COMMISSION STAFF WORKING DOCUMENT In-depth review for Croatia in accordance with Article 5 of Regulation (EU) No. 2011/1176 on the prevention and correction of macroeconomic imbalances Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE, THE COMMITTEE OF THE REGIONS AND THE EUROPEAN INVESTMENT BANK 2022 European Semester – Spring Package
Date: 2022-05-23
Institutions: European Commission, Secretariat-General
Subjects: Croatia, European Semester, economic policy, economic recovery, energy policy, euro, indebtedness, macroeconomics, multilateral surveillance, public debt

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 23.5.2022  SWD(2022) 633 final  COMMISSION STAFF WORKING DOCUMENT In-depth review for Croatia           in accordance with Article 5 of Regulation (EU) No. 2011/1176 on the prevention and correction of macroeconomic imbalances             Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE, THE COMMITTEE OF THE REGIONS AND THE EUROPEAN INVESTMENT BANK 2022 European Semester – Spring Package       {COM(2022) 600 final} - {SWD(2022) 628 final} - {SWD(2022) 629 final} - {SWD(2022) 630 final} - {SWD(2022) 631 final} - {SWD(2022) 632 final} - {SWD(2022) 634 final} - {SWD(2022) 635 final} - {SWD(2022) 636 final} - {SWD(2022) 637 final} - {SWD(2022) 638 final} - {SWD(2022) 639 final}  
 
 
 
 
On the basis of this in-depth review for Croatia undertaken under Regulation (EU) No 
1176/2011  on  the  prevention  and  correction  of  macroeconomic  imbalances,  the 
Commission has considered in its Communication “European Semester – 2022 Spring 
Package” (COM(2022)600 final) that: 

Croatia,  identified  with  imbalances  in  2021,  is  found  to  experience  no  imbalances. 
Important  progress  has  been  made  in  reducing  private  indebtedness  and  net  external 
liabilities. General government debt remains high but has resumed the downward trajectory 
that delivered marked improvements before the pandemic. The banking sector remains stable 
and  liquid,  with  a  decreasing  non-performing  loans  ratio.  Potential  output  growth  has 
increased,  building  on  strong  policy  action,  and  a  further  strengthening  based  on  a  strong 
implementation of the RRP can address remaining vulnerabilities.  On current forecasts, both 
private  and  government  indebtedness  are  expected  to  continue  falling  with  the  external 
position strengthening further benefiting also from the RRF funds. 

 
 
 
 
 
 
 
 
CONTENTS 

1.  Introduction 

2.  Assessment of macroeconomic imbalances 

3.  Thematic chapter: Private Debt 

LIST OF TABLES 

Table b.1.1:   Selected exposures 

Table 2.1: 

Selected economic and financial indicators (Part 1), Croatia 

Table 2.2: 

Selected economic and financial indicators (Part 2), Croatia 

Table 3.1: 

Private debt indicators, Croatia 

LIST OF GRAPHS 

Graph b.1.1:  Sectoral distribution of energy use and of energy imported from Russia 

Graph b.1.2:  Croatia goods and service trade balance – fossil trade contribution 

Graph 1: Indebtedness and average size of firm in the accommodation sector 

Graph 3.1: 

Thematic Graphs: Households Debt 

Graph 3.2: 

Thematic graphs: Non-financial corporations debt 

4 

5 

15 

12 

13 

14 

21 

11 

11 

18 

19 

20 

3 

 
 
 
 
 
 
 
1.  INTRODUCTION 

In  2021,  over  the  previous  annual  cycle  of  surveillance  under  the  Macroeconomic  Imbalances 
Procedure  (MIP),  the  Commission  identified  “macroeconomic  imbalances”  in  Croatia. (1)  These 
imbalances are related to high external, private and government debt in a context of low potential growth. 
The 2022 Alert Mechanism Report concluded that a new in-depth review (IDR) should be undertaken for 
Croatia with a view to assess the persistence or unwinding of imbalances. (2) 

This year’s IDR is prepared in the context of a full V-shaped recovery of Croatia’s economy from 
the  COVID-19  crisis,  but  also  rising  geopolitical  uncertainties. (3)  Croatia’s  economy  expanded  by 
10.2% in real terms in 2021, after a fall of 8.1% in 2020, thus already surpassing its pre-pandemic GDP 
level.  Real GDP is  forecast to increase  by 3.4% in 2022 and 3.0% in 2023. The  nominal GDP level in 
2023  is  forecast  to  be  18.2% above  its  2019  level. The  Croatian  economy  is  expected  to  keep  its  solid 
pace  on  account  of  a  return  of  exports  of  services  to  the  pre-pandemic  level,  positive  labour  market 
developments  and  the  anticipated  realisation  of  reforms  and  investments  under  the  Recovery  and 
Resilience  Plan  (RRP).  Employment,  which  already  recovered  to  its  pre-pandemic  level  in  2021,  is 
expected to grow by 3.4% from that level by 2023. Russia’s military aggression against Ukraine and the 
resulting  sanctions  are  not  expected  to  have  substantial  direct  effects  on  the  Croatian  economy.  At  the 
same time, indirect effects via higher prices of energy, raw materials and food products are expected to be 
felt but to a moderate extent.  As a result, inflation is expected to rise to 6.1% in 2022, before decelerating 
to 2.8% in 2023. 

This in-depth review presents the main findings of the assessment of imbalances. The assessment is 
backed  by  a  thematic  section  on  private  debt  developments.  Spillovers  and  systemic  cross-border 
implications of imbalances are also taken into account. In addition, assessments of structural issues made 
in  previous  IDRs  and  in  the  context  of  fiscal  assessments  are  also  considered  if  relevant.  The  MIP 
assessment matrix is published in the 2022 Country Report for Croatia. (4) 

(1)  European Commission (2021), European Semester Spring Package 2021, COM(2021) 500 final. 
(2)  European Commission (2021), Alert Mechanism Report 2022, COM (2021) 741 final. 
(3)  Forecast data are from European Commission (2022), European Economic Forecast: Spring 2022, Institutional Paper 172. 
(4)  European Commission (2022), Country Report Croatia 2022, SWD(2022)614 final. 

4 

 
 
                                                           
2.  ASSESSMENT OF MACROECONOMIC IMBALANCES 

Assessment of gravity, evolution and prospects of macroeconomic imbalances 

Following  the  disruption  brought  by  the  COVID-19  crisis,  and  its  significant  impact  on  public 
finances  in  2020,  Croatia’s  government  debt-to-GDP  ratio  resumed  its  decline  in  2021.  The 
government debt-to-GDP ratio had been on a firm adjustment path for several years until the outburst of 
COVID-19 pandemic. After reaching the pre-pandemic peak of 83.9% in 2014, the ratio continuously fell 
to  71.1%  in  2019,  supported  by  fiscal  consolidation  efforts  and  solid  economic  growth.  The  Croatian 
economy and public finances were severely hit by the  COVID-19 shock. In 2020, economic output fell 
sharply  -8.1%,  depressing  general  government  revenues  (-6.4%)  while  expenditure  rose  considerably 
(+8.7%),  raising  the  debt-to-GDP  ratio  by  more  than  16  pps,  to 87.3%  of  GDP. The  subsequent  strong 
rebound of the economy pushed the government debt ratio down to 79.8% in 2021.  

Government  debt  is  forecast  to  further  decrease  in  the  following  years,  reaching  around  73%  of 
GDP in 2023. The fall is expected to be driven by the denominator effect due to solid GDP growth, the 
phasing out of COVID-19-related measures, falling interest expenditures and other debt-reducing stock-
flow adjustments. Both the maturing debt, but also the newly accumulated debt, have been refinanced in 
recent  years at  very low rates and longer  maturities. The  Commission’s  fiscal sustainability assessment 
shows  that  Croatia  faces  medium  fiscal  sustainability  risks  over  the  medium  term  and  medium  fiscal 
sustainability risks in the long term. (5) 

The private debt-to-GDP ratio is returning close to its pre-pandemic level, resuming the trend that 
led to strong reductions over the last decade. The private-debt-to GDP ratio improved substantially in 
the pre-pandemic period. From a peak of above 120% of GDP in 2010, the ratio decreased to 88.3% of 
GDP in 2019. The COVID-19 shock led to an increase in the private-debt-to GDP ratio to 98% of GDP in 
2020, mostly due to the denominator effect. With the economic recovery in 2021, the ratio decreased by 
more than 7 percentage points, reaching 90.7% of GDP. The adjustment was entirely driven by the strong 
nominal GDP growth in 2021, amounting to 13.3%, which helped both household and corporate debt-to-
GDP ratios to decline substantially. Consequently, at 55.2 of GDP in 2021, the corporate debt ratio almost 
reached its pre-pandemic level of 54.5%.  

The breakdown of the private debt to GDP ratio by sector remains broadly unchanged. The share of 
non-financial  corporate  (NFC)  debt  in  GDP  in  2021  reached  the  lowest  level  since  2005  and  remained 
below the EU average and country-specific prudential thresholds. (6) The household debt ratio decreased 
to  36%  of  GDP  in  2021  (by  2  pps  compared  to  2020),  returning  close  to  the  pre-pandemic  level.  It  is 
expected  that  household  and  corporate  borrowing  will  remain  strong.  The  dependency  of  the  Croatian 
economy  on  imports  of  oil  and  gas  is  low.  However,  risks  persist  that  the  phase-out  of  state-support 
measures and potential second-round effects on economic growth from Russia’s unprovoked invasion of 
Ukraine could lead to further vulnerabilities associated to private sector debt (see box 2.1). Nonetheless, 
deleveraging is expected to continue, supported by solid nominal GDP growth and various RRP-related 
measures,  notably  reforms  aimed  at  improving  the  framework  and  speeding-up  of  bankruptcy  and 
liquidation processes and those aimed at reducing the dependence of NFCs on debt instruments.  

Croatia’s external position improved markedly in 2021, after a small deterioration in 2020. After six 
consecutive years of surpluses, supported by both public and private sector deleveraging, the COVID-19 
pandemic  turned  the  current  account  balance  mildly  negative.  However,  thanks  to  strong  export 
growth, (7)  especially  in  services,  the  current  account  returned  to  a  surplus  of  3.1%  of  GDP  in  2021. 

(5)  See  European  Commission  Country  Report  on  Croatia  for  the  latest  results  and  the  ‘Fiscal  Sustainability  Report  2021’, 

Institutional Paper 171, 25 April 2022 for methodological details. 

(6)  While  both household and  corporate debt are  higher  than  fundamental  benchmarks, the  estimation  of  these  benchmarks  may 

suffer from considerable downward bias in the case of Croatia, due largely to very low levels of debt in the initial period. 

(7)  Goods  exports  were  very  fast  to  recover,  thanks  to  their  relatively  low  exposure  to  bottlenecks  in  the  supply  chain  and  the 

strong demand in key trading partners. 

5 

 
                                                           
2. Assessment of macroeconomic imbalances 

Exports of services benefitted from the relatively low dependence of Croatian tourism on air travel, a high 
share  of  private  accommodation  and  comparatively  lax  COVID-19  measures.  As  the  current  account 
balance  recovered,  the  net  international  investment  position  (NIIP)  resumed  its  improvement  in  2021, 
reaching -34% of GDP, which brought it in line with the prudential benchmark  -44% and in conformity 
with  the  indicative  -35%  threshold  in  2022. (8)  The  improvement  was  also  supported  by  a  substantial 
capital account surplus. The mid-term outlook for external balances remains positive due to the expected 
continued recovery in tourist activity and despite the worsening of the energy balance that partly impacted 
the  current  account  already  in  2021.  Also,  the  Croatian  economy  is  not  highly  and  directly  exposed  to 
shocks related to the military aggression against Ukraine and the resulting sanctions against Russia. It is 
expected that the current account balance  will remain positive also in 2022 and 2023 and that the NIIP 
will stay on a stable adjustment path, thus reaching -20.5% of GDP in 2023. As for the competitiveness of 
Croatian  economy,  it  is  expected  that  the  ULC-deflated  real  effective  exchange  rate  will  benefit  from 
gains in productivity supported by RRF-related reforms. Meanwhile, there are still risks stemming from 
the  role  of  the  public  sector,  instead  of  the  tradable  sector,  as  the  wage  leader,  leaving  wage-setting 
imperfectly aligned with productivity developments.  

Croatia’s banking sector is expected to stay well-capitalized, highly liquid and stable. The absence of 
repatriation of profits and targeted regulatory adjustments related to the pandemic in 2021 contributed to a 
strong capital position of the Croatian banking  sector. At the end of 2021, credit institutions reported a 
Tier  1  ratio  of  25.1%.  Credit  institutions’  liquidity  remained  high,  with  the  liquidity  coverage  ratio 
totalling 202.5% at the end of December 2021, compared to EU average of 173% (EU banks participating 
in  SSM),  according  to  CNB  data.  All  credit  institutions  met  the  prescribed  minimum  liquidity 
requirements.  Following  Russia’s  military  aggression  against  Ukraine,  Croatia’s  banking  system  was 
briefly exposed to risks related to the illiquidity of Sberbank Europe AG, the owner of a local subsidiary 
in Croatia. However, the situation stabilized when the Single Resolution Board, in cooperation with the 
Croatian  National  Bank  (CNB)  as  the  national  resolution  authority,  adopted  the  decision  initiating  the 
resolution  proceedings  of  Sberbank  d.d.  Zagreb.  After  a  competitive  bidding  process,  the  Single 
Resolution  Board  decided  to  transfer  all  shares  of  the  Sberbank’s  Croatian  subsidiary  to  Hrvatska 
Poštanska  Banka  d.d.  This  allowed  the  bank  to  resume  operations  under  a  new  brand  (Nova  Hrvatska 
Banka). (9) The share of non-performing loans (NPL) in total loans in the banking system continued to 
decrease,  with  the  NPL  ratio  decreasing  from  5.3%  at  the  end  of  2020  to  4.6%  at  the  end  of  2021 
(indicated by the CNB data). 

Currency  risks  in  the  financial  sector  and  the  economy  are  still  pronounced.  Exposure  to  the  euro 
exchange  rate  risk  is  sizeable.  Ministry  of  finance  data  shows  that  around  70%  of  government  debt  is 
denominated in euro. CNB statistics indicate that foreign currency loans (dominantly euro-denominated) 
make up for around 45% of total loans to households and around 65% of total loans to NFCs. Due to the 
large exposure of domestic non-financial sectors to the exchange rate risks, the banking sector in Croatia 
is also exposed to a currency-induced credit risk. While exposure to both types of risks is high, the risks 
themselves  are  contained  given  the  historical  stability  of  the  kuna  exchange  rate  vis-à-vis  the  euro. 
Croatia’s  currency  was  included  in  the  exchange  rate  mechanism  ERM2  in  July  2020  and  Croatia 
continues to aim for euro adoption as of 1 January 2023, subject to the fulfilment of nominal criteria and 
the approval by the Council. 

Although housing price growth remains below the MIP threshold, it poses a risk for the economy 
going forward. During the COVID-19 pandemic, house prices continued to rise. Research suggests that 
the  growth  in  house  prices  in  recent  years  has  been  partly  driven  by  the  government  loan  subsidy 
program. (10)  Furthermore,  the  earthquakes  in  2020  damaged  a  significant  part  of  the  housing  stock, 
bringing  about  disturbances  to  the  real  estate  market,  particularly  in  Zagreb,  which  accounts  for  a  high 
share of transactions. As the volume of transactions of older residential property declined, the demand for 
newer  housing  increased,  which  pushed  up  prices.  House  prices  continued  to  increase  in  2021,  but  the 

(8)  Moreover, Croatia’s NIIP excluding non-defaultable instruments (NENDI) was virtually balanced in 2021 and foreign exchange 

reserves reached a historical high in the of 44% of GDP, thus limiting exchange-rate risks. 

(9)  See 

the 

SRB 

d.d: 
https://www.srb.europa.eu/system/files/media/document/20220103%20SRB%20Notice%20summarising%20the%20decision%
20taken%20in%20respect%20of%20Sberbank%20d.d..pdf. 

summarising 

Sberbank 

decision 

respect 

Notice 

taken 

the 

of 

in 

(10)  Kunovac and Žilić (2020). Home sweet home: The effects of housing loan subsidies on the housing market in Croatia. Croatian 

National Bank Working Papers W-60, Zagreb, October 2020. 

6 

                                                           
2. Assessment of macroeconomic imbalances 

growth  remained  below  the  MIP  threshold.  House  price  valuation  indicators  do  not  point  to  significant 
overvaluation.  However,  the  European  Systemic  Risk  Board  (ESRB)  still  considered  the  prices  to  be 
overvalued, referring to the assessment  made by the CNB,  which  – among other relevant factors in the 
context  of  financial  stability  -  led  to  the  ESRB  issuing  a  warning  to  Croatia in  February  2022. (11) 
Housing  affordability  is  comparatively  low  in  Croatia,  as  measured  by  the  years  of  income  needed  to 
purchase a 100m2 apartment (12.6 years in 2020, compared to an EU average of 10.2 years). 

Labour market developments are favourable, but some challenges persist. Government measures to 
support wages and liquidity mitigated the fall in employment in 2020, and the employment rate increased 
to 66.9% at the end of the  year, according to Eurostat data. In 2021, employment fully recovered to its 
pre-pandemic  level,  but  at  68.2%  remained  significantly  below  the  EU-27  average  of  73.1%.  Spring 
forecast indicated that by 2023 employment should rise by 3.4% compared to 2021 and the RRP-related 
investments and reforms and Cohesion Policy funding should tackle some of the structural issues that are 
keeping  activity  and  employment  rates  below  EU  averages.Croatia’s  potential  growth  accelerated  in 
recent years but remained among the lowest in Central and Eastern Europe (CEE). Potential growth 
in  Croatia  rose  from  around  0.9%  on  average  in  2013-2018  period  to  2.5%  in  2019.  After  some 
disturbances  brought  about  by  the  COVID-19  shock,  the  rate  of  potential  growth  is  estimated  to  have 
surpassed  the  pre-pandemic  levels  and  is  converging  towards  the  average  of  the  CEE  region.  Low 
potential  growth  hinders  the  pace  of  Croatia’s  convergence  towards  the  EU  average.  Low  allocative 
efficiency,  a  cumbersome  business  environment  and  an  inefficient  public  sector  weigh  on  total  factor 
productivity (TFP), which provided only a mild contribution to potential growth in recent years. Labour 
productivity  growth  was  also  low,  which  additionally  hampered  potential  growth.  In  contrast,  solid 
investment activity provided a boost to potential growth. RRF-related reforms and investments addressing 
structural rigidities in Croatia’s economy are expected to lift the growth potential in the upcoming years 
(see below). 

Assessment of MIP relevant policies 

The steady unwinding of Croatia’s imbalances witnessed since 2015 has been supported by policy 
action.  The  labour  market  reforms  implemented  in  2013-14  increased  flexibility  in  the  system  and 
supported  a  more  efficient  reallocation  of  labour,  benefitting  productivity  and  competitiveness.  The 
prudent fiscal policy conducted in the period 2016-2019 substantially contributed to the deleveraging of 
the  economy  and  created  a  buffer  that  proved  essential  at  the  onset  of  the  Covid-19  crisis.  On  a  more 
granular  level,  structural  weaknesses  and  slack  in  the  economy  were  reduced  through  reforms  such  as 
those  aimed  at  strengthening  the  fiscal  framework,  improving  the  efficiency  of  the  judiciary,  cutting 
administrative  and  financial  burden  on  companies,  liberalising  regulated  professions  and  improving  the 
governance  of  SOEs.  Such  reform  efforts  were  reiterated  in  Croatia’s  prior  and  post-entry  ERM2 
commitments, as well as its Recovery and Resilience Programme.    

Various  measures  in  Croatia’s  RRP  should  help  reduce  government  debt  and  enhance  external 
sustainability.  The  RRP  includes  different  measures  to  increase  efficiency  and  sustainability  of  the 
public sector. The new Budget act, that enhances the fiscal framework, was adopted at the end of 2021. In 
addition,  the  appointment  of  the  Fiscal  council  Chair  should  improve  the  quality  of  oversight  of  fiscal 
policy in the long run. Measures to address the recurrent build-up of arrears, inconsistent procedures and 
the procurement of costly medicines in the healthcare sector are to be implemented by the end of 2022, 
which should increase the efficiency of expenditure. New funds for the commercialisation of innovation 
projects could increase  non-price  and price  competitiveness and  give  an additional boost to the already 
dynamic export sector, thus contributing positively to the  evolution of external balances  in the  medium 
term. 

As  regards  private  debt,  the  RRP  contains  measures  that  could  reduce  the  dependency  of 
corporates on bank loans, by promoting equity financing. A new equity-based financial instrument is 
expected to be set up in 2022. This instrument should reduce the dependency of NFCs, especially small 

(11)  ESRB concluded  that  house  price  growth  is  elevated,  mortgage  credit  growth  is  high and that there  are  signs  of  house  price 
overvaluation, and of loosening of lending standards. Given these trends, the ESRB assessed housing market risks as medium 
and 
at 
partially 
https://www.esrb.europa.eu/pub/pdf/reports/esrb.report220211_vulnerabilities_eea_countries~27e571112b.en.pdf?421b2a7ec41
5416f4b9d6732d18af8d3. 

appropriate 

sufficient: 

available 

partially 

Report 

policy 

this 

and 

on 

as 

7 

                                                           
2. Assessment of macroeconomic imbalances 

and medium enterprises (SMEs) on debt instruments. In addition, amendments to the Bankruptcy Act and 
the  Consumer  Insolvency  Act  expected  in  2022  should  ensure  greater  efficiency  of  insolvency 
proceedings and improve the system of organisation and appointment of insolvency practitioners and the 
supervision of the performance of the service, which could also speed-up private debt reduction.  

The RRP is also  expected to boost productivity and lift the country’s growth potential,  making it 
more  resilient  in  the  face  of  future  crises.  A  notable  part  of  Croatia’s  RRP  is  aimed  at  reducing  the 
administrative burden on the corporate sector from para-fiscal and regulatory charges and at supporting a 
further  liberalization  of  services  and  the  digitalisation  of  the  Croatian  economy,  which  should  benefit 
productivity. The implementation of measures in the annual Action Plans to alleviate the administrative 
burden  on  the  economy  from  2018  to  2020  should  be  finished  by  2022,  with  most  of  the  red  tape  cuts 
already implemented over the course of 2020 and 2021. Croatia’s RRP also contains different measures 
aimed  at  stimulating  R&D  investments  and  absorption,  which  could  increase  TFP.  For  example,  the 
reform of the R&D incentive system and measures aimed at strengthening the R&D capacity of the public 
research sector are scheduled in 2022. 

Croatia is preparing for the introduction of the euro as of 1 January 2023. Euro adoption remains 
contingent  upon  the  fulfilment  of  the  convergence  criteria  as  assessed  in  the  forthcoming  Convergence 
report.  In  September  2021,  the  European  Commission  and  euro  area  Member  States  signed  a 
Memorandum  of  Understanding  (MoU)  with  Croatia  outlining  the  practical  steps  that  will  allow  the 
country to begin producing euro coins after the Council formally abrogates the derogation on adopting the 
euro.  In  December  2021,  the  Croatian  authorities  adopted  and  presented  the  National  Plan  for  the 
Changeover  from  the  Croatian  kuna  to  the  euro,  followed  by  the  presentation  and  start  of  public 
consultation on the Law on euro adoption. In May 2022, Croatian authorities notified full implementation 
of post-entry ERM II commitments.  

Euro  adoption  would  practically  eliminate  the  currency  risk  in  Croatia.  The  CNB  has  managed  to 
maintain a stable exchange rate of the kuna vis-à-vis the euro over more than two decades and has built 
up  high  foreign  exchange  reserves.  Euro  adoption  should  reduce  the  cost  of  borrowing  for  the  private 
sector (due to a reduction of regulatory burden and fall in the risk premia). This could contribute to credit 
growth in nominal terms, but the expected solid growth performance should still keep debt indicators on a 
downward path and the private sector could benefit from the refinancing of part of the debt under more 
favourable  terms. (12)  In  addition,  against  the  rising  uncertainties  and  potential  changes  in  monetary 
policy stance in the medium run, euro adoption could cushion the effects of ensuing potential increases of 
bank interest rates, thereby containing the future interest rate burden of those possible developments.  

Progress  towards  the  euro  adoption  was  one  of  the  key  factors  behind  the  recent  upgrade  of 
Croatia's credit rating to investment grade. At the end of 2021, Fitch upgraded Croatia's credit rating 
to  investment  grade,  quoting (13)  the  prospect  of  euro  adoption  as  the  key  driver  which  would  reduce 
transaction costs and limit exchange rate risk to corporate and household balance sheets. In March 2022, 
S&P  confirmed  Croatia's  investment  grade  rating,  also  citing  euro  adoption  as  one  of  the  key  factors 
behind  the  decision.  Besides  euro  adoption,  both  agencies  emphasized  the  strong  recovery  after  the 
pandemic  shock  and  the  positive  economic  outlook,  owing  to  the  rebound  of  tourism  and  the  expected 
implementation of RRP reforms and investments. In addition, both agencies recognized that, despite the 
short-term deterioration of fiscal indicators in 2020, public finances are stable and expected that the fiscal 
position will continue to improve. 

As  concerns  macro-prudential  policies,  the  existing  framework  provides  tools  to  manage  possible 
risks. The legal framework for borrower-based measures was established in 2020. While recognizing and 
supporting  the  current  CNB  macro-prudential  policies,  the  ESRB  emphasizes  that  borrower-based 
measures should be activated and complement the current implicit DSTI (debt service-to-income) limit. 

(12)  In addition, latest results of the Survey on the Access to Finance of Enterprises show that corporates in Croatia are not heavily 
dependent  on bank  loans and  that cost  of  financing  is not  one  of  the  main  factors  why  the  NFCs do not  rely  on  this type  of 
financing  (see  https://ec.europa.eu/growth/document/download/74614dc2-3e7a-4e97-bf44-a81d51165adc_en),  while  interest 
rates on housing and consumer loans (new lending) are already moving close to the lower bound of the euro area interval so the 
downward pressure on interest rates triggered by the euro adoption is not expected to strongly stimulate demand for loans in 
private sector. 

(13)  Available on this linkhere: https://www.fitchratings.com/research/sovereigns/fitch-upgrades-croatia-to-bbb-outlook-positive-12-

11-2021. 

8 

                                                           
2. Assessment of macroeconomic imbalances 

Meanwhile, in March 2022, the CNB activated the countercyclical buffer rate for the first time (raising it 
from  0%  to  0.5%,  to  be  applied  as  of  31  March  2023)  in  order  to  counter  the  procyclicality  in  bank 
lending. 

Conclusion 

Croatia’s macroeconomic vulnerabilities related to high external, private and government debt, in 
a context of low potential growth, have substantially decreased in recent years despite the COVID-
19 shock. The unwinding of macroeconomic imbalances was driven by the economic recovery following 
the prolonged recession from 2009 to 2014, but also a prudent fiscal policy stance and the reforms of the 
labour market and the business environment. After a temporary pandemic-induced deterioration in 2020, 
macroeconomic  imbalances  continued  to  unwind  in  2021,  returning  to  the  favourable  pre-pandemic 
adjustment trends.  Croatia’s private  debt-to-GDP ratio decreased strongly over the  period from 2010 to 
2019, from 122 to 88 per cent of GDP. The pandemic led to a sharp increase in 2020, which was reversed 
with the strong economic rebound in 2021. The current account returned to a surplus in 2021, following 
its temporary marginal deficit in 2020. The NIIP surpassed the prudential benchmark and came very close 
to the indicative MIP threshold of  -35% of GDP. The general government debt ratio remains above the 
60% threshold, its downward path having been disrupted by the COVID-19 shock. However, in 2021, it 
returned to a downward trajectory. The banking sector remains stable and liquid, with a decreasing share 
of  NPLs  in  total  loans.  Potential  output  growth  has  accelerated  over  the  years,  although  it  still  remains 
below the potential growth rates of most new member states. Despite increased global uncertainties, debt–
to-GDP  ratios  are  expected  to  further  decline  in  the  medium  term.  The  military  aggression  against 
Ukraine and the resulting sanctions against Russia are not expected to have substantial direct effects on 
the Croatian economy (see box 2.1). 

Measures  included  in  the  RRP  and  the  prospective  euro  adoption  should  contribute  to  further 
reductions  of  vulnerabilities  by  enhancing  public  and  private  debt  reduction,  increasing 
competitiveness of the economy and boosting potential growth. Croatia’s RRP contains measures that 
should increase the efficiency and sustainability of the public sector, improve insolvency procedures and 
promote equity financing for the private sector, and increase the competitiveness and productivity of the 
Croatian economy. A new Budget act was adopted and the president of Fiscal Council was appointed at 
the end of 2021, while reforms in the healthcare sector are to be implemented in 2022. As regards private 
debt-related  measures,  the  Croatian  authorities  have  committed  to  set  up  new  equity-based  financial 
instruments,  adopt  amendments  to  the  Bankruptcy  Act  and  the  Consumer  Insolvency  Act  and  continue 
with  the  reduction  of  administrative  burden  over  the  course  of  2022.  Also,  the  reform  of  the  R&D 
incentive  system  and  measures  aimed  at  strengthening  the  R&D  capacity  of  the  public  research  sector 
should  be  implemented  in  2022.  Finally,  a  successful  adoption  of  the  euro  would  reduce  risks  from 
exchange rate exposures. 

Based  on  the  findings  in  this  in-depth  review,  the  Communication  “European  Semester  –  2022 
Spring  Package” (14)  sets  out  the  Commission’s  assessment  as  to  the  existence  of  imbalances  or 
excessive imbalances in Croatia, in line with Regulation 1176/2011. 

(14)  European Commission (2022), European Semester Spring Package 2022, COM(2022)600 final. 

9 

 
                                                           
2. Assessment of macroeconomic imbalances 

10 

 
2. Assessment of macroeconomic imbalances 

Box 2.1: Exposures to the commodity price surge, and to Russia 

This  box  summarizes  risks  and  exposures  regarding  the  commodity  price  surge,  and  the 
importance of direct links with the Russian economy. The surge of commodity prices since 2021 
has been aggravated by the Russian military aggression against Ukraine. This box reviews the related 
macroeconomic  risks  for  Croatia.  The  available  data  suggest  higher  dependency  of  the  Croatian 
economy on imports of oil and gas in general, than for the EU as a whole, as measured by the share 
of net imports in GDP. The share of direct crude oil and natural gas imports from Russia in total oil 
and gas imports is below the corresponding EU share (Table b.1.1, see the caveat below the table on 
indirect  imports  of  Russian  gas).  Croatia  produces  around  a  third  of  its  natural  gas  needs.  The 
recently  started  commercial  operations  of  an  LNG  FSRU  terminal  on  the  island  of  Krk  has  a 
capacity close to total Croatian demand. All that capacity has been booked. 

 Graph b.1.1: 

Sectoral distribution of energy use and of energy imported from Russia 

Notes: The left panel displays the distribution of primary energy usage in Croatia according to Eurostat energy balances. The horizontal axis displays the 
relative importance of energy-consuming sectors. The vertical axis displays the importance of energy importance from Russia in satisfying that need. Note 
that this dependence on Russia differs according to sector’s use of natural gas vs oil and coal. The graph does not account for indirect imports of Russian 
gas. For comparison, the right hand panels displays the same concept for the EU aggregate.Russian imports include oil and petroleum products,natural gas 
and solid fossil fuels. 
Sources: Eurostat and European Commission services calculations 
The Transport and Energy & Transformation sectors are likely to be the most heavily hit by 
the recent surge in  energy prices, as they account for  the largest share of  energy use in Croatia, 
along with the households (Graph b.1.1). Especially the Transport sector uses a much larger share of 
energy  compared  to  the  EU.  Only  the  Energy  &  Transformation  sector  seems  to  rely  somewhat 
more  strongly  on  imports  from  Russia  (see  also  the  caveat  in  the  notes  on  the  indirect  imports  of 
Russian gas). 

The increasing energy prices are expected to have a non-negligible impact on trade balances 
in 2022 and 2023. Since Croatia is a net importer of energy goods, and assuming roughly the same 
energy  use in terms of  physical units,  higher energy  prices are expected to strongly  contribute  to a 
deterioration of the trade balance (Graph b.1.2).  

Graph b.1.2: 

Croatia goods and service trade balance – fossil trade contribution 

Notes: The graph displays the trade balance as % of GDP, and highlights net trade of petroleum products, natural gas and solid fossil fuels (mainly coal), in 
2015 import prices. The ‘fossil price impact’ component details the impact of price changes on the (also changing) real trade balance. 2022 and 2023 figures 
reflect central assumptions of the Commission spring forecast, notably combining the forecasted fossil price evolution with broadly forecasted import 
quantities of fossil energy sources. 

Exposure  of  the  Croatian  economy  to  Russia  through  trade  and  financial  links  is 
comparatively small. The Croatian economy strongly relies on international tourism, but the share 

11 

 
 
 
 
 
 
 
 
 
 
 
2. Assessment of macroeconomic imbalances 

of  Russian  residents’  nights  spent  in  Croatia  in  the  total  of  foreign  tourists’  nights  spent  is  only 
around 1%. Still, the share of value-added created in the Croatian economy to satisfy Russian final 
demand is slightly higher than for the EU, and equals 0.5% of GDP. Croatian residents do not hold 
many assets in Russia, while Russian FDI in Croatia is not negligible as it stands at around 0.7% of 
GDP. 

Table b.1.1:  

Selected exposures 

Notes:  data  source  Eurostat  for  commodity  exposures,  European  Commission  Figaro for  value-added  exposures,  BIS  for  consolidated  banking  exposures, 
European Commission FinFlows for other financial exposures. While Croatia does not have direct gas imports from Russia, data provided by the government 
suggests that indirect imports of gas from Russia are 22% of the total gas supply. Equally, while the share of nuclear power in Croatian energy mix is 0%, a 
significant  share  of  the  electricity  Croatia  imports  from  Slovenia  is  produced  in  a  nuclear  plant  commonly  owned  by  Slovenia  and  Croatia.  Energy  gross 
inland consumption excludes net imports of electricity and derived heat. 

12 

Trade & financial exposuresunitHREUEnergy mixunitHREUDomestic value added embodied in exports to Russia% of GDP0.5%0.4%Solids fossil fuels (incl. peat)% of Gross inland consumption 20204.6%10.8%Non-energy Russian import content in final demand% of GDP0.6%0.4%Oil and petroleum products% of Gross inland consumption 202035.2%32.7%Russian tourist nights spent% of total 20191.0%2.7%Natural gas% of Gross inland consumption 202031.9%24.4%FDI assets held in Russia% of 2020 GDP0.1%2.5%Renewables and waste% of Gross inland consumption 202028.3%19.0%Portfolio & other inv. assets held in Russia% of 2020 GDP0.0%0.9%Nuclear% of Gross inland consumption 20200.0%13.1%FDI liabilities towards Russia% of 2020 GDP0.7%1.2%Commodity exposuresunitHREUPortfolio & other inv. liabilities towards Russia% of 2020 GDP0.2%1.1%Net petroleum imports from all countries% of GDP 20211.7%1.2%Consolidated banking exposures towards Russia% of 2021 GDP0.5%Crude oil imports from Russia '20% of oil imports0.0%25.7%Net gas imports from all countries% of GDP 20211.3%0.6%Gas imports from Russia '20% of gas imports0.0%43.6% 
 
 
 
 
 
 
 
 
Table 2.1: 

Selected economic and financial indicators (Part 1), Croatia 

2. Assessment of macroeconomic imbalances 

(e) estimate based on ECB quarterly data 
(1) Potential output is the highest level of production that an economy can reach without generating inflationary pressures. 
The methodology to compute the potential output is based on K. Havik, K. Mc Morrow, F. Orlandi, C. Planas, R. Raciborski, W. 
Roeger, A. Rossi, A. Thum-Thysen, V. Vandermeulen, The Production Function Methodology for Calculating Potential Growth 
Rates & Output Gaps, COM, European Economy, Economic Papers 535, November 2014. 
(2) Deviation of actual output from potential output as % of potential GDP. 
(3) Current accounts in line with fundamentals ("current account norms") are derived from reduced-form regressions 
capturing the main determinants of the saving-investment balance, including fundamental determinants, policy factors and 
global financial conditions. See L. Coutinho et al. (2018), "Methodologies for the assessment of current account benchmarks", 
European Economy, Discussion Paper 86/2018, for details.  
(4) This benchmark is defined as the average current account required to reach and stabilise the NIIP at -35% of GDP over the 
next 20 years. Calculations make use of Commission’s T+10 projections. 
(5) NENDI is a subset of the NIIP that abstracts from its pure equity-related components, i.e. foreign direct investment (FDI) 
equity and equity shares, and from intracompany cross-border FDI debt, and represents the NIIP excluding instruments that 
cannot be subject to default. 
(6) Fundamentals-based benchmarks are derived from regressions capturing the main determinants of credit growth and 
taking into account a given initial stock of debt. Prudential thresholds represent the debt threshold beyond which the 
probability of a banking crisis is relatively high, minimising the probability of missed crisis and that of false alerts. Methodology 
to compute the fundamentals-based and the prudential benchmarks based on Bricongne, J. C., Coutinho, L., Turrini, A., 
Zeugner, S. (2019), “Is Private Debt Excessive?”, Open Economies Review, 1- 42. 
Source: Eurostat and ECB as of 2022-05-02, where available; European Commission for forecast figures (Spring forecast 2022) 

13 

all variables y-o-y % change unless otherwise stated2003-072008-122013-17201820192020202120222023Real GDP 4.8-1.81.72.93.5-8.110.23.43.0Potential growth  (1)3.40.00.81.82.51.82.72.92.7Contribution to GDP growth:Domestic demand 5.2-2.41.03.25.0-3.58.33.44.5Inventories 0.6-0.60.51.6-1.60.7-4.90.00.0Net exports -1.01.10.2-1.80.1-5.36.80.1-1.5Contribution to potential GDP growth (1):Total Labour (hours) 0.7-0.6-0.50.51.21.21.21.41.0Capital accumulation 1.71.00.50.70.80.50.70.81.0Total factor productivity 1.0-0.30.80.60.40.20.80.70.7Output gap (2)2.8-0.4-2.02.53.6-6.50.30.81.1Unemployment rate12.411.815.08.56.67.57.66.36.0Harmonised index of consumer prices (HICP)2.72.90.61.60.80.02.76.12.8GDP deflator 3.72.50.42.01.9-0.13.23.82.4External positionCurrent account balance (% of GDP), balance of payments-7.7-4.61.61.83.0-0.13.11.50.1Trade balance (% of GDP), balance of payments-8.9-4.1-0.1-0.8-0.3-6.8-1.2..Primary income balance (% of GDP)-2.5-3.4-1.0-0.5-0.12.30.3..Secondary income balance (% of GDP)3.72.92.83.23.44.44.0..Current account explained by fundamentals (CA norm, % of GDP) (3)-1.7-1.0-0.6-0.2-0.2-0.1-0.1-0.2-0.3Required current account to stabilise NIIP above -35% of GDP over 20Y (% of GDP) (4)-0.50.8-2.6-3.9-4.1-4.2-4.7-4.5-3.9Capital account balance (% of GDP)0.10.10.71.31.62.12.3..Net international investment position (% of GDP)-63.0-88.4-78.2-55.7-46.7-47.8-33.9..NENDI - NIIP excluding non-defaultable instruments (% of GDP) (5)-30.7-48.8-36.6-13.6-1.5-0.38.5..Net FDI flows (% of GDP)-4.7-2.9-2.00.0-4.8-2.2-3.4-6.0-7.1CompetitivenessUnit labour costs (ULC, whole economy)2.11.9-2.03.60.09.8-3.11.11.5Nominal compensation per employee 5.42.0-1.03.90.42.15.63.02.7Labour productivity (real, hours worked)2.60.22.11.0-1.1-6.88.90.3-0.4Real effective exchange rate (ULC)1.7-1.1-2.63.1-3.1....Real effective exchange rate (HICP)0.8-0.70.42.5-1.5-0.50.6..Export performance vs. advanced countries (% change over 5 years)30.7-3.7-2.419.720.20.6...Private sector debtPrivate sector debt, consolidated (% of GDP)82.4117.4108.292.188.398.090.7e..Household debt, consolidated (% of GDP)30.840.337.133.433.837.635.5e..Household  debt, fundamental benchmark (% of GDP) (6)6.516.819.617.717.119.318.3..Household  debt, prudential threshold (% of GDP) (6)52.150.149.252.453.453.854.6..Non-financial corporate debt, consolidated (% of GDP)51.677.171.158.754.560.455.2e..Corporate debt, fundamental benchmark (% of GDP) (6)26.233.339.638.237.341.939.3..Corporate debt, prudential threshold (% of GDP) (6)60.869.066.365.564.364.565.2..Private credit flow, consolidated (% of GDP) 13.93.6-0.22.21.11.33.0e..Corporations, net lending (+) or net borrowing (-) (% of GDP)-6.2-0.71.8-1.60.21.3...Households, net lending (+) or net borrowing (-) (% of GDP)2.52.23.54.54.07.4...Net savings rate of households (% of net disposable income)0.60.52.24.33.97.5...forecast 
 
 
 
 
 
   
 
Table 2.2: 

Selected economic and financial indicators (Part 2), Croatia 

2. Assessment of macroeconomic imbalances 

(7) Unweighted average of price-to-income, price-to-rent and model valuation gaps. The model valuation gap is estimated 
in a cointegration framework using a system of five fundamental variables; total population, real housing stock, real 
disposable income per capita, real long-term interest rate and price deflator of final consumption expenditure, based on 
Philiponnet, N., Turrini, A. (2017), "Assessing House Price Developments in the EU," European Economy - Discussion Papers 2015 - 
048, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission. Price-to-income and price-to-
rent gaps are measured as the deviation to the long term average (from 1995 to the latest available year). 
(8) Price-to-income overvaluation gap measured as the deviation to the long term average (from 1995 to the latest available 
year). 
(9) Domestic banking groups and stand-alone banks, EU and non-EU foreign-controlled subsidiaries and EU and non-EU 
foreign-controlled branches. 
Source: Eurostat and ECB as of 2022-05-02, where available; European Commission for forecast figures (Spring forecast 2022) 

14 

all variables y-o-y % change unless otherwise stated2003-072008-122013-17201820192020202120222023Housing marketHouse price index, nominal11.0-2.0-0.86.19.07.77.3..House price index, deflated7.9-4.9-1.04.67.87.34.5..Overvaluation gap (%) (7)11.33.0-10.6-10.2-6.4-1.10.7..Price-to-income overvaluation gap  (%) (8)5.97.5-7.4-12.2-9.4-2.9-10.8..Residential investment (% of GDP)3.63.42.72.63.03.43.1..Government debtGeneral government balance (% of GDP)-3.7-5.7-2.90.00.2-7.3-2.9-2.3-1.8General government gross debt (% of GDP)38.955.680.873.371.187.379.875.373.1Banking sectorReturn on equity (%)..-7.73.96.16.8...Common Equity Tier 1 ratio..13.416.018.019.5...Gross non-performing debt (% of total debt instruments and total loans and advances) (9)..11.17.04.64.7...Gross non-performing loans (% of gross loans) (9)..11.57.35.25.34.6..Cost of borrowing for corporations (%)..2.92.52.32.31.3..Cost of borrowing for households for house purchase (%)..3.73.62.92.52.8..forecast 
   
 
3.  THEMATIC CHAPTER: PRIVATE DEBT 

The private sector debt-to-GDP ratio improved in 2021. The ratio decreased by 7 percentage points in 
2021,  reaching  91%  of  GDP.  The  decline  was  driven  by  a  sharp  rebound  of  GDP.  The  share  of  non-
financial corporations (NFC) debt in GDP decreased by 5 pps. to 55% in 2021, while that of households 
fell by 2 pps. to 36% of GDP. Both household and NFC debt were below the EU average and country-
specific  prudential  thresholds  and  far  below  their  peaks  of  41%  of  GDP  in  2012  and  81%  of  GDP  in 
2010,  respectively.  Still,  they  were  considerably  above  the  levels  suggested  by  fundamentals  (Table 
3.1). (15) According to CNB data, the share of non-performing loans (NPL) in total loans declined to 4.3% 
at the end of 2021 from 5.3% in 2020. 

Household debt 

Although credit flows picked up, the ratio of household debt to GDP decreased in 2021 as real GDP 
growth and inflation contributed to passive deleveraging. After an increase by 4 pps. in 2020 to 38% 
of  GDP,  household  debt  decreased  in  2021  by  2  pps.  to  36%  (Table  3.1),  driven  entirely  by  the  high 
nominal GDP growth of 12.5% (Graph 3.1 (a)). Following the slowdown in 2020, household credit flow 
almost doubled in 2021 reaching 1.5% of GDP, thus slightly exceeding the benchmark for flows of 0.9% 
of  GDP  (Table  3.1).  In  nominal  terms,  total  consolidated  household  debt  increased  by  3.2%  in  2021 
compared to the previous year. In 2020, the ratio of household debt to gross disposable income was 57%, 
well below the EU average. 

Household  borrowing  in  2021  was  largely  driven  by  strong  mortgage  credit  growth.  The  stock  of 
household debt consists  mainly of  mortgages. The stock of  mortgages  grew by 9.5%  y-o-y in 2021 Q4 
(Graph  3.1  (d)),  supported  by  declining  mortgage  rates,  rising  household  disposable  income  and 
supportive  policy  measures.  Strong  mortgage  lending  growth  was  one  of  the  risks  that  the  ESRB 
emphasized in its report on residential real estate  sector vulnerabilities in Croatia (see  chapter 2) and it 
could  contribute  to  a  continued  rise  in  house  prices,  thus  additionally  pressuring  housing  affordability. 
Personal loans, which represent only a small fraction of total household borrowing, recorded a decline in 
2021 (Graph 3.1 (c)). Similar to other Member States, there has been a significant increase in household 
savings, as the COVID-19 pandemic containment measures constrained consumption (Table 3.1).  

NPL growth remains contained. According to the CNB data, the households NPL ratio stood at 6.6% in 
the 4rth quarter of 2021,  decreasing by 0.5 pps. compared to end of 2020, and still among the highest 
levels  in  EU.  Housing  NPLs  slightly  declined,  whereas  NPLs  for  other  types  of  loans  to  households 
increased, such as general purpose loans and overdrafts.  

Corporate debt   

(NFCs)  debt-to-GDP  ratio  decreased                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

sector 

The  consolidated  non-financial  corporate 
to 55% of GDP in 2021, from 60% in 2020, thus moving back to its 2019  level. The fall in the debt 
ratio was driven entirely by the sharp rebound of nominal GDP, while credit flows contributed positively 
to  the  overall  change  (Graph  3.2  (a)).  The  corporate  debt  ratio  was  below  the  prudential  threshold 
estimated for Croatia (Table 3.1). The structure of corporate debt has changed little over the years. Loans 
comprise around 94% of total NFC debt, while debt securities account for only 6%, of which 65% is held 
by  non-residents.  Around  55%  of  the  total  loans  to  NFCs  is  provided  by  the  domestic  financial  sector, 
predominantly banks.  

(15)  Prudential threshold represents the debt level beyond which the probability of a banking crisis is relatively high. Fundamentals-
based benchmarks are derived from regressions capturing the main determinants of credit growth and taking into account initial 
stock  of  debt.  Note  that  the  estimation  of  fundamental  benchmarks  may  suffer  from  considerable  downward  bias  in  case  of 
Croatia,  due  largely  to  very  low  levels  of  debt  in  the  initial  period.  For  methodologies  see  European  Commission  (2017), 
Benchmarks for the assessment of private debt. Note for the Economic Policy Committee, European Commission, Brussels, and 
European Commission (2018), Fundamentals-based private debt benchmarks: enhanced sample and robustness checks. Note to 
LIME, European Commission, Brussels. 

15 

 
                                                           
3. Thematic chapter: Private Debt 

The nominal stock of NFC debt slightly increased in 2021, driven largely by lending from outside 
the domestic banking sector. Based on data on changes of nominal stocks, NFC debt in 2021 increased 
by 2.0% compared to the previous year. The growth rate of NFC debt in 2021 was slightly above that in 
2020 (1.7%) and the main growth drivers changed.  Compared to 2020, in 2021 positive contribution of 
domestic  bank  loans  turned  to  negative,  while  negative  contribution  of  domestic  loans  from  other 
financial institutions and foreign loans turned to positive territory. Moreover, in 2021 foreign loans took 
over the role of the key driver of growth of NFC debt stock from domestic bank loans that were the key 
driver in 2020. Government loans kept its positive, but milder contribution to changes in nominal stock of 
debt, while contribution of debt securities turned from neutral to mildly positive (see Graph 3.2 (b)).  

The Croatian authorities rolled out different measures to support NFCs during the pandemic, most 
of  which  expired  by  the  end  of  2021.  This  included  various  fiscal  measures  (employee  support,  tax 
deferrals,  tax  and  contribution  reliefs,  public  loans (16)  and  public  guarantees),  moratoria  by  credit 
institutions,  leasing  corporations  and  HBOR  and  other  measures,  such  as  new  “COVID”  loans  and 
restructuring  and  reprograms  by  credit  institutions.  According  to  the  CNB, (17)  during  2021,  most 
measures  were  phased  out  or  downsized.  At  the  end  of  the  third  quarter  of  2021,  active  moratoria  and 
public guarantees were almost non-existent, while loans for preservation of liquidity are being gradually 
repaid.  

In  2020-2021,  NFCs  in  Croatia  mostly  relied  on  moratoria  and  employee  support.  Most  loan 
moratoria  were  used  by  Accommodation  and  food  service,  followed  by  Manufacturing,  Transport  and 
ICT. (18)  Following  the  COVID-19  related  measures,  which  largely  expired,  Croatian  authorities  are 
planning  to  implement  some  legislative  changes  that  could  affect  the  dynamics  and  indebtedness  of 
NFCs. As per the RRP, the Croatian authorities are planning to amend the Bankruptcy Act by mid 2022, 
which should improve the early detection of financial instability and initiate internal restructuring of high-
risk  NFCs.  This  should  reduce  risks  of  defaults  and  the  subsequent  initiation  of  bankruptcy  and 
liquidation procedures. In addition, new equity financial instrument expected to be set up in 2022 should 
reduce dependence of NFCs on bank lending. Implementation of measures in the Action Plans to alleviate 
the administrative burden on the economy 2018, 2019, 2020 should be finished by the end of 2022, with 
most  of  the  red  tape  cuts  already  implemented  over  the  course  of  2020  and  2021.  Reduction  of 
administrative burden could support overall business dynamics. 

The share of NPLs in corporate debt decreased in 2021 and it is expected to stay on a downward 
path. According to the CNB data, NPLs in the NFC sector in 2021 decreased by 2.6 pps., to 9.9%. Both 
the numerator (value of NPLs) and the  denominator (total loans) supported the decline. Most NFC sub-
sectors  recorded  a  decline  in  NPLs,  with  the  notable  exceptions  of  accommodation  and  food  service 
activities  (see  Box  3.1)  as  well  as  transport,  i.e.  sectors  that  were  most  affected  by  the  pandemic.  The 
biggest  decline  was  recorded  in  agriculture,  forestry  and  fishing,  manufacturing  and  construction  (see 
Graph 3.2 (c)). NPLs are highest in transport, and manufacturing, while real estate activities record the 
lowest NPL ratio of 5.9%. Given the decline in the share of Stage 2 loans in most large sectors, the NPL 
ratio can be expected to continue decreasing going forward. The notable exception is accommodation and 
food service activities (see Box 3.1 below), where the share of Stage 2 loans in total loans stood at 55%. 
As most government support measures were already phased out during, 2021 it is not expected that NPLs 
will start to increase in the future. According to CNB data, total NPL coverage ratio declined from 68% in 
2019, to 64% in 2020 and 63% in 2021. 

The share of so-called zombie firms increased in 2020 in many sectors, but the establishment and 
exits  of  firms  have  recently  been  increasing.  In  2020,  the  share  of  zombie  companies,  defined  as 
companies  that  are  unable  to  cover  interest  expenses  for  three  years  in  a  row,  in  total  sales  by  NFCs 
increased in all sectors, except for Manufacturing and Wholesale and retail sale sectors. (19) The share of 
zombie firms was highest in transport, in accommodation and food service activities and in construction, 
while it was lowest in the ICT sector (see Graph 3.2 (d)). In 2020 registrations of new business decreased 
to 83% of 2019 level, recovering only partially in 2021 – to 98%of  2019 level. Exits from the market in 

(16)  Provided  by  Croatian  Bank  for  Reconstruction  and  Development  (HBOR)  and  Croatian  Agency  for  SMEs,  Innovations  and 

Investments (HAMAG-BICRO). 

(17)  CNB publication Macroprudential Diagnostics, No. 16 
(18)  CNB publication Financial stability, No. 22 
(19)  Data provided by CNB during the IDR mission.  

16 

                                                           
2020  fell  to  74%  of  the  2019  level,  while  in  2021  they  exceeded  the  2019  level  by  8%.  In  2021,  there 
were similar number of sectors with registrations of new business and exits from the market above and 
below 2019 level (see Graph 3.2 (e)). 

3. Thematic chapter: Private Debt 

17 

3. Thematic chapter: Private Debt 

Box 3.1: NFCs debt in tourism sector 

The  accommodation  sector  is  dominated  by  households  and  small  firms,  with  around  82%  of 
enterprises  having  less  than  10  persons  in  employment  (2019  data)  (Graph  1  (b)).  These  micro-
enterprises account for less than 10% of  of total sectoral employment and slightly more  than 10% of total 
sectoral  turnover.  Conversely,  a  small  number  of  the  largest  companies  account  for  around  half    of  
employment and total turnover in the sector. As for the indebtedness of the sector, group of large companies 
accounts for slightly less than half of the loans. Looking at the distribution of companies by productivity, 
dominant part of loans is concentrated in the 3rd quartile.  

The  tourism  sector  was  hit  hard  by  the  pandemic,  following  a  substantial  growth  in  pre-pandemic 
years. Companies in the Accommodation and food service sector had the largest uptake of support measures 
in form of moratoria and loan restructuring (up to 31 March 2021). According to the CNB, the hotel industry 
was hit by the crisis more severely than sole proprietors. However, due to the strong tourist season in 2021, 
financial  results  of  NFCs  in  Accommodation  and  food  services  sector  have  improved.  Receipts  in  2021 
stood  above  90%  of  2019  level,  compared  to  only  55%  in  2020.  Business  registrations  in  the 
Accommodation and food services sector fell to 78% of the 2019 level in 2020 and further down to 76% in 
2021, while exits fell to 76% in 2020 and returned to 2019 level in 2021.  

As  a  considerable  share  of  moratoria  expired  before  the  end  of  2021,  some  deterioration  of  loans’ 
quality in the  accommodation  and food service sector  could be observed,  despite the strong tourism 
recovery  in  2021.  After  the  outbreak  of  the  pandemic,  the  share  of  non-performing  loans  (NPLs)  in  total 
loans of the Accommodation and food service sector increased from 7.5% in 2019 to 8.3% in 2020 and 10% 
in 2021, reversing the downward trend in recent years (Graph 3.2. (c)). This was in contrast to the evolution 
of total NFC NPLs, and to developments in other important sectors. The accommodation and food services 
sector records the highest share of stage 2 loans in total loans. This indicator increased from 8% at the end of 
2019 to 55% in mid-2021, after which it has been stagnating. Other large sectors recorded a steady decline. 

Graph 1: Indebtedness and average size of firm in the accommodation sector 

European Commission services. Turnover measures in million EUR. Productivity refers to labour productivity. 

18 

 
 
 
Graph 3.1: 

Thematic Graphs: Households Debt 

3. Thematic chapter: Private Debt 

Source: European Commission services 

19 

051015202530354045% of GDP(b) Consolidated household debtLong-term bank loansShort-term bank loansLoans by OFIsOther domestic debt liab.ForeignTotal consolidatedSource: Eurostat051015202530354045070809101112131415161718192021% of GDP(c) Bank loans to households by typeLoans for house purchaseLoans for consumptionLoans for house purchase, EALoans for consumption, EASource: EuropeanCommission calculations based on ECB, Eurostat020406080100120140160-20-15-10-505101507Q408Q409Q410Q411Q412Q413Q414Q415Q416Q417Q418Q419Q420Q421Q42015=100Rate of change y-o-y (%)(d) House price and mortgage credit growthMFI loans for house purchase (y-o-y growth rate)Real House Price Index (2015=100), right axisNominal House Price Index (2015=100), right axisSource: Eurostat, ECB (BSI)0.010.020.030.040.050.060.070.080.09900010203040506070809101112131415161718192021%GDP(f) Household debt and benchmarkHousehold debt, %GDPFundamentals-based benchmark, household debtPrudential benchmark, household debtSource: European Commission services010203040-200204060IELTROITPLCYFIEEHRBGELSIMTESLVDKNLHUSKCZBEPTFRDEATSELU%(e ) Overvaluation metricsECFIN average overvaluation gap (lhs)ECB average overvaluation gap (lhs)Number of years of income needed to buy 100sqm (rhs)Source:European Commission Services-6-5-4-3-2-101234513Q114Q115Q116Q117Q118Q119Q120Q121Q1y-o-y change(a) Decomposition of y-o-y changes in debt-to-GDP ratios, householdsCredit flowReal growthInflationOther changesD/GDP, changesource: Eurostat   
 
Graph 3.2: 

Thematic graphs: Non-financial corporations debt 

3. Thematic chapter: Private Debt 

Source: European Commission services 

20 

-10-5051015080910111213141516171819202122'y-o-y change(a) Decomposition of y-o-y changes in debt-to-GDP ratios, non-financial corporations, consolidatedCredit flowReal growthInflationOther changesD/GDP, changeSource: B1 based on Eurostat (consolidated data).  05101520253016Q216Q316Q417Q117Q217Q317Q418Q118Q218Q318Q419Q119Q219Q319Q420Q120Q220Q320Q421Q121Q221Q321Q4(c) NPL across sectorsNFC totalAgricultureManufacturingConstructionTradeAccomm. and foodReal estateTransportSource: Croatian NationalBank02468101214(d) Share of zombie firms by sector20192020Source: CroatianNational Bank, based on FINA dataC&REITCAgrManTranTradeTourTotalC&REITCAgrManTradeTourTotal5010015050100150Foundation, 2019=100Exits, 2019=100(e) Exit and registrations by sector20202021(240;71)Note: En: Energy,C&RE: Construction & Real Estate,ITC: ITC,Agr: Agriculture,Man:Manufacturing,Tran: Transport,Trade: Trade,Tour: Accomodation and Food,Total: TotalSource: Croatian National Bank, based on FINA data-0.05-0.04-0.03-0.02-0.0100.010.020.030.04201320142015201620172018201920202021(b) y-o-y changes of nominal stocks of NFC liabilities, contributionsDebt securitiesForeign loansGovernment loansDomestic other financial sector loansDomestic bank loansTotal debtsource: EuropeanCommission services  
 
Table 3.1: 

Private debt indicators, Croatia 

3. Thematic chapter: Private Debt 

(f) European Commission forecast, . (1) Quarterly data is non-consolidated. (2) Gross non-performing bank loans and 
advances to Households and non profit institutions serving households (% of total gross bank loans and advances to 
Households and non profit institutions serving households). (3) Gross non-performing bank loans and advances to Non-
financial corporations (% of total gross bank loans and advances to Non-financial corporations). (4) Quarterly data is 
annualized. 
Source: (a) Eurostat, (b) Ameco, (c) European Commission calculations, (d) ECB. 

21 

2003-072008-122013-18201920202021f|21Q121Q221Q321Q4SourceStocksPrivate debt level (% of GDP)(1)(a,d)82117105889891|133128121118Private debt level (% of potential GDP)(1)(a,b,d)85117104919291|122121119118Prudential threshold (% of GDP)(c)113119116118118120|Fundamental benchmark (% of GDP)(c)315059546158|FlowsPrivate credit flows (transactions, % of GDP)(4)(a)13.93.60.21.11.33.0|5.37.3-1.83.6Private credit flows (transactions, % of potential GDP)(4)(a,b)14.43.80.21.21.23.0|4.97.0-1.83.6Benchmark for flows (% of GDP)(c)|Households (HH)StocksHH debt level (% of GDP)(a,d)314036343836|38373534HH debt level (% of potential GDP)(a,b,d)324036353536|35353534Prudential threshold (% of GDP)(c)535050535455|Fundamental benchmark (% of GDP)(c)61719171918|Debt (% of gross disposable income)(a,b,d)4864595657|Interest paid (% of gross disposable income)(a,b)1.52.81.00.30.2|Debt (% of gross financial assets)(a,d)38.742.131.227.726.5|26.226.025.725.2Share of variable rate loans for house purchase (%)(d)60.553.613.120.214.9|Domestic  loans in forex (% of dom. loans)(d)75.561.945.544.845.3|FlowsHH credit flows (transactions, % of GDP)(4)(a)5.40.60.32.30.81.5|1.42.32.00.7HH credit flows (transactions, % of potential GDP)(4)(a,b)5.50.70.42.40.71.5|1.32.22.00.7Benchmark for flows (% of GDP)(c)1.92.20.10.40.60.9|Savings rate (% gross disposable income)(b)6.66.88.59.513.4|Investment rate (% gross disposable income)(b)5.45.95.26.76.4|p.m. Bank HH NPLs (% of HH loans)(2)(d)9.5|Non-financial corporations (NFC)StocksNFC debt (% of GDP)(1)(a,d)527769556055|95918684NFC debt (% of potential GDP)(1)(a,b,d)537768565655|87878484Prudential threshold (% of GDP)(c)606966646565|Fundamental benchmark (% of GDP)(c)263339374239|Debt (% of value added)(a,b,d)107154139108124|Interest paid (% of gross operating surplus)(a,b)15181356|Debt (% of gross financial assets)(a,d)140182146104101|Domestic  loans in forex (% dom. Loans)(d)72.266.561.863.463.0|63.063.262.863.0FlowsNFC credit flows (transactions, % of GDP)(4)(a)8.62.9-0.1-1.20.61.5|3.95.1-3.82.9NFC credit flows (transactions, % of potential GDP)(4)(a,b)8.83.1-0.1-1.20.51.5|3.64.8-3.82.9Benchmark for flows (% of GDP)(c)|Investment (% of value added)(b)37.529.128.028.628.6|Savings (% of value added)(b)23.225.227.825.627.3|p.m. Banks NFC NPLs (% of NFC loans)(3)(d)25.012.011.4|Total private sector (Households and Non-financial corporations)