At its session today, the CNB Council examined recent economic and monetary developments and the current financial stability situation. The items on the agenda included the report on the banking system condition for the first quarter of 2020 and the report on the operation of the Croatian Monetary Institute in 2019, which was accepted. The CNB Council also adopted the CNB's Annual Report for 2019 and enacted several decisions on matters falling within its competence.
The new coronavirus pandemic has significantly worsened the economic outlook. Croatia was hit by the pandemic crisis a bit later than large European economies, so that real GDP declined relatively moderately in the beginning of the year. The decline was mostly driven by poor performance in March. Monthly data point to a pronounced economic downturn in April and May. Despite the start of the recovery of domestic demand, following the easing of strict epidemiological measures, the expected decrease in foreign demand, particularly in tourism revenues, will slow down and prolong the recovery period, so that Croatia's real GDP at the level of the whole of 2020 might decline by 9.7%. In 2021, the annual growth of economic activity is expected to reach 6.2%, however, economic activity will not be able to reach the pre-crisis levels. Although the number of employed persons is expected to drop noticeably, the labour market reaction to the decline in economic activity has been mitigated by the economic policy measures.
The projected developments of the GDP and its components are exposed to an extremely high degree of uncertainty, which is primarily related to the development of the epidemiological situation and the success with curbing the spread of the virus and, at the same time, a gradual reactivation of economic activity. In this context, the pessimistic scenario of a worsening epidemiological situation at the end of the year was also discussed, which would result in a slightly stronger fall of real GDP in 2020.
The decrease in goods exports due to lower foreign demand and an even larger decline in tourism revenues will have an unfavourable effect on the current and capital account balance, which should nevertheless remain positive because of the decrease in imports and a larger absorption of EU funds. However, the trend of a decrease in the relative indicator of gross external debt in 2020 might be temporarily interrupted due to the decline in nominal GDP, and the pre-crisis upward trend is expected to continue in 2021.
Inflationary pressures have been additionally subdued by the worsening economic outlook, mostly because of the impact on the decrease in oil prices. In Croatia, the average annual consumer price inflation rate is expected to slow down to –0.1% in 2020, while in 2021 it would accelerate to 0.7%.
Over the rest of the projection horizon, the central bank will continue to pursue an expansionary monetary policy, while maintaining the stability of the exchange rate of the kuna against the euro, and further support the sufficient foreign currency and kuna liquidity of the financial system. Household lending activity is expected to slow down, while corporate financing is expected to intensify, which might also be attributed to the favourable effect of the measures aimed at offsetting the negative consequences of the pandemic. Taking into consideration the expected reduction of budget revenues and the growth of budget expenditures, according to the revised budget for 2020, a general government budget deficit of 6.8% of GDP could be generated in the current year, while a notably lower deficit (2.4% of GDP) is forecasted for 2021. After a sharp increase in 2020, the general government debt-to-GDP ratio might follow a downward trend again in 2021.
In addition to a strong and sudden contraction of the economy and a considerable worsening of the economic environment due to the uncertainty regarding the strength and the duration of the pandemic, systemic risks for the stability of the financial system have also increased significantly. The coordinated activities of the Government, the CNB and HANFA stabilised the financial markets and the regulatory framework was adjusted to enable a favourable treatment of the deferral of payments of credit liabilities in conditions of a temporary decline in revenues of non-financial corporations and households. Most of the measures approved by the financial institutions until June refer to the deferral of repayments, while relatively a small number of applications for additional liquidity are approved at a slower pace.
Credit institutions have faced the deterioration of economic activity with high levels of capital and liquidity, which strengthens their resilience to economic disruptions. However, it is estimated that their profitability will decrease considerably due to higher credit risk, which has been partially deferred by the negotiated moratoriums. Furthermore, uncertainty in the real estate market has also increased, which will reflect in the appraisal and marketability of the instruments of collateral in banks' balance sheets. The undertaken fiscal measures have a favourable impact on credit risk. However, they strongly increase the government's needs for financing, which will solidify the already high interconnection between the government and the financial sector in Croatia.
The consequences of the crisis for the economy and financial stability will largely depend on the further development of the epidemiological situation and the duration of the related extraordinary economic and social conditions, on both domestic and global levels. Favourable circumstances include a prolonged period in which households and corporations reduced their vulnerability, the banking system’s reliance on the stable domestic sources of financing and the access to EU funds and other mechanisms that will support the recovery of economic activity.
At today's session, the CNB Council approved the appointment of Martin Hornig and Zdenko Matak as Members of the Management Board of Erste&Steiermärkische Bank d.d.; Siniša Špoljarec as Chairman of the Management Board of Imex banka d.d., and the appointment of Dušanka Mišković as Member of the Management Board of the same bank. Also at this session, the CNB Council approved the proposal of OTP banka d.d. to appoint Balasz Pal Bekeffy as Chairman of the Management Board as well as the proposal of Slatinska banka d.d. to appoint Andrej Kopilaš as Chairman of the Management Board and Marin Prskalo and Oliver Klesinger as Members of the Management Board of that bank.
Finally, the CNB Council adopted a decision on the issuance and sale of commemorative silver coins to mark historically and politically important events for the Republic of Croatia: the "25th Anniversary of the Military and Police Operation Flash, 1995 – 2020" and the "25th Anniversary of the Military and Police Operation Storm, 1995 – 2020", in the total quantity not exceeding 10,000 pieces per issue. The commemorative silver coins "Flash" and "Storm" will be released for sale on 4 August. In addition to the issuance of individual coins, the issuance of a numismatic set of the two issues is also planned.