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PROJECT INFORMATION DOCUMENT (PID)
APPRAISAL STAGE
Project Name
Region
Sector
Project ID
Borrower(s)
Implementing Agency
Report No.: AB4838
Croatia Export Finance Intermediation Loan (CEFIL)
EUROPE AND CENTRAL ASIA
General industry and trade sector (40%);General finance sector
(30%);Other industry (25%);Agro-industry (5%)
P116080
CROATIAN BANK FOR RECONSTRUCTION & DEV.
Croatia n Bank of Reconstruction and Development
Strossmayerov trg 9
10000 Zagreb
Croatia
Tel: (385-1) 459-1541 Fax: (385-1) 459-1696
Environment Category
Date PID Prepared
Date of Appraisal
Authorization
Date of Board Approval
[ ] A [ ] B [ ] C [ √] FI [ ] TBD (to be determined)
June 3, 2009
June 18th, 2009
July 30, 2009
1. Country and Sector Background
Macroeconomic background
Croatia enjoyed strong economic growth in recent years (around 4.5% per year in 20012008) driven by a domestic demand boom, expansion of industrial production and tourismrelated activities, and large capital inflows. This resulted in rapid convergence with the EU in per
capita income terms. The country’s GDP per capita, at PPS in 2008, was 63.6% and 101.8% of
the average level of EU27 and EU10, respectively. However, like the rest of the region, Croatia
is now experiencing a slowdown as EU demand for its goods and services weakens and liquidity
in global capital markets limits access to external funding sources. Challenges on the macro front
include a downturn in employment, sustainable adjustment of the current account deficit, and
meeting external financing requirements of the public and private sector.
Croatia’s external debt increased from 53% of GDP in 2000 to 82.4% in 2008, mainly as
a result of financing from parent banks to the banking sector and private sector borrowing. A
large share of private sector debt is short-term (13.8% of overall external debt), and as result the
debt service and rollover requirements during 2009 are high, estimated at €13.8bn (including
interest). Fiscal response over the 2006-2008 period suggests almost no change in the broadly
defined deficit; revenue over-performance was followed by relative spending increase. While
automatic stabilizers have already been activated during late 2008 and early 2009 on account of
recessionary economic trends, the lack of fiscal reserves and scarce financing is forcing the
government to compensate the revenue shortfall with frontloaded expenditure-led fiscal
adjustment thus acting pro-cyclically. The government’s total debt stock amounted 42.2% of
GDP in 2008, of which 18% of GDP is external debt.
Figure 1. External imbalances deepened, in % of GDP (left) and in billon of EUR (right)
8
6
4
2
0
% -2
-4
-6
-8
-10
-12
7.0
6.4
4.4
45
5.5
4.8
40
2.0
35
Direct investment
30
-0.1
-0.6
-3.2
-4.4
-7.5
-6.3
20
-5.5
-6.9
15
-7.6
Banks
10
-9.4
2001
2002
2003
2004
Other sectors
25
2005
2006
2007
5
2008
Government
0
CAB
2004
Non-debt creating inflows
2006
2008
Sources: CBS, CNB
Export Sector
Exports nearly doubled in euro terms between 2000 and 2008, as industrial production
expanded, but imports outpaced exports and the trade balance deteriorated significantly (the
trade deficit reached 23.7% of GDP in 2008). The current account was supported by a positive
and increasing surplus on services, as tourism receipts mounted, and capital inflows which
helped to close the balance of payments. A large share of incoming FDI went to the financial
sector (this comprised 37.6% of the FDI stock as of 2008), on account of revenues from the
privatization of banks and reinvested earnings. Exports are expected to fall more than imports
going into 2009, but FDI and capital inflows from parent banks are expected to slowdown
because of the global financial crisis and the external imbalances could widen further.
Figure 2 . Croatia’s External Trade (1992-2008
35,000
30,000
Import
25,000
Export
20,000
15,000
10,000
5,000
Source: UN Comtrade data
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
0
1992
Croatia has experienced robust export
growth since 2002, a period in which
the economy has become closely
integrated with that of the EU. Annual
export growth averaged 19% over the
period
2002-08,
a
significant
improvement over the 1% growth in
1992-2002 (see figure 2), although
modest relative to the 26% annual
growth of EU-10 exports in recent years.
Exporting activities have been supported
by changes in the trade policy regime,
which has become highly competitive.
Unilateral liberalization and free trade
agreements led to a rapid reduction in average tariffs, from levels of 7.6% in 2000 to 4.5% in
2006.1 This is comparable to EU countries where tariffs stand at 4.2%.
Banking Sector
The banking system has proved resilient in the face of the global financial crisis, in part
thanks to large participation by foreign banks. The banking sector comprised of 33 banks and 5
housing savings banks at the end of 2008, with HRK 423.2bn in total placements and contingent
liabilities. Of these, the 16 banks in majority foreign ownership held 91% of banks’ assets, with
Austrian-owned banks accounting for 60% of assets. Gross earnings increased in recent years at
a similar rate to average assets, yielding a stable return on average assets (ROAA) of around 1.6
percent. At the same time, capital increases outpaced bank earnings, leading to a fall in the return
on average equity (ROAE) in 2006-2008. Competition for market share resulted in a narrowing
of interest spreads, which in turn reduced net interest income as a percentage of average assets,
but offset by a reduction in general administrative expenses as well as depreciation.
The central bank’s efforts to reduce the external vulnerability of the economy have
achieved results. A combination of monetary, administrative and prudential measures, aimed at
reducing both macroeconomic and financial vulnerabilities, curbed credit expansion and reduced
to a certain extent foreign borrowing. Several actions were taken by the CNB to maintain
confidence in the currency stability. An increase of the foreign exchange component of the
reserve requirement allocated in kuna from 50 to 75 percent aimed to maintain the exchange rate
stability and ease the depreciation pressure on Kuna vis-à-vis the euro. This was accompanied by
a CNB FX intervention in January 2009, selling €328mn and additional February intervention of
€185mn. In addition the CNB intervened with a purchase of €331.2mn in order to prevent Kuna
strengthening. Full liberalization of the capital account has been delayed. Official FX reserves
are still at favorable levels covering approximately 4.6 months of imports at end-2008.
Impact of the current financial crisis: Liquidity pressures and demand for medium term funding
The global liquidity crisis has resulted in far slower lending by Croatian banks as parent
banks curtail their overall lending in an attempt to deleverage and reassess their capacity to bear
risk especially in emerging markets. To enable sustained growth of the Croatian economy in
times of global crisis the Central Bank undertook a number of measures to maintain the needed
flow of long-term funds. In February 2009, the CNB lowered the ratio of minimum required
reserves on foreign currency liabilities from 28.5 to 25 percent releasing €840mn to commercial
banks. Since then the CNB further lowered the minimum required reserve from 25 to 20 percent,
releasing €1.25bn to commercial banks for private sector debt servicing needs. Additionally, the
required reserve rate was lowered at the end of 2008, from 17 to 14 percent, thus releasing some
€1.3bn. Since end-October, non-resident deposits and loans rose sharply, by HRK4.1bn and
HRK3.5bn respectively, funding liquidity gaps after the October’s deposit flight and crossborder corporate credit crunch. Demand for medium term finance however remain high given the
rollover pressures on the local banks, the reduction of credit lines by parent banks and the
shortening of maturities offered to the corporate sector. The shortening of maturities especially
impacts the investments plans of the corporate sector and compounds uncertainty. This is
magnified by no increase in credit lines from the parent banks for Croatia, which justifies further
actions to ease liquidity and provide medium term funds including the proposed line of credit.
1
These are estimates of the simple average most-favored-nation (MFN) applied tariffs excluding specific duties.
All parent banks continue to roll-over current exposure in Croatian subsidiaries, but it is not
expected that they would increase current levels of financing during 2009. As a result of more
expensive financial resources and increase of interest rates, in last quarter of 2008, banks
restructured their liabilities. Namely by a decrease in deposit base and an increase in foreign
liabilities, as parent banks provided both loans and deposits, but with higher cost of financing.
Some Croatian banks infact gained additional liquidity on international inter-bank market
directly, because of lower costs comparing with loans and deposits provided by parent banks.
Slower deposit growth in 2009 is expected due to a shrinkage in economic growth, which leads
to strong competition among banks for each depositor and increase in interest rates. Higher costs
of financial resources lead to higher active interest rates which banks charge to their clients. In
conclusion the banks will have to rely only on organic growth – through deposit base, which
because of the high competition, further increases interest rates, both on deposits and on loans.
By increasing interest rates on loans, banks are implicitly increasing credit risk. This is
evidenced in the 1st quarter of 2009 already. Higher interest rates on loans indirectly increase
credit risk for banks.
2. Objectives
CEFIL will support the Government of Croatia’s aim to maintain a steady flow of credit to
the private sector and assist in enhancing competitiveness looking towards full European
integration. The outbreak of the global financial crisis in summer 2008 has had profound effects
on the operating environment of Croatian economy. Nevertheless, Croatian banks were not
immune to the global environment. International interbank market has become more risk averse
and the liquidity condition has tightened significantly. As a consequence, loan growth in Croatia
has slowed down and banks have adjusted their balance sheets to cope with the new
environment. The government decided it will provide additional support to the HBOR to be used
to support exporters, tourism, agriculture and SMEs.
The project is consistent with the FY09-12 Country Partnership Strategy which includes
promoting private sector-led growth as a key priority to achieve faster convergence with EU27
per capita income levels. The project was not included in the pipeline in the CPS, however due to
the specific circumstances in lieu of the financial crisis, the Government approached the Bank
asking for financial assistance in order to support HBOR. The significant role of the
development bank in such environment and the need to continue supplying long-term funds to
Croatian companies was a key motive for the authorities, thus implementing the strategic goal of
the Government in fostering competitiveness of the economy which is critical to employment,
sustainable growth and recovery.
3. Rationale for Bank Involvement
Restricted access to medium and long term finance at a time of restricted global liquidity is a
recognized impediment to the growth and sustainability of Croatia’s export sector and the project
aims to help to partially offset the stagnation in capital flows by making available additional
medium and long-term funding. The proposed Croatia Export Finance Intermediation Loan
(CEFIL) aims to respond to the developmental need for medium term funds for investment and
working capital to exporters and FX earning enterprises (e.g. Tourism, Logistics).
4. Description
The proposed €100mn Croatia Export Finance Intermediation Project (CEFIP) is a singlecomponent project consisting of a credit line to Croatian Bank for Reconstruction and
Development (HBOR) as the Borrower and implementing agency. HBOR will whole sale the
funds through Participating Financial Intermediaries (PFIs), which in turn will on-lend to eligible
private exporters and quasi-exporters such as the tourism sector
5. Financing
Source:
Borrower
International Bank for Reconstruction and Development
Total
(€m.)
0
100
100
6. Implementation
The CEFIL project is to be implemented through HBOR’s funding department. Its
responsibilities will include: (i) on-lending to PFIs for final lending to sub-borrowers (ii) ensure
effective functioning of the on-lending facility to final borrowers through PFIs; (iii) on-going
monitoring of the PFIs to ensure compliance with project criteria; (iv) responsibility for
adherence to all fiduciary and safeguard requirements of the World Bank for final borrowers; and
(v) monitoring and evaluation based on key project development indicators. HBOR has
identified key individuals responsible for various aspects of the project with whom the Bank will
interact with during the course of the project. Due to HBOR’s on going experience with the
Bank, other IFIs and PFIs the arrangements in house for the implementation of the project are
satisfactory. The Operations Manual which is a living document through the life of the projects
records the process flow for the project and the roles and responsibilities of all parties involved.
7. Sustainability
The project is designed to enable participants to continue the activities independent of the
project on a commercial basis as the Croatian financial sector’s access to medium and long term
funding increases. As the current financing crisis settles and funding flows return to the
developing world 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 more broad
spectrum and stronger. Exporters/quasi exporters will build credit history with financial
intermediaries and improve their financial records and documentation required for bank loans,
thus improving their ability to gain access to credit. These effects will be gradual and are
expected to be partially achieved throughout the life of the project.
8. Lessons Learned from Past Operations in the Country/Sector
The project will benefit from lessons learned from credit line financing throughout the world
(e.g., India, Turkey, Armenia and Ukraine). A lesson learned from credit lines that the World
Bank has provided to its client countries throughout the world is that the problems have stemmed
mainly from weak borrower accountability and management capacity, lack of clearly defined and
transparent indicators for monitoring of the financial performance of the concerned financial
intermediaries as well as poor monitoring of the overall project impact, inadequate demand from
ultimate beneficiaries and lack of bankable sub-projects, and inflexibilities in project design that
make it difficult to adjust design to reflect changing ground realities.
The CEFIL project designs and implementation plan tackles each of the perceived and real
issues upfront. Market research and survey have confirmed the immediate need for the funding
provided by the Bank, HBOR has detailed experience with dealing with PFIs, the PFIs are
selected on a thorough analysis that ensures effective and timely placement of funds.
9. Safeguard Policies (including public consultation)
Safeguard Policies Triggered by the Project
Environmental Assessment (OP/BP 4.01)
Natural Habitats (OP/BP 4.04)
Pest Management (OP 4.09)
Physical Cultural Resources (OP/BP 4.11)
Involuntary Resettlement (OP/BP 4.12)
Indigenous Peoples (OP/BP 4.10)
Forests (OP/BP 4.36)
Safety of Dams (OP/BP 4.37)
Projects in Disputed Areas (OP/BP 7.60)*
Projects on International Waterways (OP/BP 7.50)
Yes
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No
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10. Contact point
Contact: Isfandyar Zaman Khan
Title: Financial Sector Specialist
Tel: (202) 458-7688
Fax: (202) 614-7688
Email: [email protected]
11. 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
*
By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties' claims on the
disputed areas