Croatian National Bank: Sustainability of Debt is the Biggest Macroeconomic Risk

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Director of the Croatian National Bank Boris Vujčić addresses delegates on the country’s major macro-economic risk.

An annual conference organized by the Zagreb Stock Exchange and Croatian pension funds has begun in Rovinj with more than 400 participants from the financial industry. The keynote speech was given by governor of the Croatian National Bank Boris Vujčić, reports Vecernji List on October 22, 2015.

“We expect the economic growth of 1.2 percent in this year and 1.5 percent in the next year. We also expect stronger growth of private consumption compared to the original forecasts, while the consumer confidence has returned to pre-crisis period. We are also witnessing favourable trends in the labour market and in exports, while the first signs of a reversal of negative trends are visible in the field of capital investments as well”, Vujčić said.

He noted that the main reason for such positive results are the expansive monetary policies which have created excess liquidity, which currently stands at 8.5 billion kuna. The problem is the perception of high risk for the country, which is the reason why credit risk insurance for the last two years has been the highest among all the comparable countries of Central and Eastern Europe. Vujčić noted that, if the economic growth does not continue and if fiscal sustainability is not ensured, that could adversely affect the credit rating in the medium term.

“The biggest macroeconomic risk is the sustainability of public debt. In addition to the high primary deficit, in recent years the public debt has been affected by the so-called snowball effect, which arises from the difference between the interest rate on public debt and the rate of economic growth. To cancel out the negative effect in the next two years, Croatia should have a cumulative primary surplus of about three percent of GDP, or about 10 billion kuna, but according to current projections in this period we could actually achieve cumulative primary deficit of about three billion kuna, which points to the existence of fiscal imbalance”, Vujčić explained.

He also said that the economic growth depends on the acceleration of growth in investments and productivity, and that Croatia’s long-term growth potential is worse than before the crisis. Therefore, he said, populism is the easiest way for politicians, but that will not allow for higher productivity which is essential for growth. And as the European Commission reported, Croatia, Slovenia and Lithuania have the worst long-term growth prospects in the EU.


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