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)

Croatia: Small business red tape cut in efforts to stimulate self-employment

Although received with a fair amount of skepticism and confusion by many in Croatia the government’s seemingly swift move to cut red tape, simplify small business registration and make it affordable to any entrepreneur or person with a view to entering into a business enterprise is praiseworthy.

As of 18 October people in Croatia are able to form or register a small business (so called simple company with limited liability) with only 10 Kunas (1.33 EURO) of founding capital/ share value. This falls within the new amendments of trading company laws and is aligned with EU standards and tasks imposed upon Croatia for its accession to EU in July 2013.

Under Article 390.a of Croatia’s Trading Companies Act (Zakon o trgovačkim društvima), a simple company with limited liability is a company with a lowest base capital of 10 Kunas, and the lowest nominal share value is 1 Kuna. Such a company cannot have more than three members/shareholders and can only have one member on its management. If the members of management do not have “health and pension insurance” through some other means (e.g. another job elsewhere) then such insurance will need to be paid by the business entity itself.

Dubbed a “simple company”, this limited liability company is required, under the law, to pay into its reserve capital one quarter of its annual profits. Hence, providing the company an avenue (given a thriving business through time) to reach the status of a “normal” or ordinary company where reserve capital is set at 20,000 Kunas (2,659 Euro), equivalent to about 3.7 average monthly wages. Up until now the cost around forming/registering a company had been around 5,000 Kunas and the new 10 Kuna deal makes the mere registration accessible for all.

The simple company registration process is user-friendlyvia a prescribed Form that needs to be filled in by a Public Notary, stating the intention to form a company, the list of members, the list of persons authorised to manage the company’s business and acceptance of a member of the nomination to manage the company. The Form is signed by all members and lodged electronically with the business court registry.

The use of company reserve capital is very strict,” says the Croatian justice minister Orsat Miljenic, adding: “These reserves can only be used to cover losses in previous financial year, but also to increase the company’s capital. This is a simple way of entering into business, designed to prevent the gray and black markets and the legalisation of business trading”.

He further added that this opportunity of starting and working within the frame of a simple company has been inserted into legislation as yet another measure in Croatia’s approach to EU membership. Just like in Germany, Italy and numerous other countries such opportunity is there for those who wish to “test their business entrepreneurship”.

The pleasing outcome of this new “push” to attract self-employment and/or pull in the reins of gray or black economy (that without exception avoids tax paying) is also in the reported fact that the company registration certificates take only 24 hours now, as opposed to the formerly unnerving practice/ red tape that took months and months.

Economist Ljubo Jurcic has been quoted as saying that “this new measure by the government is a damaging measure as it could reflect badly against individuals”. Jurcic added that “stimulating people to become business entrepreneurs is very bad because people who start a business out of desperation find themselves in an even worse situation a year later. The measure of simple companies sounds nice, but it’s more important to come up with a good idea and needed information, and then start a business.”

While Jurcic’s statement reflects those of many others in Croatia it is patronising, nevertheless.

The new measure by the Croatian government must be seen in a positive light.

It is there to offer opportunities that have never existed before in Croatia or in former Yugoslavia. It’s there as a vessel to bring about personal business responsibility and open up a new hopefully busy world of “cottage industries”, service outlets, small-scale manufacturing, open up small business veins throughout the country’s economy without which a healthy economy would struggle. Most Croatian people are well aware that one cannot start a business out of thin air, empty pockets or without a solid business plan projecting viability; they don’t need lectures or grandstanding such as the one offered by Jurcic.

With unemployment in Croatia reaching almost 18% cutting red tape around small business is a positive move. The government should now do more in low-cost and/or free training or educating people in small business via workshops, seminars, brochures etc. Furthermore, assisting people who come up with sound and viable business plans could also develop into small business government grants and loans.

The deeply regretful thing about Croatian business entrepreneurship is that its major development bank ( Croatian Reconstruction and Development Bank/Hrvatska banka za obnovu i razvoj/HBOR) has for years been extending loans to big business that often found itself in dire straits of profitless struggles and unchecked risks. Had there been greater attention to small and medium business, in developing better accountability for loans and grants, perhaps we’d be looking at a much healthier picture of employment and economy. Certainly a sole trader or small business owner feels the immediate effects of nonviable trading and fights harder to stay afloat than what an employee of a larger company does. The horizon for small and medium business in Croatia might be looking healthier as we speak. European Investment Bank has been reported in September for extending 100 Million Euro loan to HBOR for financing small to medium business in Croatia. I trust, though, that strict accountability and monitoring measures will be put in place for these loans and that such moneys will go to the genuine business entrepreneurs and not to  “free-money” larks or become an avenue for corruption or fraud which has not been swept clean yet. Ina Vukic, Prof. (Zgb); B.A., M.A.Ps. (Syd)


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