Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
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 [√ ] [] [√] [√] [] [] [] [] [] [] No [] [√] [] [] [√] [√ ] [√] [√] [√] [√] 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