 2021, the value of the euro against the dollar has weakened by 19 percent, and just over a month ago, the dollar reached its highest level in 20 years – largely due to the FED, which has raised interest rates five times this year.

The record growth of the dollar, amid inflation that most countries are struggling with, poses a challenge for many and raises questions about the impact on the economy in general, as well as the impact on individual countries, including Croatia. Can Croatia benefit from the entire situation, and what does the rise of the dollar actually mean?

Opportunity for Europe?

In the case of the US, the strengthening of the dollar has several advantages, but one should not overlook the damage it causes to American multinational companies, whose executives have begun to complain that the current situation is harming their profits. At the same time, it benefits companies that buy goods from abroad, as they have now become cheaper. This fact could be an opportunity for European manufacturers, as their goods become more desirable in the US.

In this context, Davor Nađi recently explained in a LinkedIn post why the strengthening of the dollar, or the fact that the euro has fallen against the dollar by over 20 percent, does not have to be exclusively a dark scenario and what benefits Croatia can derive from it.

– Products and services exported from the EU to the US have become 20 percent more competitive. If we also consider that companies from the US are now looking more towards Europe than China, this adds further importance. In Croatia, there are industries (for example, IT and arms manufacturing) that can take advantage of this opportunity and increase exports to the US – Nađi wrote in his post.

Namely, a weaker currency can favor a country’s exports and the sales of its companies. Croatia has companies that export to the US. According to data from HGK, the most exported products from Croatian companies to the US last year were medicines (28.52 percent) and revolvers and pistols (19.53 percent), and the highest total level of bilateral trade exchange of 1.4 billion dollars was reached. But does this mean that these companies or others, for example from the IT sector, really have an opportunity?

– The appreciation of the dollar to a level not seen in the last 20 years has a significant impact on the whole world due to the dollar’s influence as a global currency. The fact that the dollar has reached parity with the euro, as well as soon with our future currency, is of significant importance for Croatian companies. Of course, the current exchange rate of the kuna follows these global events, so our exporters indeed have a better opportunity to market their services and products. The price of our goods and services is now cheaper and thus more attractive to our customers in the US – explained Vladimir Kosanović, Vice President of the HUP ICT Association. —

Vladimir Kosanović, GlobalLogic Hrvatska

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However, he added that one should look at the broader perspective and understand that foreign competitors exporting to the US market are in the same situation as Croatian companies. On the other hand, he emphasizes that American companies, due to weaker sales revenues in international markets, and again due to the strengthened dollar, may revise their investments and demand, especially due to the increasingly frequent announcements of an impending recession.

– Because of all this, we can conclude that our comparative advantage should not primarily be based on exchange rate differences, but primarily on building our fundamental advantages – Kosanović explained.

Advantage for IT companies

Croatian IT companies are a good example of companies for which the appreciation of the dollar helps in future development, but this is primarily because they, according to Kosanović, have developed their portfolio and capabilities over the years and have increasingly entered foreign markets – especially the US market.

– We mentioned fundamentals as the basis for mature thinking about future positions. All those IT companies that have thought this way are managing to turn the situation to their advantage – Kosanović emphasized.

That every situation is an opportunity if one knows and can take advantage of it is believed by HS Produkt, which achieves about 70 percent of its total revenue in the US, and they see this situation, at least in part, as an opportunity for themselves.

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Željko Pavlin, HS Produkt

photo Mladen Volarić

— The fact that the dollar has significantly strengthened against the euro and the fact that imports from Ukraine and Russia have decreased due to Russian aggression against Ukraine can certainly be used to substitute those products with some new products. How many products Croatia has to offer something and how to offer it is another question, and each company must find an answer to that. Croatia should certainly try to be more active in this regard, especially since we import more from the US than we export there – emphasized Željko Pavlin, Director of HS Produkt.

– The situation where the dollar has strengthened is certainly positive for us, although this is offset by a significant increase in energy and raw material prices, which has raised production costs. As far as we are concerned, we can say that we would have significant problems in business if the dollar had not strengthened, but when it comes to sales itself, we do not see that this situation has a significant impact on its increase – Pavlin explained.

Cheaper for American tourists

Following the same logic, Europe should become a desirable destination for travelers from the US. For them, due to the exchange rate differences, it is 20 percent cheaper to come to Europe than it was a year ago. All this opens up an opportunity for European tourism – provided we attract a larger number of American travelers.

Leila Krešić Jurić, Director of the HTZ Office in New York, pointed out that although the strengthening of the dollar can be good news for American consumers, other facts should also be taken into account, such as the economic situation in the US. In addition, Croatia generally attracts wealthier guests from the US, who are less price-sensitive, so when it comes to them, Krešić Jurić emphasizes that a stronger dollar is a good argument for attracting that segment of consumers, but not the main one. As she states, according to data from the eVisitor system, over 462,000 arrivals and more than 1.4 million overnight stays have been recorded from the US market so far this year, which is an increase of 91 percent in arrivals and 70 percent in overnight stays compared to last year. Also, compared to the record year of 2019, 90 percent of the results in overnight stays have been achieved. —

Leila Krešić Jurić

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– However, this is by no means a result of lower prices, as Croatia is not considered a cheap destination among Americans, but rather as a destination that offers the most for the invested money – said Krešić Jurić.

Not everything is ideal

However, that not everything is so simple and that many factors need to be taken into account, even when a certain advantage is achieved, is emphasized by Omca Croatia. In the company, which generates over 20 percent of its total revenue in the US, they believe that there is a certain advantage due to the strengthening of the dollar, but also that it is ‘difficult to say that this is an opportunity for the Croatian industry in general’. Namely, the type of product that a company offers, the competitiveness of local production in the US, and competitiveness against European or often Chinese suppliers play a significant role in this case – because in that case, there is actually no currency advantage.

– For those already present in the US market and especially for those competing with local production or service activities, this can be a small opportunity to increase volume, especially for service activities. On the other hand, we in Europe face the burden of expensive energy, where we are in a less favorable position compared to the US and Chinese suppliers, for whom energy prices have not risen as much – they explained from Omca.

In their case, since they mostly compete with European and Chinese suppliers, they do not have serious currency advantages in this situation to further increase sales volume.

– However, we benefit in cases of some previously fixed dollar prices, where we now generate additional income based on the currency difference – they add from Omca.

Works in theory, but not in practice

However, in general, despite numerous opportunities, many still do not feel enthusiasm regarding the rise of the dollar, as it is simply bad for the global economy, some believe. It increases global inflationary pressures at a time when prices have already risen and fears of recession prevail. —

Goran Šaravanja

photo Lider Media

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A strong dollar represents a problem for everyone, as evidenced by the fact that all central banks in the world, including even the Japanese central bank recently, want to prevent further depreciation of their own currencies. Namely, since all goods in the world are priced in dollars, a strong dollar increases their prices in (weaker) domestic currencies. This is the genesis of the term imported inflation. A strong dollar is a signal that certain disruptions have occurred in global financial markets, which will have consequences for the global economy, which are already visible in the sharp decline in freight prices from China to the US and vice versa – explained Goran Šaravanja, Chief Economist of HGK.

– Theoretically, in isolation, a stronger dollar would increase the price competitiveness of Croatian exports to the US, but in reality, at the moment in which the global economy finds itself, that thesis has no basis – Šaravanja added.

From Pliva Croatia, they emphasized that they believe that the strengthening of the dollar against the euro can contribute to the availability and increase in demand for products from Europe. However, from the company, which generates almost 90 percent of its revenue in foreign markets, with the US being one of the key ones, they also emphasize that it should be noted that at the same time ‘all input materials, whose purchase price is in dollars, also affect the production price – which, due to the continuous pressure on product prices, can also negatively reflect on availability and supply’.

– The potential opportunity for strengthening competitiveness could lie in recognizing the importance of further development and retaining overall production on the territory of the European Union, which would gradually reduce the industry’s and manufacturers’ dependence on the dollar for the procurement of necessary materials – concluded Pliva.