Croatian Economy: The Gangrene Must Out

Porto Portugal Cartoon:

Porto Portugal Cartoon:

The beginning of 2013 was marked by stagnating movements in economic activities. Significant drop in exports came as well, coupled, though, with concurrent strengthening of domestic demand under the influence of increased government’s investment activities,” said the Croatian National Bank’s (HNB) analysis of the economic movements in Croatia on 8 May. “In such conditions, the administrative rate of unemployment stayed at high levels, which had already been reached. The fiscal politics were expressly expansive during the first three and a half months, however, sustaining such a trend for the remained of the year will only be possible if there is significant review of the fiscal goals for the whole of the year”, the HNB analysis continued.

In this clearly dark prognosis HNB emphasised that there had been significant fall in exports – up to 14.4 % in comparison to the same quarter of 2012, the industrial production had stagnated and so did small trade. Small movements in the building industry have been noted, as well as in job markets due to the temporary reduction in the number of unemployed associated with seasonal employment.

Consolidated central government expenditure has increased by 7.5% between January and February 2013, while government income had decreased by 1.2% in comparison with the same period last year.

“Total deficit in the consolidated central government for January and February was 60% of the planned amount for 2013. Central government debt in that period had increased by 3.9 billion Kuna, thus reaching 179.4 billion Kuna by the end of February…”

To remind oneself in the Budget for 2013-2015 the Croatian government had stated that Government Budget deficit for 2013 would be 10.9 billion Kuna or 3.1% of GDP. It forecasted revenue or income of 113.65 billion Kuna and expenditure of 124.52 billion Kuna.

The Croatian National Bank’s analysis talks about the need for the government to undertake a significant review of fiscal goals for 2013 if anything worthwhile is to happen in the economy. This could mean that the Croatian government must change its budget mid-year and that perhaps they did not know what they were doing when they picked up power in 2012.

Certainly, the Social Democrat led government seems to be floundering clumsily and helplessly through the economic nightmare that Croatia has been in for years. Successive governments (since the early nineteen nineties – secession from Yugoslavia) have done likewise, dragging their feet on administrative and legislative reforms that were and are absolutely essential for economic survival with the milieu of free and economically competitive nations.

Evidently none have made a point of fully taking up dr Franjo Tudjman’s advice and forecast that if Croatia was to become a truly prosperous democracy then it must learn from those who have succeeded in it, bring in the knowledge and the expertise from abroad, etc. But to do that, corruption and personal enrichment through privatisation of public companies would not have been entirely possible – the die-hard Communist political elite made sure that advancement of widespread entrepreneurship made only cosmetic appearances.

There is no doubt in my mind that the over-sized state is the culprit for the desperate situation Croatia is in economically. Too many people live off the state budget. It’s like a gangrene that must be cut out. All governments in Croatia – HDZ and SDP led ones equally – have done very little in cutting the public administration and in assisting the development of private enterprise. Indeed if the wealth of privatised public assets and companies did not go into the pockets of many individuals, either in hard currency or political favours, Croatia would now be in a much better place economically. It had and it has ample natural resources, it had and it has a nation of people among whom most are hard working in pursuits of a better life.
A serious and urgent reform is needed. Indeed, a reform that would see deep cuts in the public sector employment, but I fear no major political party will dare to bring this on in fear of losing votes.

The reality is that someone needs to cut out the gangrene (the huge surplus of public servants), otherwise all will fall.

The above mentioned analysis by the Croatian National Bank tells in no uncertain terms that the government is spending more and more, that the state revenue is less and less and that state debts are greater and greater.

It’s like the government politicians (and the opposition, for that matter) have fastened their seat-belts, shut their eyes, charging in a frenzy towards the “saviour” EU, hoping to wear the turbulent journey unscathed. Nope, that isn’t likely to happen, as majority have not made any serious progress away from the communist mind frame even though many almost swear they have.

Once in EU (from 1 July) Croatia will enter into a market of 500 million people, majority of which have established economically and political assertive practices while the Croatian lot still fail to assert their own political, professional and historical values on the international scene. They’ve kept tight with the markets within borders of former Yugoslavia – Serbia, Bosnia and Herzegovina, Macedonia, Montenegro … and come July 1 they will lose the freedom of trade they’ve had with these countries – they’ve done little if anything that truly counts to plug into the EU countries’ markets in preparation for entry into the EU.

And, at the end of the day, all we seem to hear from the Croatian government and the opposition is how they want foreign investments in Croatia, how they want domestic investments, how they want investments from the Croatian diaspora … but they’re doing almost nothing that would significantly make the state administration and red tape conductive to a strong investment climate. While acknowledging the fact that investments generally are on a slump worldwide, the Croatian government and the opposition nevertheless seem full of air and bubbles and someone needs to pop that balloon of political elitism before it takes the people into the dungeons of and economic gutter from which there is no return. Yep, the time has come when hitting the fist on the table, when determined measures regardless of the EU must be brought forward by Croatian, for Croatians. Ina Vukic, Prof. (Zgb); B.A., M.A.Ps. (Syd)

Croatia: How Government’s Kicking the Can Along Economic Junk Road

kicking the can

Croatia’s credit rating is on the junk heap. This will affect all facets of the economy and place growth onto a wish-list, rather than on the done-list.

Rating agency Standard & Poor’s on Friday 14 December lowered Croatia into junk status to BB-plus from BBB-minus, concluding that the recent government reforms will not be enough to boost the economy.

Oh what a tangled web Croatia’s Cock-a-doodle-doo coalition government weaves as it spends the money it doesn’t have.

Oh what a tangled web Croatia’s Cock-a-doodle-doo coalition government weaves as it’s Prime Minister Zoran Milanovic stamps his feet, shouting: ratings are not important … one rating agency says one thing and another says something entirely different three months later … have we done anything scandalous during the last three months to deserved reduction in rating … no we haven’t…we will sort it out ourselves … we don’t need the IMF (International Monetary Fund) … government does not save … government takes out loans … all countries take out loans … we will borrow more money … we won’t lower the wages … we won’t reduce the numbers of workers paid from the public purse (source: Prime Minister Zoran Milanovic on Croatian HRT TV news 16th December 2012).

Well, it’s true nothing scandalous, or otherwise, has been done by Milanovic’s government in the past three months. It is precisely that inactivity that has earned the junk status for Croatia’s credit rating and Milanovic simply does not seem to see that.

Déjà vu overpowers me. I’ve heard this before. Croatians have lived this before. When Tito ruled over Communist Yugoslavia. Anything – even the rigid and productivity based unsustainable job security – to keep people believing the “party” is keeping the individual afloat, while the economy’s flushing down the toilet!

The question that must be asked: Why isn’t the Croatian government prepared to implement painful changes/cuts to its public expenditure, introduce real and meaningful incentives for private business enterprise that will benefit all in the long run? The answer could well lie in its fear that it will lose votes at the next elections if it cuts public expenditure/public jobs.

It’s about votes; bugger the consequences for “Joe Bloggs” down the street.

Standard & Poor wrote: “In our opinion, the Croatian government’s reforms have so far been insufficient to eliminate the structural rigidities that hamper the country’s growth potential… We believe that the government’s fiscal resolve has weakened, leaving structural budgetary weaknesses, such as high personnel and social expenditures, which together make up just under three quarters of central  government spending, unaddressed. The outlook is stable, reflecting our view that Croatia’s wealth levels, relatively diversified economy, and future receipt of EU funds could help stabilize external imbalances and government finances while improving  growth prospects.”

Milanovic crows about borrowing more money. He talks of other countries that are doing the same as if that’s very fine and O.K.
Well, it’s not OK.
It’s not O.K. to drown along with others.

The issue of debt won’t go away by borrowing more money.  The more you borrow the more you must return. The issue won’t go away until the debts are liquidated. New loans are most likely going to prop up banks’ balance sheets or, God save the people from this one: more government bonds. Most likely nothing will go towards extending loans to businesses or households and getting out of the economic rut.

If the Croatia Bank for Reconstruction and Development (HBOR), headed by Anton Kovacev, appalling track record in instigating and supporting changes to and development of new private business enterprise is anything to go by, then Croatia is likely to stay on the junk heap for some time to come. HBOR has, according to Croatian HRT TV news December 17, also been placed onto the junk pile of economic performance/credit rating.

Finance minister Slavko Linic said December 17 that the government will be borrowing but the borrowing would mostly be internally, rather than externally. Kind of keep-things-local approach.

Next year will not pose any problems with borrowing and the Croatian government can take out loans to the value of HRK 28 billion which are equal to its dues, with most of these being taken on the domestic market, and we will not release government bonds in the first quarter because there is no need for us to crash the value of our bonds on the foreign market and there is also no need to take out a loan with the International Monetary Fund (IMF),” Finance Minister Slavko Linic said on Monday 17 December.

To throw a spanner into the government’s works, the Croatian National Bank governor Boris Vujcic holds that dependence upon domestic borrowing is not a good plan to recovery and economic growth. Vujcic states that in such circumstances interest rates would grow and it’d push out private borrowing – and that would result in a further ratings fall.

With HBOR’s poor rating and performance and Croatian National Bank (HNB) governor being at loggerheads with the government over the source of funds for government borrowing the real issues of desperately needed financial, public expenditure, private enterprise invigoration get lost and economic growth is in the can the government keeps kicking down the road. Decisions to implement real changes, get rid of structural rigidities, keep being delayed and the children of today will indeed bear the full burden when the government debt collectors start banging – not knocking – on the door.

If Milanovic was looking up to countries like Portugal, Spain, Greece … when he gave borrowing a thumbs up, then he’d better look again. One wouldn’t want Croatia to end up where these countries are heading – bankruptcy! Milanovic and his government have said several times over recently that foreign investment in Croatia hasn’t been coming as they thought it would. Of course it hasn’t – private investors look for security and flexibility that would allow decent profits and Milanovic’s government just hasn’t been delivering its part of the deal. They seem to be stuck in business operational rigidity, much of which corroded the economy of Communist Yugoslavia.

The reality is that national banking systems in Europe are having a hard time borrowing money from private investors and, hence, the European Central Bank (ECB) is becoming the lender of last resort. Perhaps ECB loan “terms and conditions” aren’t as rigid as those of the private sector and Milanovic might put on a pair of rosy-coloured glasses on his way to grab some ECB seemingly free money – if he sides with HNB governor rather than his Finance minister on the issue of borrowing, that is.

Don’t hold your breath for a better future on “free” or “easy” money terms ECB’s peddling.

Then Croatia (like Portugal or Greece) will become overborrowed, have an even smaller chance of growing the economy. Finance minister’s statement that new borrowings in 2013 will just be enough to service existing debt supports such dire consequences for the ever growing number of the unemployed and poverty stricken individuals!

Such government borrowing is, in reality,  a “rob Peter to pay Paul” self-inflicted predicament. What happens next?!

This is the biggest threat to the country and the people’s wealth and measures must be taken to protect the people and avoid utter misery. Such measures do not include inhaling solace, like Milanovic does, from comparing Croatia to other countries that borrow money.

Milanovic and his government are perhaps also marking time, kicking the can down the road, until EU funds start kicking in after 1 July 2013 (when Croatia is expected to become member of EU). That’s what Tito would do if he and the Communist Yugoslavia were still alive. Well, this just isn’t good enough. No EU fund will save the Croatian economy unless Croatia itself walks the hard yards and implements required changes to its public expenditure and vigorously stimulates sustained growth in small to medium private business enterprises. Ina Vukic, Prof. (Zgb); B.A., M.A.Ps. (Syd)

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