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UPDATE 2-Croatia to return to growth in 2015 but only just -central bank
December 17, 2014 / 10:52 AM / 3 years ago

UPDATE 2-Croatia to return to growth in 2015 but only just -central bank

(Adds details on monetary policy, banking system)

By Igor Ilic

ZAGREB, Dec 17 (Reuters) - Croatia’s economy will grow next year for the first time since 2008, the central bank said on Wednesday, but its forecast for a 0.2 percent expansion is even lower than the government‘s, and bad loans in the economy are still rising.

“For the first time since 2008, household consumption could provide a mild positive contribution to GDP, mostly because of salary tax changes,” central bank Governor Boris Vujcic told reporters.

From January the government will raise the tax-free portion of salaries, hoping it will help revive private spending, which has shrunk since the crisis started in 2009. Croatia joined the European Union last year.

The government expects 0.5 percent growth in 2015, but many analysts warn of downside risks, pointing to continuing fiscal consolidation and an unattractive investment climate, soured by red tape, a high tax burden and an inefficient judiciary.

Vujcic said investments, “which should be the driver of growth”, would rise only 0.3 percent next year.

“Croatia must implement reforms to improve the business climate and change its negative image,” he said.

The central bank forecast inflation would average 0.2 percent in 2015, compared with -0.2 percent expected this year.

Croatia’s economy has contracted by about 13 percent in the last six years, pushing unemployment up to 19 percent and forcing the government to take on more debt every year to finance the budget gap.

Zagreb’s efforts to cut its budget deficit, seen at around 5 percent of gross domestic product this year, and public debt, which has surpassed 80 percent of GDP, are now monitored by the European Union.

Vujcic said the central bank would continue its expansive monetary policy while maintaining a stable exchange rate for the kuna, which it keeps in a tightly managed float regime against the euro.

“If necessary, we can also further lower the mandatory reserve requirement rate to boost liquidity. Our goal is to gradually reduce the rate in the future,” Vujcic said.

Currently, Croatia’s mandatory reserve rate is 12 percent.

The central bank said the level of non-performing loans was still rising, reaching 17.2 percent at the end of September compared with 15.7 percent at the end of 2013. The bad loan ratio in the corporate sector is particularly high at 31 percent.

“Despite that and a downward trend in the interest rates level we expect the banking system to post higher profits than in 2013 as they have improved their business efficiency,” said vice-governor Damir Odak. ($1 = 6.1578 kuna) (Reporting by Igor Ilic; Writing by Zoran Radosavljevic; Editing by Hugh Lawson)

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