In 2012, the banking sector remained stable. It is well-capitalised and resilient to external shocks. In addition, the national currency has remained strong over recent years, and inflation has remained at moderate levels. What strategies are you implementing to balance a stable exchange rate, low inflation and the need for economic growth?
The idea of having a stable exchange rate, which we have had since 1994, is that the Croatian economic system is heavily euro-ised de facto. That means that on the deposits side, most of the deposits are in euros; 78 percent of deposits are in foreign currency, of which the majority is in euros. The banks also extend credit linked to euro in order to hedge their foreign currency position. Because of that, the stability of the exchange rate is of paramount importance for financial stability, because if the kuna devalues too much, that increases kuna value of debt of borrowers who have foreign currency-linked debt. If it appreciates too much, on the other hand, that hurts the export sector. That is why having a stable exchange rate is important both for the financial stability and for the growth of the economy.
We have been successful in keeping prices stable over the past 15 to 20 years, and this is also important for economic growth. The Central Bank’s primary mandate is to keep inflation low in order to create an environment for growth. In a small open economy like Croatian exchange rate stability also helps keeping inflation stable.
Please tell us about the benefits of joining the EU and an overview of the economy.
EU accession has definitely helped all economies joining the EU in the past. The same will happen with Croatia. It will increase the attractiveness of the Croatian market for foreign investment, just as we have seen in other countries that have joined the EU, because a country is joining a much bigger market. Another benefit is EU funds (the cohesion and the common agricultural funds). This again contributes to the growth potential of the economy. Croatia is learning from the experience of other countries in order to better exploit these benefits upon entry.
Croatia is joining the EU in a period of slow growth, but there will be an increased inflow of investments and a positive impact of transfers when we join the EU.
Regarding the competitiveness of the nation, we are aware that a series of privatisation processes are taking place at the moment. We know that some of the sectors are very attractive to Britain thanks to their know-how and expertise. What sectors are key opportunities for FDI?
At the moment there are ongoing privatisation processes in two important companies in the financial sector – the biggest insurance company in Croatia, and the Croatian postal bank. The tourism sector is definitely an advantage because of our location, and I believe that over time we will see an increasing number of foreign investments taking place in that sector, including, for example, health care tourism. Government also plans privatisation of a significant number of companies in tourism sector by the end of this year.
The Government will proceed with the privatisation of other government-owned companies. Croatia is in an interesting location, not just in terms of tourism but also transport. It is the southern link to central Europe through the coastal area and highways. A number of businesses are interested because of these locational opportunities.
Another opportunity that Croatia offers is a highly productive labour force, among the few most productive ones in the Central and East Europe, which might attract whole range of investors.
You are a very experienced banker, and we know about how much the Croatian people trust your management. We would like to delve into one of your comments that Croatia should be more business friendly. What path is Croatia taking to achieve this goal?
This is related to my previous remark related to improving the business climate as we enter the EU. That will be compounded in terms of foreign direct investment. There is a new investment law, so the tax environment has been changed for the better in terms of being more attractive for foreign investors. Investors in Croatia can now, for example, be exempt for up to ten years of corporate tax if they employ a certain number of workers. In addition to that it is very important to remove barriers for investors (mainly administrative barriers). The Government is now working on another law which intends to do exactly that – streamline and shorten the necessary procedures. That law should soon be adopted by the Parliament.
If you look at doing business and the competitiveness index rankings, and if you remove most of these obstacles, the country should move up the rankings. This is what the Government should be working on, and is working on at the moment.
Croatia is contemplating the future of the euro and the potential benefits of joining. What is your opinion of this, and when can we expect Croatia to want to join the Eurozone?
Croatia is already heavily euro-ised. Deposits in the banking sector are mostly in euros, therefore the benefits of Croatia entering the Eurozone are much higher than the costs. You always have to weigh the costs and benefits. We do not have a lot of freedom when it comes to an independent monetary policy, because we have to keep the exchange rate stable. So we will mostly get the benefits, through removal of the exchange rate risk, higher credibility, lower interest rates and integration in the payments system, without actually incurring many costs. Therefore, our goal will be to get into the monetary union as soon as possible, in other words, as soon as we are ready.
When will that happen? Technically speaking, you have to get into the EU and then first negotiate the entry into the exchange rate mechanisms before satisfying the Maastricht criteria. We will have to work hard to satisfy all the criteria to join the EMU as soon as possible. That is in our interest.
What is your opinion on the power of communication by joining forces with different countries?
I think that in business, it is all about the products you create and sales strategy that you have. You should make sure that you have competitive products to sell, and make sure you communicate them well. You cannot do much without having both.
How would you like people abroad to perceive your country?
It would be nice if they perceived it as a potential destination for doing business. It already has a very good tourism image, but now it has to improve its reputation as a business destination. That should be the objective.