Loans and economic growth Conference: Risks can be overcome by the State, businesses and the financial sector together


Zagreb, 5 April 2016 - Today's conference, entitled "Loans and economic growth", organized by the Croatian Banking Association (HUB) in cooperation with the Croatian Employers' Association (HUP), was attended by more than 200 businessmen, representatives of the Government and Croatian Parliament, representatives of foreign embassies in Croatia, domestic and international financial institutions and the economic and financial experts and analysts, and sponsored by the Croatian President Kolinda Grabar-Kitarovic.

In his opening address, Mr. Zdravko Maric, the Minister of Finance, brought to mind that the pre-crisis credit growth in Croatia totaled to 25, in some years even more than 40 percent, whereas today we see the opposite trend. "In the last six years, the growth of loans at the system level was about one percent, but the state loans taken out from the statistics, we have actually witnessed a credit decline of one percent. A great challenge has been put before us in that area. Our goal is to achieve sustainable economic growth which will be followed by the credit growth.“, said Minister Maric and pointed out: „The risks can only be overcome by the State, businesses and the financial sector together."
Zdenko Adrović, director of CBA, noted in his welcoming speech that it is necessary to implement fiscal consolidation and to introduce better regulation at the state level, which would then lead to a general risk reduction and lower interest rates, and better placement of creditors. He also said: "Although today we are primarily focused on loans and economic growth in search for an answer on how to overcome the risks that have a negative impact on lending, we should not forget that this is but a piece in a large puzzle that is the overall economic situation of the country. It is extremely important to implement reforms long sought and remove numerous obstacles put before current businesses and investments in the economic sector,"

Gordana Deranja, president of the Employers' Association, pointed out that entrepreneurs are asking for stronger support from banks, whereas banks are looking for quality and less risky projects. "But the problems with loans and financing, although important, are not the only problems the companies in our country are faced with. High taxes, constant changes in the law, slow and complicated bureaucracy, legal uncertainty - these are some of the problems that have negative or aggravating effect on business in Croatia, be it on companies, banks or other financial institutions. Without solving all mentioned and many other problems, opportunities for development and growth of the Croatian economy remain very limited. And reforms are, unfortunately, still on hold." concluded Deranja.

Dubravko Mihaljek, head of global macroeconomic analysis at the Bank for International Settlements (BIS) presented the results of international studies that used companies´ and banks´ data and that show that banks in crisis really do tighten their policies on loans. Mihaljek pointed out: "Among the vast majority of economists there is still prevalent view that an effective and developed financial system is one of the basic preconditions for long-term sustainable growth. This is especially true for less developed economies such as those in Central and Eastern Europe, where the economic sector needs banks as a source of financing for current operations and in particular investments, as alternative sources of funding simply do not exist for most businesses. "

Boris Vujčić, Governor of the Croatian National Bank, showed that prior to the crisis "an unsustainable credit growth and inefficient allocation " took place, which led to some companies´ high indebtedness and the difficulty on their part in servicing that debt. He presented data according to which the Croatian corporate sector is among the most indebted in Central and Eastern Europe, where almost a third of the debt of the corporate sector was rated as excessive. "Recovery and optimistic expectations stimulate demand, but indebtedness and shortage of collaterals makes it hard for the demand for loans to recover," said Governor Vujčić. He pointed out that for the more favorable terms of financing a better framework for the resolution of non-performing loans is needed, meening more efficient bankruptcy procedures and elimination of tax dilemma, whereas the lack of collaterals indicates the potential for significant use of guarantee schemes and the EU funds. "Credit growth can probably not be considered neither as a key factor nor as a formula for the ultimate recovery of the Croatian economy. What should be the key factor for the recovery is export growth and increased competitiveness of the local economy based on structural reforms, "said the governor.

Economic analyst Velimir Šonje from Arhivanalitika spoke about the main emphases of the CBA Analyses 57." Loans, debt and economic growth: breaking the vicious circle." Šonje emphasized the problem of high levels of indebtedness of the corporate sector, which is quite contrary to the thesis that often can be heard that banks don´t approve enough loans to companies and approve too much loans to the general population. Šonje presented an analysis of the ratio of credits to companies and to industrial production, that shows that in the long run there is no growth without credits. Dynamic analysis of short-term ratio between loans to companies and to industrial production shows the dominance of the effect of demand with a time lag of several months. This means that loans subsequently react with the previous production growth. It is necessary to strengthen the ability to respond to offers of loans to the expected increased demand, which can be achieved by removing barriers associated with expensive and unpredictable regulation and incentives for recapitalization of the company. Presentation of the new issue of the CBA Analysis was the introduction to the panel discussion which was attended by Gordana Deranja, president of the Croatian employers' association, Zdravko Marić, the minister of Finance, Carlos Piñerúa, the World Bank for Croatia and Slovenia, Božo Prka, CEO of Privredna banka Zagreb, Petar Šimić, vice president of CEA Association of SMEs, Emil Tedeschi, CEO of Atlantic group and Miljenko Živaljić, CEO of Zagrebacka banka.

"Only by cooperation and partnership can we solve the problems of the past. Our economic system is outdated, a ruinous house that needs a complete renovation "- said Božo Prka. He stressed that the problem is also in banks´ regulation in the segment when you want to write off or sell bad investments. In this part, says Prka, the problem is in parts of "bad credit" sales that are tax recognized and emphasized that their recycling should go faster.
The head of the Zagreb bank, Miljenko Živaljić, also called for partnership and cooperation, noting the need for new instruments and funding opportunities. "I can´t remember last time a company in Croatia issued an IOU.“, Živaljić said and asked: „ And what about the privatization follow-up?"

Emil Tedeschi, CEO of Atlantic Group commented on the lack of education of local management teams, not only in private but also in public sector, who are regularly selected by party lines, which hinders Entrepreneurship development in Croatia.
The president of CEA, Gordana Deranja, said on the panel that the key is in abolition of the para-fiscal charges that stifle businesses and are their own purpose.

Minister Zdravko Maric welcomed all initiatives that he heard from bankers and entrepreneurs. He hopes and believes that this government will succeed in all scheduled plans and ideas, as much as some think they perhaps lack ambition.
At the end of the conference, Director of CBA Zdenko Adrović summed up the conclusions of all the presentations and panels.

"The demand for loans is crucial, and banks should be capitalized and ready at any time to respond to the demand. In parallel, we need to develop the capital market (privatization, IPOs, debt instruments ...), particularly with regard to substantially improving the management system of state-owned companies, " Adrović said, adding that we can see a demand for quality exporters in the small and medium-sized businesses sector emerging."
Some companies´ indebtedness needs to be addressed by encouraging the investment of equity, quasi equity (mezzanine finance), "Adrović noted giving an example – by increasing equity and quasi-equity investments for, let´s say, three billion kunas, banks would be able, through financial leverage, to finance new investments in the amount of 3-5% GDP.

Also, Croatia needs an improved framework for dealing with companies´ over-indebtedness, or insolvency, and the harmonization of prudential and tax regulations concerning the treatment of write-offs. The key factors for the part of the new and rapidly growing economic segment are: the competitiveness which depends on the promotion of fair competition; venture capital funds and investors with a high propensity to risk; tax incentives and better regulatory and structural policy (further faster reduction of fiscal charges, improved public procurement); lower interest rates (they are still too high because of poor rating which makes companies uncompetitive); new guarantee schemes (EU funds as an upgrade to existing HBOR / CASB guarantee schemes + export guarantees) and new risk-sharing instruments.
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