ZAGREB, Dec 19, 2020 – The outgoing year 2020, which was supposed to have been a year of continued economic growth, has turned into a year marked by the COVID 19 pandemic that has tested the strength of public finances.
At the very beginning, 2020 seemed to be similar to the previous five or six years: nine laws regulating tax changes ushered in the fourth round of a tax reform which shouldincrease the post-tax disposable income by HRK 2.4 billion. The ordinary pace of the social and economic activities continued against a background of more and more information about the spread of the coronavirus infection in China.
25 February – 1st registered case of coronavirus infection in Croatia
On 25 February, Croatia’s health authorities reported that they had confirmed the first case of the infection with the novel virus in the country. Immediately after that, citizens rushed to stores to buy large quantities of food and hygienic products. Traffic across borders was also made more difficult due to a high number of passengers going back home and stringent controls at border crossings.
On 12 March, Prime Minister Andrej Plenkovic announced first anti-COVID restrictive measures and reassured the enterprise sector that compensatory measures for businesses were being hammered out. The PM put an emphasis on the retention of jobs.
In mid-March, the Croatian National Bank (HNB) assessed that the earlier forecasts of economic growth would have to be revised, and for the first time in its history the central bank purchased state bonds in the amount of 213 million kuna.
HNB-ECB swap line deal, 1st set of measures to offset lockdown damage to economy
In March, the HNB conducted five interventions on the foreign exchange market to maintain the stability of the exchange rate of the kuna, selling a total of € 2.25 billion. Since then, it has also taken some other measures to mitigate the economic impact of the coronavirus pandemic. The HNB also released HRK 3.8 billion to banks in a structural operation and HRK 1.85 billion in regular ones in that period.
In mid-April, the HNB said it had agreed with the European Central Bank (ECB) to set up a precautionary currency agreement, known as a swap line, that will allow the HNB to borrow up to €2 billion from the ECB in exchange for Croatian kuna. The HNB said in a press release that the precautionary currency swap line would be activated if needed.
This swap line gives the HNB “the space to provide additional euro liquidity to Croatian financial institutions, should they need it, without using its own international reserves.”
The central bank said that it “will notify the ECB of the use of euro liquidity acquired through the currency swap line. The currency swap line will remain in place until 31 December 2020, and can be extended if necessary.”
In the second half of March, public events and gatherings were cancelled, and the government and the parliament adopted the first HRK 30 billion-worth set of compensatory schemes, with the aim of retaining jobs and ensuring funds for wages. The government also financed a minimum net monthly wage of HRK 3,250. The first package, worth HRK 30 billion (€4bn), included 63 measures aimed at those that were already feeling or were yet to feel the consequences of the crisis.
Lockdown and earthquake
Croatia went into a lockdown on 19 March and on 22 March, Zagreb and its environs were hit by an earthquake with a magnitude of 5.5 on the Richter scale which kille a teenage girl in downtown Zagreb and caused serious material damage, estimated at HRK 42 billion, in the city and nearby counties. Currently, 12 billion kuna has been made available for the reconstruction as an initial fund coming from the EU Solidarity Fund plus a US$ 200 million loan provided by the World Bank.
The fund for the post-earthquake reconstruction of Zagreb and two neighbouring counties has been established in the meantime, with renowned manager Damir Vandjelic at its helm. He has said that the total revenues of the construction sector in Croatia in 2019 came to 18 billion kuna, whereas the activities in the reconstruction of quake-damaged buildings would bring 3-4 billion kuna annually.
2nd set of compensatory measures
In April, the government introduced the second rescue package to save jobs and help the economy, including increasing the net minimum wage to HRK 4,000 (€725). In total, the state was expected to pay HRK 5,460 per employee as a furlough measure in April, May and June. The state funded the measure with HRK 8.5 billion.
Secondly, the government partly or fully exempted some businesses from taxes for April, May, and July (12 billion kuna).
The third measure in this package applied to VAT payments, making possible for companies to defer such payments until the billing of invoices issued.
In mid-April, the Croatian parliament unanimously (with 120 votes ‘for’) adopted the government-sponsored law under which the enforcement of monetary assets of natural persons would be suspended for a period of three months, and if necessary for an additional three months.
Throughout May, the epidemic ebbed away, and 23 May was the first day since the outbreak of the infection without any new case of coronavirus.
The favourable circumstances enabled the gradual ease of the restrictions and reopening of non-essential shops and hospitality services.
In late June, Croatia adopted a short-time work scheme as one of the measures to help the businesses affected by the corona crisis.
Tourist season, parliamentary elections
Two summer months, July and August, were marked by the 5 July parliamentary elections, with the Croatian Democratic Union (HDZ) being a relative winner. After that, it and its junior partners formed the new government, the second cabinet led by Prime Minister Andrej Plenkovic.
During the peak summer season, more and more tourists travelled to Croatia. The data for the first nine months of 2020 show that 6.6 million visitors were in Croatia in that period, making 39.7 million overnight stays, or 63.4% fewer travellers and 54% fewer overnight stays compared to January-September 2019.
Coronavirus ‘second wave’
In September, the government unveiled a new rescue package witch also included COVID loans to improve the liquidity of companies in distress due to the corona crisis.
The government adopted budget guidelines for the next three years, which project a 8% GDP drop this year, a 5% growth in 2021, a 3.4% growth in 2022 and a 3.1% growth in 2023.
This year, the budget gap is expected at 6.7% of GDP, while in 2021 it should be reduced to 2.9%, which is within the Maastricht criteria, the government said when unveiling the guidelines in late September.
With the deterioration of the epidemic in November and in the first half of December, the government continued providing assistance through a job-retention scheme and other measures.
However, the dissatisfaction of the worst affected businesses, notably enterprises in the transport and hospitality sectors, was growing. As a result, apart from the HUP, HGK and HOK business associations, one more association — the Voice of Entrepreneurs (“Glas Poduzetnika”) — was set up, bringing together disgruntled businesses.
In mid-December, Prime Minister Andrej Plenkovic said that Croatia was now facing a challenging period in the coronavirus epidemic which has cost Croatia HRK 30 billion so far and that the human casualties and the high number of people infected call for new measures.
The Prime Minister underscored that since the outbreak of the epidemic the government has spent HRK 30 billion through various activities to maintain a normal life and to enable the health system to continue functioning.
ERM II and journey to euro area, OCED membership
2020 would be also remembered for Croatia’s admission to the Exchange Rate Mechanism (ERM II) in July.
The European Central Bank (ECB) and the European Commission announced on 13 July that Croatia had been admitted to ERM II, the key step in the process of adopting the euro, and that the Croatian National Bank (HNB) had established close cooperation with the ECB. Croatia now faces the job of meeting the Maastricht criteria in the next two years.
In mid-December, Plenkovic said that the coronavirus crisis had once again shown the importance of Croatia’s membership bid to join the Organisation for Economic Cooperation and Development (OECD), which continued to be one of the government’s priorities. The Croatian government sent a formal membership request to the OECD in January 2017 and since then it has candidate status. The decision on accepting it as a member has to be unanimously adopted by the OECD Council after which the accession process begins.
EU’s Multiannual Financial Framework, €22 bn to be made availabe to Croatia
The corona crisis has also tested the institutions of the European Union and its response to the new circumstances. The most important event in this context is the July agreement of the European Council on the new Multiannual Financial Framework (MFF), including a €750 billion recovery fund.
Of the €1.8 trillion long-term EU budget, approved in mid-December by the European Parliament, Croatia should receive a total of €22 billion from those sources.
The Next Generation EU plan was adopted in synergy with the MFF 2021-2027, and it should repair the economic and social damage caused by the coronavirus pandemic, kick-start European recovery and protect and create jobs. Slightly over €12.6 billion from the new MFF and €10.6 billion from the Next Generation EU instrument will be available to Croatia.
Credit rating agencies’ assessment
In mid-November, the Moody’s credit rating agency upgraded Croatia’s rating to Ba1 from Ba2 and changed the outlook to stable from positive, citing enhanced institutional capacity and policymaking as the country enters a critical phase of euro area accession and reduced exposure to foreign-currency debt risk.
Two other major credit rating agencies, Standard & Poor’s and Fitch, keep Croatia’s credit rating at investment grade. S&P affirmed its rating of ‘BBB-/A-3’ with a stable outlook in September.
On 5 December, Fitch Ratings affirmed Croatia’s long-term foreign-currency issuer default rating (IDR) at BBB-, assessing the outlook as stable and noting that it expects gradual recovery from the coronavirus crisis with the help of EU funds as well as that limited capacity to absorb EU money poses a problem.
(€1 = HRK 7.5)
