Croatia Among the Largest Global Debtors, Slovenia a Net Creditor

According to its net foreign position, Croatia ranks among the largest global debtors, while Slovenia is increasingly positioning itself as a net creditor, warns macroeconomist Ivan Odrčić.

The net foreign position indicates how much a country owes the world and how much assets it owns abroad, and Croatia owes the world as much as 27 percent of its GDP, or about 20 billion euros.

In comparison, Greece is in an even worse position, with external debt of 132 percent of GDP. However, Odrčić emphasizes that Croatia has no reason for comfort. For years, our country, he says, has spent more than it earned, financed itself through borrowing and selling assets, which has led to structural deficits and dependence on foreign capital.

Interestingly, in times of crisis, everyone realizes that debts must be repaid, and Slovenia stands out as a positive example in this context. With a net position of +8 percent of GDP, it clearly ranks among international creditors alongside Germany, which is already at a level of +81 percent of GDP.

– The key direction for us must be to increase the export of higher added value. According to UNCTAD, Slovenia’s merchandise export per capita amounted to over 37 thousand euros, placing it above Norway and Qatar and among the ten strongest exporters in the world by this criterion. Croatia, on the other hand, is at a level six times lower, which clearly shows the room for improvement. In addition to exports, it is crucial to attract greenfield investments that bring new production and employment, and we also have regular repatriation of profits from foreign companies, which amounts to hundreds of millions of euros annually and further pressures our external position – claims Odrčić.

On the other hand, domestic pension funds and institutional investors manage over 20 billion euros in assets and could play a key role in reducing Croatia’s dependence on foreign capital. However, Odrčić adds, most of that capital is currently tied to government bonds or invested abroad.

By directing part of that capital into the domestic real sector, innovative companies, infrastructure, or strategic projects such as renewable energy sources, where investments worth about 2.6 billion euros are currently frozen, these funds could become drivers of national capital accumulation. However, this also requires the development of the domestic capital market, which is still not sufficiently developed or liquid.

Tourism Our Everyday

Of course, a significant role (we dare say an excessive one) is played by tourism, considering that its direct share in the Croatian economy is just above 12 percent, but this is not enough to support the net export position in the long term.

– Our tourism generates about 15 billion euros annually, but as much as 90 percent of that revenue is generated in just four months. Additionally, it is a sector that carries relatively low added value, is highly seasonal, and very sensitive to external shocks, as seen during the pandemic. Therefore, it is essential to diversify sources of income from abroad and develop other export-oriented sectors such as pharmaceuticals, IT, food industry, and defense. For example, according to Eurostat, the share of high-tech products in Croatian exports is about seven percent, while the EU27 average is just above 17 percent – reveals Odrčić.

For Croatia to become a net creditor, deep changes are needed in the way capital is created, retained, and invested, Odrčić emphasizes. The key to everything, he claims, is education, especially in STEM fields, because without a technologically skilled workforce, there can be no long-term sustainable economic growth.

Currently, about 1.2 percent of GDP is invested in tertiary education, while Hungary, for example, allocates almost twice as much. Additionally, Croatia is in dire need of reforming its tax system, which is currently predominantly focused on taxing labor, while assets are hardly taxed at all.

– A policy that encourages the reinvestment of profits and the building of long-term value is needed. The digitalization of public administration is also lagging. Croatia has fallen below the EU average in the availability of online services to businesses, which raises business costs. Building assets means having more claims against the world than obligations, and that means strengthening exports, investments of our companies abroad, and the development of domestic financial and investment institutions – concludes Odrčić.