zeljko rohatinski : what 2010 may hold for the croatian economy address by dr zeljko rohatinski, governor of the croatian national bank, at the business conference “ big plans day ”, organised by the lider business weekly, zagreb, 26 october 2009. * * * after a turbulent 2009, the year 2010 is expected to be mostly a year of stagnation ( viewed statistically ), without major structural changes in the real and financial sectors. more important than the statistics, however, is that no significant changes are expected in the modalities of economy functioning, as there are no substantial changes in the economic policy. but this does not mean that 2010 is going to be a “ calm year ” and that the “ status quo ” will be restored and maintained by itself, particularly in the context of current domestic developments which may postpone the country ’ s exit from recession. the three key determinants of our economic situation in the coming year are the following : stagnation in croatia ’ s most important partner countries in the european union and in the region will curb export demand, while, given the poor propulsiveness of our export demand, an “ active ” improvement in the current account can hardly be expected. goods and services exports could go up about 5. 5 % ( dropping by 18. 1 % in 2009 ). a rational domestic demand and import policies will be required ( with a 5. 3 % rise in imports, given the oil price growth ), in order to keep the current account deficit at about 6. 5 % of gdp ( eur 3 billion ), the same as in the current year. of course, this implies a continuation of heavy dependence on foreign sources of financing in 2010. given stagnation in direct and portfolio investments ( eur 2. 1 billion in 2009 vs. eur 2. 3 billion in 2010 ), this would mean that : − the current account deficit will have to be financed by foreign borrowing ; − the external debt - to - gdp ratio will increase from 83 % last year and about 93 % in 2009, to about 100 %, which is feasible, but will certainly not improve the country ’ s credit rating, and the question is to what extent the global downward trend in interest rates can carry over to this country. this is all too important, as we know that in 2010 : − total debt repayments ( eur 8. 3 billion in principal and eur 1. 4 billion

for risk transfer mean that more risk may end up in parts of the financial system where supervision and disclosure is weaker and in parts of the economy less well able to manage it. and finally, we have seen substantial growth in the integration of national financial systems. indeed, a number of foreign and foreign - owned banking organizations are among the largest financial institutions in the u. s., with operations here that run into the hundreds of billions of dollars, and in some cases representing the majority of their global assets. the major u. s. banks and investment banks are more global in the scope of their operations, and their affiliates are a major presence in many of the countries in which they operate, in some cases with a larger share of financial activity than they have in the u. s. market. payments and clearing arrangements are increasingly transnational in scope. but, the legal and supervisory frameworks for financial activity are still national, and are likely to remain so for the foreseeable future. and despite the development of a much more intensive and extensive network of cooperation among supervisory and regulatory and enforcement authorities, and movement toward an ever - higher standard of convergence in key elements of the regulatory structure across jurisdictions, the regime is inevitably uneven, with different standards across jurisdictions and therefore continuing opportunities for regulatory arbitrage. implications these broad developments alter the hierarchy of systemic concerns for the u. s. authorities. the greater systemic importance of a smaller number of large bank - centered financial institutions, the greater role played by non - bank financial institutions, the growth in the gses, the greater operational demands on the more concentrated core of the clearance and settlement infrastructure, the dramatic increase in the complexity of the risk management and compliance challenge, and the extent of global financial integration - these developments change the nature of the potential sources of stress to the financial system. they change how stress is transmitted. and they change the impact of tools we use to mitigate risk ex ante and to contain the broader financial and macroeconomic fall - out of financial distress. these developments can have both positive and negative impacts. in many respects, they help to reduce risk. in some ways, they increase risk. on balance the positive aspects dominate the less positive. shocks may act more quickly, but they can be more easily diffused and absorbed. institutions and markets seem better positioned to handle a substantial degree of stress. shocks may be less likely to result in the type of trend amplifying, self - reinforcing dynamic for sustained periods