At the 21st scientific and professional conference "Croatian Money Market" opened today in Opatija, the Croatian National Bank Governor, Boris Vujčić, gave a speech entitled "Monetary policy in 2018-2019 and challenges for the labour market in conditions of demographic changes and labour automation".
Talking about monetary policy in 2018 and 2019, the Governor noted that favourable developments in the international environment were expected to continue, while real GDP in Croatia might steadily grow coupled with a recovery in the labour market. Inflation is expected to go up by 1.3% in 2018 and by another 1.4% in 2019. In addition, the surplus in the current and capital account of the balance of payments is expected to remain significant despite downward pressures, so that the falling trend in external debt should hold steady. The fiscal balance is expected to be positive, while the general government debt-to-GDP ratio should continue to decrease. Public debt is expected to drop to 70% of GDP by 2019, noted the Governor. Foreign currency purchases provide a boost to surplus liquidity and international reserves, while the lending recovery continues and is coupled with a mild tightening of standards for household loans.
Demographic changes – consequences for the labour market
The Croatian population is on a steady downward path; according to demographic projections, it will fall to 3.7 million by 2050 and to only 3.4 million by 2017, with an increasing share of people over 65. At the same time, adverse effects will be felt in the labour market, with a downturn in the share of the working age population and an upturn in the share of dependent population in the forthcoming period. Also, the decline in population is further exacerbated by strong emigration, with pressures emerging in the labour market due to the shortage of labour. In view of the fact that Croatia has one of the smallest participation rates in the labour market, which is particularly pronounced because of the low activity of Croatian Homeland War veterans and tourism, the fall in population might be somewhat mitigated by higher participation of inactive population in the labour market. Alternative scenarios would imply a lower level of economic activity due to labour shortage, a more significant entry of foreign workers, and labour automation and introduction of new technologies – noted the Governor.
The strong emigration flow is not unexpected; emigration was given a boost following the 2008 financial crisis – but, as in other new EU Member States, the trend gained more momentum after the EU entry. The difference in wages is large and people go where wages are higher – once this difference diminishes, emigration will decrease. Bulgaria, Romania and Croatia have the highest percentage of emigration; Croatia has recorded a fast increase in jobs, but they are filling slowly. A positive development is that, due to the Government decision, the number of work permits for foreigners is to be tripled in 2018 as 30 thousand work permits are to be issued. It would probably be very good if the market were to open even more. At the same time, wages will grow, pushing unit labour costs up and competitiveness down; one of the two major operating problems mentioned by employers is the lack of qualified labour, which is why the issuance of labour permits for foreigners is welcome. Any stronger entry of foreign workers may trigger political resistance – one should be ready for such a scenario, which, in Croatia as in many other European countries, may have both political and economic consequences.
How to achieve growth in conditions of insufficient labour supply in the domestic market? It is necessary to raise population activity; the working age population in Croatia has the second lowest employment rate – only 57% of the economically active population is employed. Greece alone has a lower percentage, while it stands at 72% in the Czech Republic and Estonia.
Automation – robotisation of jobs
We are entering the third era of automation – the first was in the 19th century, and was marked by freedom from hard manual labour, the second was in the 20th century, and was marked by automation of repetitive, mechanical work followed by informatisation of administration. We are now in the third stage, where machines are to take over smart jobs and compete with human labour in particular thinking jobs. Machines are already better than people at some jobs.
In the first stage, particularly fast automation is to be seen in jobs related to transport, construction, sale, translation, etc. New technologies also create new professions; however, they are not labour intensive – only 10% of people are currently employed in jobs that did not exist in 1914. The speed of introducing automation depends on the time needed for a technology to mature – once it does, it penetrates fast. Research shows that automation has made a strong impact on the economy as entrepreneurs are already looking for machine solutions when they are unable to find adequate workers. "We are currently at a mature stage of one technological level, the automation process is unstoppable, but it remains to be seen how will regulators respond", noted Governor Vujčić. Productivity growth is much stronger in companies that use technological options as much as possible.
Owing to automation and the impact of technology on the labour market, the sharpest fall seen in recent decades has been recorded in middle class professions; a decline in employment in middle pay levels has been seen in the EU as well. There are many potential effects of technological development on the labour market: an increase in occasional jobs (gig economy), which is already present, impact on all sectors (blue- and white-collar workers), a decline in global value chains due to the return of production, a drop in wages in advanced economies, development of skills to cooperate with machines in all professions, a decrease in labour rights due to the weaker negotiating power of unions, remote work and work in virtual teams, education system adjustment, new qualifications and competencies, impact on government spending (re-training, retirement). Among possible responses are the introduction of the compulsory "human quota" in some sectors, levying taxes on automated work (taxation of robots – Bill Gates) or labelling products as "made by humans". Nevertheless, the impact of computer technology on productivity is not statistically quantifiable due to the gradual introduction of new technologies that will not be broadly used as long as human labour is cheaper and the fact that the transition will take several decades.
Technological development is expected to bring major changes to the labour market and the society should be ready for them and offer solutions in the fields of education, tax policy, income distribution, pensions, etc. Technological development can also significantly mitigate future problems arising from demographic developments in Croatia, which requires active involvement, concluded the Governor.
Banking system: why is lending at a standstill in conditions of surplus liquidity?
Also organised at the 21st scientific and professional conference "Croatian Money Market" was a panel entitled "Banking system: why is lending at a standstill in conditions of surplus liquidity?" The roundtable was moderated by the Croatian National Bank Vicegovernor, Damir Odak, who also gave the opening speech. Surplus kuna liquidity exceeding the regulatory requirements stood at HRK 26.2 billion or 7.5% of GDP at end-January 2018, while foreign currency liquidity surplus was only slightly lower, at HRK 18 billion in late 2017. In early 2018, the liquidity coverage ratio (LCR) for the Croatian banking system averaged 171.1%, while the regulatory requirement is 100%. Notwithstanding abundant liquidity, loans at system level did not grow in 2017; the overall balance recorded medium term stagnation, while loans to households and non-financial corporations decreased. However, the data on the basis of transactions (collection/disbursement) show that household and corporate loans grew faster than GDP in 2017. At the same time, the sale of portfolio amounted to 3% of the total portfolio, and the result of apparent stagnation is sale that offsets growth, noted Vicegovernor Odak at the beginning of his speech.
Housing loans decreased by 20% from 2011 to 2017, with the largest share of this decrease (64%) being due to the conversion of CHF loans in 2016. On the other hand, as other loans to households did not fall in the same period, the share of housing loans in total loans to households dropped from 49% to 44%. Furthermore, the quality of household loans has been improving rapidly since 2015, mainly due to the reclassification of placements, which was largely triggered by the 2016 loan conversion. As a result, the cost of credit risk in the last two years has been at a "peacetime" level of 0.4% a year.
Vicegovernor Odak emphasised that, in addition to housing loans, non-financial corporate loans also decreased from 2011 to 2017, by HRK 30 billion (27%), with HRK 22 billion of non-financial corporate loans, accounting for 73% of the decrease, being sold outside the banking system in that period. While the share of non-performing corporate loans continues to be a rather high 22%, it is much lower than the previous 35%. In contrast to household loans, the main reason for the decrease was sale.
Although the economy emerged from recession, the costs of credit risk in relation to corporations did not decrease; in 2017, this was entirely due to the situation in Agrokor. Nevertheless, the costs of credit risks are expected to fall sharply in 2018 and subsequent years.
In conclusion of his speech, the Vicegovernor noted that while banks do have sufficient capital for a large increase in loans and the response of interest rates points to market competition for prime borrowers, the question is whether this response should be stronger? The average annual cost of credit risk (value adustments) for hosehold loans was 0.4% of the portfolio from 2015 to 2017, while the average interest rate on such loans was 6.7% in 2017. This implies that for an average household loan banks would earn 6.3% more than on surplus liquidity. When this is projected to the surplus kuna liquidity, it turns out that HRK 1.6 billion could be earned a year, so the question is why banks fail to take at least some of that income.
Various reasons for loan stagnation from the standpoint of banks were provided by Balazs Bekeffy, Chairman of the Management Board of OTP banka Hrvatska d.d., Borislav Centner, Member of the Management Board of Erste&Steiermarkische Bank d.d., Ivan Gerovac, Member of the Management Board of Privredna banka Zagreb d.d , Tomislav Vuić, Chairman of the Management Board of Hrvatska poštanska banka d.d., Mario Žižek, Chairman of the Management Board of Addiko Bank d.d., and Ivan Žižić, Member of the management Board of Raiffaisenbank Austria d.d. Banking sector representatives pointed to insufficient demand for loans due to bad experience of debtors during the recession and the risk aversion of banks spurred by the poor institutional environment, which is characterised by long collection periods in bankruptcy and enforcement proceedings as well as low amounts of such collections.