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PROJECT INFORMATION DOCUMENT (PID)
APPRAISAL STAGE
Project Name
Region
Sector
Project ID
Borrower(s)
Implementing Agency
Environment Category
Date PID Prepared
Date of Appraisal
Authorization
Date of Board Approval
Report No.: AB7273
Croatia Export Financing Guarantee Project (CEFGP)
Europe and Central Asia
General industry and trade sector (35%); General finance sector
(30%); Other industry (35%)
P133471
Croatian Bank for Reconstruction and Development
Croatian Bank for Reconstruction and Development
[ ] A [ ] B [ ] C [x] FI [ ] TBD (to be determined)
March 8, 2013
April 3, 2013
June 25, 2013
1. Country and Sector Background
Macroeconomic and Sector Background
Like many other countries in the region, the global financial crisis severely impacted Croatia and
continues to do so. Croatia underwent four consecutive years of recession, with an output decline of
almost 11 percent since the crisis outbreak. In 2012 alone, the economy contracted by a further 2 percent,
as a result of weak industrial production and construction. Croatia's industrial production dropped by
almost 6 percent in 2012 on the back of negative growth in mining, oil production and shipbuilding, while
construction declined by over 11 percent. Moreover, low aggregate demand and uncertain economic
prospects discouraged any substantial investment in production facilities, which was reflected in import
dynamics and, to some extent, in capital goods production. Contracting economic activity in many EU
Member States, not least among some of Croatia’s most important trading partners, will continue to
weigh on the domestic economy in 2013 and limit growth.
Although initially the impact of the crisis on employment was modest, the pace of job destruction
has accelerated. In the last four years, total registered employment fell by more than 11 percent, a loss of
almost 180,000 jobs. Negative labor market trends have continued in 2013 along with the weakening
consumer confidence. The registered unemployment rate stood at 21.1 percent in December 2012, driven
by defensive restructuring in construction, trade and manufacturing. The survey-based unemployment rate
stood at 15.2 percent in September 2012, the second highest among all EU10 member states. Labor
participation, in turn, is the lowest among all countries in EU.
With a decline in GDP and substantial fiscal deficits, Croatia’s fiscal position has deteriorated
considerably since the beginning of the economic crisis. Deficits and debt ratios have soared to
unsustainable levels, forcing the new government to implement credible fiscal consolidation plans. After
deficits on average higher than 5.5 percent of GDP, the new government was able to reverse the trend in
2012 with a deficit at 3.4 percent of GDP (preliminary). However, the fiscal position, as announced in
2013-15 budget, is set to deteriorate in 2013 (deficit of 4.1 percent of GDP) and the projected fiscal
consolidation in the medium term is less ambitious than earlier announced. Public debt has surged
sizably, and as of November 2012, including guarantees in the amount of 16.2 percent of GDP, it stood at
68.6 percent of GDP. Based on inadequate consolidation plans that continue to lead to a fast build-up of
already high public debt, both S&P (December 2012) and Moody’s (January 2013) downgraded Croatia’s
credit rating to a speculative grade.
Figure 1: Croatia: Economic Developments
Croatia’s recovery is more delayed than
expected…
….creating strong pressures on labor market.
The current account has improved, as a result of
strong performance in tourism and week trade…
…but pressures on the finacial account have
risen with declining flows to private sector.
Source: CROSTAT, World Bank staff calculations
Overview of Croatia’s Export and Tourism Sectors
Croatia is an open and small economy with total trade in goods and services accounting for around
85 percent of GDP. Croatia’s main export products consist of transport equipment, mainly ships and
boats, refined petroleum, textiles and apparel, chemicals, food products, machinery and equipment and
electrical machinery. Among foreign exchange earning industries, tourism represents a major source of
foreign exchange revenue and value added. Tourism comprises above 40 percent of overall exports of
goods and services and some 11 percent of GDP in the last couple of years. More importantly, tourism’s
growth has brought foreign revenue that is critical to compensate for the trade deficit on goods. Travel
and tourism generated 135,500 jobs directly in 2011 (12.3% of total employment), including employment
by hotels, travel agents, airlines and other passenger transportation services, and activities of the
restaurant and leisure industries directly supported by tourists. Despite its economic significance, the
share of tourism as an economic activity was relatively stable over a longer period of time, but continues
to be minimal in terms of access to finance. One of the key problems of Croatian tourism is strong
seasonality exacerbated by structure and quality of tourism offer and its concentration in the coastal
region of the country.
Croatia has made limited strides in increasing its presence in some markets but lost market share
in major export products, as the restructuring of the most important export branches -shipbuilding and metal industry – commenced. The EU represents Croatia’s largest trading partner,
with its shares of total exports and imports of goods at 60 percent and 62 percent in 2012, respectively.
Although integration with the EU through the trade channel remains high, the lagging of Croatian exports
behind that in comparable Central and Eastern European (CEE) countries continued and was reflected in a
shrinking market share.
While maintaining exchange rate and Figure 2: Costs of domestic corporate financing
price stability, monetary policy has
been focused on sustaining high
liquidity in the domestic banking
system and reducing regulatory costs
affecting interest rates. The central bank
maintained an accommodating monetary
policy stance in the context of subdued
economic activity, while maintaining
exchange rate and financial and price
stability. However, domestic long-term
interest rates did not change significantly
and are still at relatively high level. This
combined with the suppressed domestic
demand, is reflected in constrained Source: CNB
lending activities by banks and in deleveraging by domestic sectors. Banks’ efforts to attract stable
domestic sources of financing certainly had an additional effect on such movements, together with the
guidance of the foreign regulators, instructing both the bank groups in the region and their subsidiaries in
Croatia to increase the domestic deposit base (i.e. to reduce the loan to deposit ratios).
Unfavorable domestic financing conditions are accompanied by a slowdown in external corporate
financing, as foreign creditors are holding back on lending under the impact of uncertainty in
global financial markets and pessimistic expectations. Private sector credit declined by 1.9 percent in
2012, despite the central bank release of over HRK4 billions of extra liquidity early in the year, through a
reduction in reserve requirements from 15 to 13 percent. Lending to private sector was focused on loan
refinancing and providing working capital funds, thus changing the maturity structure of loan portfolios
of Croatian banks in favor of short-term loans (80 percent of all new loans are short-term loans).
Although they were conducive to freeing up a substantial amount of immobilized funds and led to a
reduction in regulatory costs, the central bank measures failed to boost lending growth to a great extent
due to banks’ increased cautiousness, credit risk aversion and weak domestic demand.
2. Objectives
The project development objective (PDO) is to support exporters and foreign exchange earners in
Croatia by enhancing HBOR's capability to mobilize medium and long-term financing. The funds
would enable continuation of extending credit to exporters and foreign exchange earning enterprises
(project beneficiaries) in an environment of constrained funding due to the impact of the eurozone crisis
on the financial sector, thus ensuring these companies remain competitive.
Specifically, the PCG would help HBOR in attaining market access at reasonable terms and
establishing its credit in the financial market as well as diversifying HBORs funding sources. The
latter is particularly important, as HBOR’s funding strategy envisages a gradual shift from borrowing
with official assistance to market-based funding. Using the World Bank’s proposed partial credit
guarantee to backstop RoC’s statutory guarantee of HBOR has the dual advantage of showcasing the
World Bank’s confidence in the creditworthiness of both HBOR and RoC.
3. Rationale for Bank Involvement
The funds raised through the PCG for HBOR will support the Government of Croatia’s objective
to maintain a steady flow of credit to the private sector and assist in enhancing competitiveness
looking towards full integration to the EU. The global financial crisis had profound effects on the
operating environment of the Croatian economy, and Croatian banks have not been immune to the global
environment. The international interbank market has become more risk-averse and liquidity conditions
tightened significantly. As a consequence, loan growth in Croatia slowed down and banks have adjusted
their balance sheets to cope with the new environment. The government thus decided it would channel
additional support to strategic sectors including exporters, tourism, agriculture and SMEs through HBOR
and in partnership with commercial banks.
The PCG structure itself lends to a number of higher objectives as they relate to; i) the development
of HBOR as a market funded institution by virtue of getting funds from the private sector; ii) exposure of
HBOR as an institution to a host of new investors; iii) exposure of RoC as a credible partner to a number
of investors by the virtue of the World Bank’s guarantee standing behind that of RoC’s to HBOR.
The project is consistent with the FY09-12 Country Partnership Strategy (CPS) which includes
promoting private sector-led growth as a key priority to achieve faster convergence with EU27 per
capita income levels and with the FY 14-17 CPS as part of the innovative lending instruments the
Bank is fostering. Due to the specific circumstances derived from the financial crisis, the Government
approached the World Bank requesting financial resources to support HBOR. The significant role of
HBOR in such an environment and the need to continue supplying long-term funds to Croatian companies
was a key motive for the authorities, consistent with the strategic goal of the Government to foster
growth.
4. Description
The project will have a single component which will provide medium and long-term funding to
support the private sector. This component will use the funds raised with the support of the guarantee
for on-lending to private sector exporters1 and foreign currency earners, based on specific eligibility
criteria. Companies supported under the project would need to have revenues in foreign currency in order
to mitigate any currency risk. Typical beneficiaries will be closely matched to the universe that was
funded under the original Croatia Export Finance Intermediation Loan (CEFIL) and represent a large
subset of the Croatian private sector such as manufacturing, tourism and food processing. Delivery of
these funds will be through two on-lending arrangements.
5. Financing
Source:
Commercial lenders (partially covered by IBRD guarantee)
Total
($m.)
328
6. Implementation
CEFGP is to be implemented through HBOR’s credit division which is already successfully
implementing the original World Bank-funded CEFIL project and its additional financing. Its
responsibilities will include: (i) on-lending to PFIs for final lending to sub-borrowers (ii) direct lending to
final beneficiaries; (iii) ensuring effective functioning of the on-lending facility to final borrowers through
PFIs; (iv) ongoing monitoring of the PFIs to ensure compliance with project criteria; (v) adherence to all
fiduciary and safeguard requirements of the World Bank for final borrowers; and (vi) monitoring and
evaluation based on results monitoring indicators. HBOR will manage project implementation and will be
responsible for such functions as: procurement, financial management, monitoring and evaluation, and
reporting. There is already a PIU in place for this and is fully staffed up
7. Sustainability
The project is designed to enable participants to continue their activities on a commercial basis and
independently of the project as the Croatian financial sector’s access to medium and long term
funding increases. As the current financing crisis is resolved and funding flows return to emerging
markets, it is hoped that longer maturity funding will become available. HBOR, by virtue of its other
programs, has built strong lending relationships and experience with PFIs, and the technical design of this
specific project will help to make that relationship even broader and stronger. These effects will be
gradual and are expected to be partially achieved throughout the life of the project. Additionally the
project will help HBOR to move towards mobilizing financing from the commercial markets on a stand
alone basis.
8. Lessons Learned from Past Operations in the Country/Sector
Lessons from FILs:
1
A private sector company is defined as that having more than 50 percent private ownership.
Ensuring that there is a healthy pipeline of projects that meet the eligibility criteria is essential. The
experience of similar flexible investment facilities has confirmed the need to have a strong pipeline of
projects that will meet the eligibility criteria. It is also crucial to have an appropriate number of PFIs to
on-lend through and thus the universe of PFIs under this project is being expanded. Additionally for
speedy yet prudent disbursement it is important for all stakeholders to understand the fiduciary and
safeguard procedures early on and the process for that has already started. Lastly, given that up to 100%
of the amount of a World Bank guarantee may be used to support retroactive financing (with a proposal
for retroactivity to extend up to 12 months prior to approval of an operation by the Board of Executive
Directors), it is important to start identifying the potential projects as early as possible..
Lessons from Guarantees:
It is critical to maintain regular communication with potential partners in the financial sector. This
is key since markets are extremely volatile and investor appetite can change very quickly across
segments, which can affect the ability of the team or borrower to pursue one transaction approach or
another. Similarly, regulatory changes underway are affecting funding conditions in various ways.
Understanding how these changes are affecting financial sector risk appetite is now especially important.
A rich dialogue with banks, in the current climate of uncertainty, can promote needed exchange of ideas
and help to prevent unnecessary delays or false-starts and can lead to discovery of new opportunities as
they emerge.
Flexibility in internal procedures is important to ensure the transaction is accommodating to the
needs of all stakeholder. In the case of a PCG, the interplay between market conditions and the client is
essential to determining the underlying borrowing terms such as drawdown schedules and the various
documentation and approval steps.
9. Safeguard Policies (including public consultation)
The project triggers Environmental Assessment (OP/BP 4.01). The design of the project calls for FI
environmental category. HBOR has prepared an Environmental Management Framework (EMF). It
defines the environmental screening and assessment procedures for the project and sub projects.
According to the EMF, sub-loan applicants will be required to carry out adequate type of environmental
assessment of the proposed subprojects according to the World Bank safeguards procedures and to obtain
environmental permits as prescribed by the national legislation.
Pest Management can be triggered for some sub-projects if potential sub-projects are in the exportoriented food production and processing sector. If eligible sub-projects will include financing for
purchase of pesticides (including post-harvest treatment) or investments which are likely to increase or
expand the use of pesticides in such operations, the EMF sets out requirements for applicants to prepare a
simple Pest (and Pesticide) Management Plan consistent with OP 4.09 requirements
Given the rich cultural heritage of Croatia, the policy of physical cultural resources OP/BP 4.11 is
to be triggered. Due to the possible chance finds in sub-projects as well as in view of expectations that
some operations will likely have a direct impact on historical structures or sites (e.g. in tourism sector).
The EMF indicates that sub-projects will comply with local legislation on chance finds as well as
including advance consultation with the Ministry of Culture through local permitting process in case of
potential impact on historical sites or structures.
The project would trigger OP 4.12. The funds through the guaranteed borrowing will possibly finance
land investments implying either the involuntary acquisition of land, loss of access or income or assets,
and/or the displacement of persons. A RPF will be put in place and an acceptable draft of this will be
disclosed prior to appraisal (in the same way as the EMF).
10. List of Factual Technical Documents
N/A
11. Contact point
World Bank
Contact:
Isfandyar Zaman Khan
Title:
Senior Financial Sector Specialist
Tel:
458-7688
Email:
[email protected]
.
Borrower/Client/Recipient
Name:
Croatian Bank for Reconstruction and Development
Contact:
Mr. Kolenc Obrazović Zrinka
Title:
Head of Loans and Securities Unit
Tel:
+385 1 4591 625
Email:
[email protected]
.
.
Implementing Agencies
Name:
Croatian Bank for Reconstruction and Development
Contact:
Mr. Kolenc Obrazović Zrinka
Title:
Head of Loans and Securities Unit
Tel:
+385 1 4591 625
Email:
[email protected]
.
12. For more information contact:
The InfoShop
The World Bank
1818 H Street, NW
Washington, D.C. 20433
Telephone: (202) 458-4500
Fax: (202) 522-1500
Email: [email protected]
Web: http://www.worldbank.org/infoshop