CBA Analysis no. 7

External debt to GDP ratio is a structural indicator which is influenced by the level of economic development (a higher level of development means higher debt), the size of the country (smaller and more open economies have a higher debt ratio), and membership in a monetary union (membership may be linked to higher debts). Compared to similar countries, the international debt to GDP ratio in Croatia does not seem to be very high and is, moreover, stabilizing, while the other countries of the New Europe are experiencing the opposite trend. The same goes for the banks’ share in the external debt. The higher the level of economic development is, the higher the banks’ share in the external debt. This regularity speaks of a productive role of banks in terms of skilful risk management and provision of capital, which ensure stability and growth for the economy as a whole. The banks’ share in the external debt in Croatia is lower in comparison with similar countries. This share has additionally decreased this year, as corporations have been raising loans directly from abroad instead with domestic banks (this is due to domestic lending limits).

Short term indicators of financial vulnerability do not indicate that the Croatian economy is in immediate danger stemming from global financial turbulence. Its balance of payment deficit on the current account and fiscal deficit do not stand out in comparison to other similar countries, which are recording even higher deficits on average. Deficits and the increase of external liabilities go hand in hand with the process of real convergence in an environment of rapid financial integration. Although the extent of global financial turbulence is not large at present, and although it is not expected to significantly affect European economic growth, caution is advisable. The only effective remedies in such an environment are fiscal surpluses and the continuation of structural and institutional reforms aimed at boosting competitiveness.

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