UK – CROATIATrade & Investment Forum 2013

London, October 24th

Boris Vujčiće-mail: boris.vujcic@hnb.hr

Domestic demand remains a drag on growth while exports are recovering

* 2013, 2014 values - CNB estimate/projection

Data from 2010 are provisional

Source: CBS.

Net domestic demand continues to weight down on growth...

... while exports are steadily recovering

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

2006 2007 2008 2009 2010 2011 2012 2013

90

100

110

120

130

140

150

Exports (excluding ships and oil)In

dex,

200

5=10

0

Source: CBS

-8

-6

-4

-2

0

2

4

6

2006 2007 2008 2009 2010 2011 2012 2013e 2014p

%

Net domestic demand Foreign demand GDP

...is domestic demand at the turning point?

III. 2

008.

IX. 2

008.

III. 2

009.

IX.2

009.

III. 2

010.

IX. 2

010.

III. 2

011.

IX. 2

011.

III. 2

012.

IX. 2

012.

III. 2

013.

80,000

90,000

100,000

110,000

120,000

130,000

140,000

150,000

160,000

170,000

180,000

mil. H

RK

Source: CNB

80

85

90

95

100

105

110

115

120

2006 2007 2008 2009 2010 2011 2012 2013-8

-6

-4

-2

0

2

4

%

QoQ Retail Trade CCI, 3m moving average

Consumer confidence and retail trade Net financial wealth of households

Source: CBS, Ipsos Puls

Current Account Has Improved on Lower Import Demand

Sharp improvement in the trade balance driven by stable exports and falling imports

Exports projected to rise gradually, with further upside potential from structural reforms aimed at enhancing cost competitiveness

High import substitution potential in energy and agriculture

FDI is expected to grow following accession, whilst deleveraging will further improve the net external position

Current Account Balance (as % of GDP))

Source: CBS

-10%

-8%

-6%

-4%

-2%

0%

2%

2005 2006 2007 2008 2009 2010 2011 2012 2013 Q2*

Merchandise Trade (EUR bn)

Source: CNBBreakdown of imports (H1 2013): Other Agriculture Energy

0

5

10

15

20

25

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 H1 2013Exports Imports Trade deficit

Exchange rate performance …(average monthly

exchange rate)

Source: CNB.

Euroization

Stability Against the Euro: Long-Term ER Policy of the Central Bank

Source: CNB.

60

65

70

75

80

85

90

1/0

4

7/0

4

1/0

5

7/0

5

1/0

6

7/0

6

1/0

7

7/0

7

1/0

8

7/0

8

1/0

9

7/0

9

1/1

0

7/1

0

1/1

1

7/1

1

1/1

2

7/1

2

1/1

3

7/1

3

%

Share of f/c deposits in total time and saving deposits

Including kuna indexed deposits

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

1/0

4

7/0

4

1/0

5

7/0

5

1/0

6

7/0

6

1/0

7

7/0

7

1/0

8

7/0

8

1/0

9

7/0

9

1/1

0

7/1

0

1/1

1

7/1

1

1/1

2

7/1

2

1/1

3

7/1

3

USD/HRK EUR/HRK

Reserves, Broad and Base Money (EUR bn)

Money Supply Fully Covered by FX Reserves

Source: CNB.

0

2

4

6

8

10

12

142

00

0

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

International Reserves Money Supply Base Money

FX reserves remain sufficient to cover base money (146%) and money supply (151%) as at August 2013, underpinning the strong commitment towards the stable exchange rate policy

At the June of 2013, FX reserves were sufficient to cover around 8 months of imports goods and services and 82% of ST debt by remaining maturity

Monetary Policy Easing Resulting in Structural Liquidity Surplus

7

Favorable Kuna liquidity was reflected in low levels on overnight money market interest rates

0

1

2

3

4

5

6

7

8

9

0

2

4

6

8

10

12

14

16

18

20

1/0

6

7/0

6

1/0

7

7/0

7

1/0

8

7/0

8

1/0

9

7/0

9

1/1

0

7/1

0

1/1

1

7/1

1

1/1

2

7/1

2

1/1

3

7/1

3

bill

ion

HR

K

%

Liquidity surplus (including overnight deposits with the CNB) - right

Overnight interbank interest rate - left

1-year T-bills (HRK) - left

0

10

20

30

40

50

60

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

%

Reserve requirementMarginal reserve requirementMinimum foreign currency liquidity

Reserve Requirements and Minimum f/c Liquidity

Liquidity Surplus and Overnight Interest Rates

Source: CNB Source: CNB

Corporate Lending Recovering, while Household Sector Continuous Deleveraging

8

* excluding shipyards' credit liabilities which Ministry of Finance took over in 2012 and a transaction of one bank which, in an effort to reduce the amount of partly recoverable and fully irrecoverable placements, transferred a total of HRK 5.6bn in its claims on companies to a company indirectly owned by a parent bank.

Source: CNB Source: CNB

10

12

14

16

18

20

22

-5

0

5

10

15

20

25

30

12/0

3

6/04

12/0

4

6/05

12/0

5

6/06

12/0

6

6/07

12/0

7

6/08

12/0

8

6/09

12/0

9

6/10

12/1

0

6/11

12/1

1

6/12

12/1

2

6/13

%%

Share of placements to the central government in total placements - rightYoY rate of change in placements to households - leftYoY rate of change in placements to enterprises* - left

0

2

4

6

8

10

12/0

3

6/04

12/0

4

6/05

12/0

5

6/06

12/0

6

6/07

12/0

7

6/08

12/0

8

6/09

12/0

9

6/10

12/1

0

6/11

12/1

1

6/12

12/1

2

6/13

%

Interest rates on foreign currency deposits

Interest rates on credits to enterprises

CPI Inflation Has Averaged 2.8% Over the Last Decade

9

The “quasi currency board” monetary policy regime anchors inflation expectations

Inflation decelerated in 2013 against a background of weak domestic demand, a drop in imported inflation and a favourable base effect

Stable outlook with inflation of 1.8% and 2.0% forecast for the next two years

CPI Inflation Components (EOP Year-on-Year Change, %)

HICP Inflation: Peer Comparison (%)

Source: CBS

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

2008 2009 2010 2011 2012 2013

Services Industrial non-food without energy

Precessed food Unprocessed food

Energy Consumer price index

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Croatia Czech Rep. Euro Area Hungary Poland

Source: Eurostat

Structural reforms/improving business climate are the key to restart growth in a sustainable

way!

Law on promotion of investments

– From the start of 2013, the Law enables up to 10 years of 0% corporate tax depending on the employment, plus one-off subsidies for newly employed ranging from 3000-9000 euros

Law on strategic investments

– Investments over 30 mil euros, streamlines procedures needed for the investment, reduces role of local authorities, which were the main obstacle

Ongoing restructuring and privatization process of shipyards

Restructuring of public companies (Croatian Railways, Croatian Motorways and Rijeka Zagreb Motorway, Croatian Airlines...)

– Consolidation of the railway companies, privatization of cargo business, outsourcing of non-core businesses, layoff 1.500 workers

– Consolidation of maintenance of Croatian Motorways and Rijeka Zagreb Motorway, layoff 600 workers, reduction of costs

Privatizations (insurance company, postal bank, part of the railways, state owned real estate/hotels at the coast, energy production...)

Labor market reforms increasing flexibility

Regulation of regular contracts, including additional provision for collective dismissals

*Higher index indicates more rigid labor market

Source: OECD 2008, 2013

*Higher index indicates more rigid labor market

Source: OECD 2008, 2013

Regulation of temporary contracts

0.0 1.0 2.0 3.0 4.0

Germany

Italy

Slovenia

Czech R.

Croatia

Austria

Poland

Slovakia

Estonia

HungaryEPRC 2008

EPRC 2013

0.0 1.0 2.0 3.0 4.0

Estonia

Italy

Slovania

Slovakia

Poland

Austria

Czech R.

Hungary

Croatia

GermanyEPT 2008

EPT 2013

Croatian financial system is bank-centered

Sources: CNB; HANFA

16%

9%

75%

Insurance companies and pension funds

Other financial intermediaries

Credit institutions

98%

0%2%

Banks

Savings banks

Housing savings banks

59%3%

38%

Mandatory pendion funds

Voluntary pension funds

Insurance companies

Non-performing loans ratio still growing (albeit at slower pace)

However, relatively strong operating income and high capital adequacy provided sufficient buffer after the crisis

Significant systemic liquidity

The aggregate capital adequacy ratio of 20.8% in 2Q13 is well above the regulatory requirement of 12%, providing a considerable capital buffer despite deterioration in asset quality after 2008

The banking system remained profitable during the financial crisis

NPLs Have Risen, But Capital Adequacy very high

13

Non Performing Loans (As % of Total Loans) Well-Capitalised Banking Sector

10.2%

7.4%

5.2% 4.9%

7.8%

11.2%12.4%

13.8%

15,1%

0%

2%

4%

6%

8%

10%

12%

14%

16%

2002 2004 2006 2008 2009 2010 2011 2012 2Q/13

15.3%14.6% 14.0%

16.4%15.2%

16.4%

.18,8%19.6%

20.5% 20.8%

0%

5%

10%

15%

20%

25%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2Q/13

Capital adequacy ratioSource: CNB Source: CNB

CAR high and leverage low

14

Source: IMF, FSI, (bank assets) weighted averagesNote: CEE countries: Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovak Republic, Slovenia

Bank capital to un’weighted assetsBank (regulatory) capital adequacy ratio (CAR)

10

12

14

16

18

20

22

2008 2009 2010 2011 2012

%

Croatia CEE Eurozone United States

4

6

8

10

12

14

16

2008 2009 2010 2011 2012

%

Croatia CEE Eurozone United States

Bank Performance Indicators

15

Source: IMF, FSI, (bank assets) weighted averagesNote: CEE countries: Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovak Republic, Slovenia

Bank Return on Assets Bank Return on Assets excluding value adjustment costs

-0,5

0,0

0,5

1,0

1,5

2,0

2008 2009 2010 2011 2012

%

Croatia CEE Eurozone United States

-0,5

0,0

0,5

1,0

1,5

2,0

2,5

2008 2009 2010 2011 2012

%

Croatia CEE Eurozone United States

Capital ratios are sensitive to NPL coverage

16

Source: IMF, FSI

Capital ratios, End 2012

-10

-5

0

5

10

15

Aus

tria

Belg

ium

Bulg

aria

Croa

tia

Cypr

us

Czec

h Re

publ

ic

Den

mar

k

Esto

nia

Finl

and

Fran

ce

Ger

man

y

Gre

ece

Hun

gary

Irel

and

Italy

Latv

ia

Lith

uani

a

Luxe

mbo

urg

Mal

ta

Net

herl

ands

Pola

nd

Port

ugal

Rom

ania

Slov

ak R

epub

lic

Slov

enia

Spai

n

Swed

en

Uni

ted

King

dom

Uni

ted

Stat

es

%

Capital to assets (Capital-uncovered NPLs) to assets

Deleveraging of banks’ in CEE

Loan to deposit ratio

Sources: CNB; national central banks

17

Change in banks' external debt between March 2013 and September 2008

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

2.3

2007 2008 2009 2010 2011 2012

EU periphery Central Europe Baltics

SEE Croatia

-30

-25

-20

-15

-10

-5

0

5

Esto

nia

Slo

ve

nia

La

tvia

Hu

ng

ary

Lith

ua

nia

Slo

va

k R

ep

.

Bu

lga

ria

Ro

ma

nia

Cze

ch

Re

p.

Po

lan

d

Cro

atia

as %

of G

DP

in

20

12

Thank You!

18