HNB headquarters, Zagreb, Croatia (Hrvatska narodna banka, CC BY 2.0)
Joining the Eurozone is Croatia’s main strategic goal in foreign policy. Dependency of Croatian economy on tourism (providing between 15 and 20 per cent of GDP) and services in general, makes it vulnerable to international shifts. Therefore, the HNB governed by a liberal Boris Vujčić, plays an important role in co-leading, together with the government of Croatia, the country into the EU core. The crisis which accompanies the pandemic of COVID-19 can undermine this path.
From March 9th to March 17th, the HNB intervened four times, selling the EUR1,625bn to prevent the HRK from depreciation. On March 16th, the HNB allocated the HRK4,55bn (around the EUR600m) as a part of structural and regular open market operations. In the structural operation, the HNB accepted all bank offers and thus placed the HRK3,8bn on the market. These funds were placed in banks at a fixed interest rate of 0.25 per cent for five years (the deadline is March 18th, 2025). In addition, the HNB also offered the HRK750m to credit institutions through a regular reverse repo auction at an interest rate of 0.30 per cent and a settlement date of March 18th, with the maturity date being March 25th.
The HNB began to buy government bonds of the Republic of Croatia in order to maintain stability on the government securities market. On March 13th, the bank purchased securities worth the HRK212,88m (approximately the EUR27m). On March 18th, the HNB purchased additional securities at a nominal value of the HRK4,075bn.
Additionally, the HNB ordered credit institutions to retain the net profits they generated last year. According to the Croatian Bank Association, in 2019, banks in Croatia achieved a net profit of around the EUR761mln. Pursuant to the decision of the Croatia’s central bank, commercial banks should not pay their owners profits made last year, but they are expected to retain and redirect profits to reserves. The goal is to further strengthen the liquidity of the banking system.
However, to ease the functioning of the banking sector in these exceptionally difficult circumstances, the HNB has decided to take a flexible approach in applying the existing regulatory framework. For example, certain supervisory activities (stress-testing of credit institutions, direct supervisions of operations) have been postponed. The HNB has also expressed its readiness to consider and redefine the timeframe for meeting the previously imposed supervisory measures, providing banks with additional space for manoeuvring.
Additionally, HNB decided that a „credit institution may postpone payment obligations or in another way restructure credit liabilities and grant new loans for the existing and the new exposures towards its regular clients who were classified as A clients on December 31st, 2019 – whose operation has already been affected or will be affected by the coronavirus pandemic, all with the objective to avoid further deterioration of the clients’ financial condition”.
However, suspension of payment obligation, together with restructuring of credit liability or granting of new loans for entrepreneurs and natural persons, applies only in situations, where continuity of operations of clients and jobs, as well as contingent operating costs incurred due to the coronavirus pandemic. As such, they will last until end of March of the following year.
On March 23rd, the Council of the HNB reduced the reserve requirement rate from 12 per cent to 9 per cent. The goal is to free additional liquidity for the banking system and, ultimately, for the Croatian economy as a whole. The reduction of the reserve requirement rate will lower the overall amount of the reserve requirement by the HRK10,45bn. HNB returned the excess of the allocated HRK component of the reserve requirement (the HRK6,33bn) to banks on March 27th. By this move, the HNB brought its reserve requirements system closer to the European Central Bank’s minimum reserve requirements system.
The provided measures show the responsibility and determination of the Croatian National Bank and Vujčic to maintain the financial situation in Croatia. The ultimate results, however, will be visible only once the pandemic is maintained. For the next few months, the economic financial system should provide economy with enough means to escape disaster. If the pandemic prolongs the HNB will not be able to solve the problem.
In an interview for the Poslovni daily business Vujčic clarified: „The weak reaction of the capital market to the announcements of monetary policy measures is not surprising if the scale of the shocks affecting the economy is taken into account. Monetary policy also plays a very important role in this crisis, but it cannot reestablish broken production chains, open closed shops and outlets, or lift ground planes into the air. It cannot even produce vaccines and medicines. Its ability to encourage economic activity is limited as long as health threat and restrictions on economic activity exist. Monetary policy can exclusively maintain favorable financing conditions for all sectors in order to ease the burden of debt for entrepreneurs and citizens in these adverse conditions, and to reduce the cost of emergency financing to the government. This will also allow faster recovery of the economy after the pandemic is brought under control.”
Jan Muś works as an analyst in the Balkan Department at the Institute of Central Europe in Lublin, Poland.