During 2021, the economy of the Republic of Croatia began to recover from the crisis caused by COVID-19. We expected that economic growth after the pandemic-induced crisis would be strong and that it would reach normal trends by 2023, but unfortunately, positive developments were halted by the war in Ukraine.
As during the corona crisis, HBOR promptly responded to the Ukrainian crisis by introducing new measures, emphasizing survival and maintaining liquidity. We enabled favorable financing of working capital (annual interest rate of 0.5 percent) for entrepreneurs who found themselves in difficulties caused, directly or indirectly, by the Russian aggression against Ukraine. The second measure relates to guarantees (portfolio and individual insurance policies) for exporters and a subsidy for the guarantee premium. These measures will be implemented until the end of this year, but it is expected that the European Commission will extend the deadline for the Temporary Crisis Framework. If that happens, HBOR will extend the implementation period of the mentioned measures.
During this year, we also started implementing financial instruments under the National Recovery and Resilience Plan. Currently, under the NPOO, we are directly financing small and medium-sized enterprises for projects worth more than one hundred thousand euros. This is our new lending program, and under existing investment loan programs, we have introduced models for subsidizing interest rates for small and medium-sized enterprises, as well as large companies in growth and development phases, and for the public sector.
Growth in demand for working capital
All new measures and activities have also resulted in a 19 percent increase in HBOR’s lending activity compared to 2021. Here, I refer to the first ten months of this year, but it can be expected that such a trend will be maintained until the end of the year. We also note an increase in export insurance transactions, for which HBOR secured 2.6 billion kuna in export turnover last year, and in the first ten months of 2022, it secured 2.4 billion in export turnover, making 2022 potentially a record year for export insurance transactions since 1998, when HBOR began conducting these operations.
Such trends are characteristic not only for HBOR but also for other development banks, which, especially in times of crisis when risk aversion increases, adapt their operations, relax financing conditions, take on greater risks, and thereby reduce market disruptions characteristic of crisis times. In crisis circumstances, the share of financing for working capital increases; thus, in the pre-crisis year of 2019, HBOR recorded only 19 percent of approved placements intended for working capital, while from 2020 to today, this share has increased to about 50 percent, which is the clearest indicator of slowing economic activity. In the next year, we can expect that demand for working capital will lead over investment loans. It is known that crises halt investments, as the majority of entrepreneurial efforts are directed towards maintaining existing production and employment, and very few exceptionally brave individuals will embark on new projects during such times. What gives us optimism is that there are indeed such entrepreneurs and that projects from certain sectors are moving forward very courageously.
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However, the circumstances are such that they actually require investment investments. We are witnessing an energy crisis caused by the war in Ukraine, which has a dual effect: on one hand, the rising cost of energy, and on the other hand, supply constraints. The only response to this situation can be energy transition, which, among other things, requires investment investments and strong support from the financial sector. I believe that the involvement of commercial banks in the financial instrument of interest rate subsidies from NPOO funds will contribute to investment investments in energy transition. We are currently in the process of finalizing agreements with commercial banks and leasing-companies that will be involved in the implementation of financial instruments, and we expect that implementation will begin in January next year.
Development of the venture capital market
A problem that entrepreneurs often face is insufficient insurance instruments for further borrowing, but starting in 2023, HBOR plans to issue guarantees for investment loans for the first time. This is a new guarantee product based on a payment of 600 million kuna approved to HBOR from the National Recovery and Resilience Plan. The guarantees will cover up to 80 percent of the principal of loans that banks approve for large entrepreneurs in Croatia. The guarantees are intended for all types of entrepreneurs, but more favorable conditions will be achieved for investments that are eligible according to the NPOO criteria. The total budget for guarantees amounts to three billion kuna, and in addition to the guarantees, HBOR will also provide entrepreneurs with a subsidy of up to one hundred percent of the guarantee fee.
As part of the National Recovery and Resilience Program, among other things, the implementation of the financial instrument Investment in equity and quasi-equity financing instruments is planned, aimed at encouraging the development of the venture capital market in the Republic of Croatia. Such types of investments are a key prerequisite for diversifying sources of financing, strengthening equity in the financing sources of domestic economic entities, and enhancing the resilience of the financial and economic system to future market disruptions. We expect to sign agreements with relevant ministries by the end of this year, after which we will proceed to conclude a Cooperation Agreement with the EIF. The EIF will announce a competition for a management company, and in 2023, activities aimed at establishing a fund are expected to commence.
In conclusion, I want to emphasize that HBOR will continue to be a financial support for Croatian entrepreneurs as it has been so far. This year, we are marking the thirtieth year of operation. Over these thirty years, HBOR has evolved from a bank for the reconstruction of a war-torn economy to a modern development and export bank and export credit agency. We have successfully operated in both crisis and stable times. We will continue to strive to be agile in responding to the negative effects that the times we live in pose to most economic entities in the form of the most challenging business challenges.
