## CROATIA: ASSESSING PROGRESS IN REDUCING FINANCIAL IMBALANCES

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### A. Introduction
- Almost a decade after the Global Financial Crisis (GFC), the economy’s total indebtedness remains high: public debt is above 70 percent.
- Corporate sector debt is concentrated in a few segments and remains high relative to the sectors' financial assets, indicating potential solvency risks.
- Agrokor’s debt crisis and Croatia’s aspirations to join Euro area motivate further decline in balance-sheet exposures.
- Historical context and summary:
  - Persistent large current account deficits contributed to external debt rising close to 80 percent by 2008.
  - As output collapsed, debt ballooned to over 100 percent, while the economy’s net financial position (NFP) fell to nearly -100 percent of GDP.
  - Croatia’s total indebtedness (on a consolidated basis) reached 217 percent of GDP by 2014.
  - After the GFC, six years of recession; growth resumed end-2014 led mostly by strong tourism, private consumption, and EU accession effects.
  - NFP improved to -61.9 percent of GDP in 2017.

### B. Sectoral Balance Sheets

#### Deposit Taking Institutions (Banks)
- Balance sheet growth and composition:
  - Assets and liabilities expanded close to 100 percent of GDP over two decades; growth more subdued after the GFC.
  - Loans constitute about 58 percent of assets, with households accounting for 47.1 percent of total (end-July 2018).
  - Deposits account for 89 percent of total liabilities as of 2017.
  - Loan-to-deposit ratio of consolidated monetary financial institutions declined from its peak of 104 percent in 2011 to 76 percent in 2017.
  - Banks’ holdings of securities increased fivefold from 2001 and by 52 percent since 2010.
- Resilience and losses:
  - Banks’ profitability held up except in 2015, when mandated conversion of Swiss franc household loans into euros cost banks about 2 percent of GDP.
  - Foreign assets declined from 14.6 percent of GDP in 2011 to close to 10 percent in 2017.
- Shifts in exposures:
  - Claims on central government and social security funds (net) by deposit institutions increased from about 7 to 20 percent of total banks’ outstanding credit over 2001–17 and since 2010 by 35 percent.
  - Bank own borrowing in FX declined from a peak of 28.4 percent of total liabilities to foreign financial institutions in 2006 to 7 percent in 2017.
  - Banks currently have no net external debt.
  - Sector’s net FX position improved from -34.3 percent of GDP in 2010 to below -11.6 percent in 2017.
  - As a share of total bank lending, FX lending peaked at about 73 percent even after the crisis, declining to 56 percent by end-September 2018.
- Policy and regulatory notes:
  - Domestic deposits were denominated or indexed to FX, limiting direct FX mismatch but creating indirect FX risk from unhedged borrowers.
  - New lending to households increasingly in kuna and with fixed interest rates.

#### Non-Financial Corporations
- Balance sheet and indebtedness:
  - NFP worsened over 2009–10 by some 20 percentage points to -130 percent of GDP; improved by some 10 percent by 2017.
  - Consolidated corporate debt-to-GDP decreased to below 65 percent of GDP in the first half of 2017 from a peak of 83 percent in 2010.
- Composition shifts:
  - Between 2010 and 2017, equity and investment fund shares grew; loan obligations declined.
  - Corporate paper value grew almost 70 percent during the period.
  - Share of loans and debt securities dropped from about 48 to 40 percent of total liabilities.
  - FX debt remains high; new borrowing equally divided between short- and long-term and mostly in domestic currency.
- Non-performing loans and profitability:
  - NPLs reached a high of 35 percent of total loans post-crisis; declined and stood at 22 percent as at end-2017; total NPL ratio in low double digits.
  - Corporate profitability relatively poor pre-GFC and improved only marginally.
  - Based on firm-level data as of 2014, estimated debt overhang is about a third of corporate debt; concentrated in about 2000 large companies (out of 36,000), particularly in construction.

#### Households
- Financial position and indebtedness:
  - Sector’s net worth, including pension assets, is close to 90 percent of GDP at end-2017.
  - Liabilities (debt to banks) as percent of GDP doubled since 2001 and averaged around 40 percent through 2010–17.
  - Assets are mostly in the form of euroized deposits.
- Currency and rate structure of loans:
  - Share of FX loans declined to below 48.6 percent as of April 2018 (from above 70 percent in previous years).
  - Over one third of loans are at a fixed interest rate, one third tied to the National Reference Rate (NRR), and approximately 18 percent tied to the EURIBOR.
  - A little less than one half of housing loans tied to the NRR, almost 30 percent tied to the EURIBOR, and approximately 14 percent carry a fixed rate.

#### Public Sector
- Fiscal and balance-sheet developments:
  - Government’s NFP about -35 percent of GDP in 2017; financial assets about 55 percent of GDP covering a bit over half of liabilities.
  - Over 95 percent of liabilities are bonds and loans; bond issuance quadrupled between 2001–17.
  - Debt hovered around 40 percent of GDP before the GFC and increased to over 85 percent by 2015.
  - Deficits averaged 6.7 percent of GDP over 2009–11; fiscal position improved from a deficit of 7.8 percent of GDP in 2011 to a surplus of 0.9 percent in 2017.
- Debt structure and risk management:
  - Share of external debt in central government debt declined from 64 percent of GDP in 2000 to 36 percent in 2017.
  - Long-term debt constitutes 70 percent of domestic debt and 50 percent of external debt.
  - Share of fixed-rate bonds is more than 85 percent.
  - Government guarantees declined from 5.5 percent of GDP at their peak in 2002 to below 3 percent by end-2017.

#### Central Bank (Croatian National Bank, CNB)
- Balance sheet and reserves:
  - Central bank’s assets amounted to more than 35 percent of GDP in 2017; assets are mostly FX deposits and securities (high-quality external sovereign bonds or deposit claims on other national central banks in the Euro system).
  - Historically, CNB maintained a small negative NFP.
  - Reserves quadrupled between 2002–2017; slight drop in 2016 partly due to abolishment of requirement to maintain part of banks’ required reserves in FX with CNB.
  - Official reserves exceeded the metric starting in 2017 and there is a comfortable margin relative to the benchmark of 100 percent of short-term debt.
  - Metric excludes banks’ obligation to maintain liquid FX assets (minimum 17 percent of FX liabilities), which serve as an additional buffer but are not fully available to, or controlled by, the CNB.
  - Reserve accumulation driven by strong current account surpluses and EU funds inflows.

### C. Cross-Sectoral Assessment and Risks
- Balance-sheet approach (BSA) purpose and caveats:
  - BSA analyzes the economy as a system of interlinked sectoral balance sheets to highlight mismatches that may exacerbate vulnerability to shocks.
  - Caveat: consolidated and aggregated sectoral positions can mask important differences in individual entities (e.g., Agrokor); BSA is useful for net exposures and transmission across sectors but less useful for analyzing credit risk.

### External vulnerabilities and key indicators
- NIIP improved from -93 percent of GDP in 2010 to -67 percent of GDP in 2017, largely reflecting a large decline in intercompany loans.
- Gross external debt declined to 82.5 percent of GDP by end-2017.
- Factors contributing to decline in external debt: repayments of cross-border loans, lower foreign parent bank funding, a growing current account surplus, large EU funds, and positive GDP growth.
- Selected external vulnerability indicators (Percent of GDP, unless otherwise indicated):
  - External debt: 2010 — 103.9; 2017 — 82.5
  - External debt in percent of exports of goods and nonfactor services: 2010 — 275.8; 2017 — 159.5
  - Gross official reserves (billions of euro): 2010 — 10.7; 2017 — 15.7
  - Percent of short-term debt by remaining maturity: 2010 — 84.5; 2017 — 156.2
  - Months of next year's imports of goods and nonfactor services: 2010 — 7.0; 2017 — 7.9
  - Foreign assets: 2010 — 53; 2017 — 70
    - Of which: Currency and deposits: 2010 — 13; 2017 — 15
    - Reserve assets: 2010 — 24; 2017 — 34
  - Foreign liabilities: 2010 — 146; 2017 — 136
    - Of which: Foreign direct investment in Croatia: 2010 — 53; 2017 — 62
    - Public and private sector bond issuance: 2010 — 14; 2017 — 21
    - Loans: 2010 — 64; 2017 — 39
  - General government (liabilities): 2010 — 13; 2017 — 14
  - Banks (liabilities): 2010 — 81
  - Other sectors (liabilities): 2010 — 43; 2017 — 23
  - Net international investment position: 2010 — -93; 2017 — -66

### Balance sheet cross-sectoral exposures (2010–17)
- Little improvement in reduction of important cross-sectoral dependencies and liabilities to the rest of the world over 2010–17.
- Sectoral balance sheet highlights:
  - Corporate sector (NFPS) retains a large negative FX exposure to the outside world and a moderate exposure to the banking system.
  - Banks are substantively exposed to sovereign FX and domestic debt.
  - The government remains a sizable net debtor in FX to the rest of the world.
  - Households are net creditors to banks.
- Accounts payable (net) of NFPS increased from 1 percent to 8 percent over 2001–17, but remained constant as a percent of total liabilities at about 12 percent.

### Risks and stress test findings
- Main vulnerabilities and associated risks:
  - Sudden tightening in global financial conditions could put pressure on public finances and borrowers with variable rate loans. Mitigating factor: 75 percent of gross external debt of largest debtors (government and NFPS), and all of securities, are long-term, which somewhat reduces refinancing risks. Household holders of variable rate loans, especially at the longer end of maturity, are much more exposed to the risk.
  - Elevated currency risk due to a high degree of euroization. Corporate balance sheet FX mismatches are the highest in the region.
    - At end-2017, about 60 percent of bank (net) loans were exposed to currency-induced credit risk (CICR) (CNB 2018).
    - The share of loans not hedged against CICR, or loans to borrowers with mismatched currency position, was 85 percent.
    - Maturity mismatch risk amplifies currency risk as increase in kuna lending is supported by household kuna deposits at shorter maturities.
  - Banks’ exposure to general government (GG) could raise some concerns, including crowding out; however, exposure is mostly through government securities, minimizing the risk. Crowding out concerns have been mitigated by low demand for credit from the private sector due to continued deleveraging.
  - Growth-Investment nexus: decline in GDP growth will negatively affect balance sheets through presumed decline in revenues and available cash for debt servicing. Debt overhang on corporate investment can feed back into low growth or deceleration in growth. Evidence: Damijan (EBRD 2016) and Martinis and Ljubaj (CNB 2017c).
  - Agrokor case highlighted prevalence of intra-company payment delays; part of high Accounts Payable could become non-performing.

- FX stress test estimates (Box 1):
  - IMF external debt sustainability analysis: under an (unlikely) assumption of 30 percent kuna depreciation in 2018, external debt would increase from 82.5 to 109 percent of GDP in the subsequent year.
  - CNB extreme adverse scenario: 10 percent kuna depreciation against the euro within two years is considered the key risk to financial stability (CNB 2017a).
  - Sectoral balance sheet stress-test implication presented for a shock of 20 percent depreciation:
    - NFPS’s debt net position to the rest of the world worsens by 11 percentage points to -106 percent (post-shock value reported as -106 percent).

### Takeaways and policy recommendations
- Overall assessment:
  - Despite recent improvements, both public and private balance sheets remain vulnerable. Cross-border financial exposures have declined as borrowing slowed and relied more on domestic sources, but the economy remains exposed to several risks.
  - To reduce fiscal vulnerabilities, consolidation should proceed as advised in the 2018 Article IV Country Report.
- Reserve policy and external position:
  - Maintaining an adequate level of reserves is important given large balance sheet exposures to currency risks.
  - Reserve accumulation is mostly tourism driven; increasing the volume of merchandise exports would reduce dependence on tourism. To achieve this, advance structural reforms to improve business environment and labor force participation, including a competitive wage policy to attract more FDI into tradable sectors.
- Financial sector monitoring and public education:
  - Continue close monitoring and education about currency and interest rate risks.
  - Banks should enhance internal monitoring of mismatched foreign exchange positions and variable interest rate exposures, especially as they induce risks on the household level.
  - CNB should continue concerted efforts through regular publications/directives and special information materials to increase customer awareness about these risks.
- Corporate sector vulnerabilities and governance:
  - Address remaining gaps in corporate governance, including the role of supervisory boards, accounting and auditing standards, and insolvency and creditor rights (lessons from the Agrokor case).
  - High Accounts Payable (net) may point to deficiencies in payment culture; risk of these becoming non-performing.
  - Overleveraged state-owned companies require special attention: strengthen governance, procurement rules, and establish clear performance targets and evaluation tools to instill financial discipline and derive efficiency gains.
- Deleveraging, insolvency, and debt restructuring:
  - Encourage further deleveraging through specific policy options and strategies.
  - Recent improvements to bankruptcy legislation for large corporates should help facilitate orderly restructuring, but room remains to improve efficiency (e.g., facilitate out-of-court settlements, provide more flexibility for personal or corporate bankruptcy).
  - Reduce time for insolvency proceedings and hire experienced judges and insolvency administrators to improve insolvency processes (IMF 2010).
  - Continue efforts to ease and simplify debt write-off processes, and encourage banks to carry out loan restructuring while respecting owners’ rights, minimizing moral hazard and potential fiscal costs.

*Source: Croatia: Assessing Progress in Reducing Financial Imbalances (January 23, 2019).*

### References _______________________________________________________________________________ 17

### CROATIA: ASSESSING PROGRESS IN REDUCING FINANCIAL IMBALANCES

### A. Introduction
- Almost a decade after the Global Financial Crisis (GFC), the economy’s total indebtedness remains high: public debt is above 70 percent.
- Corporate sector debt is concentrated in a few segments and remains high relative to the sectors' financial assets, indicating potential solvency risks.
- Agrokor’s debt crisis and Croatia’s aspirations to join Euro area motivate further decline in balance-sheet exposures.
- Historical context and summary:
  - Persistent large current account deficits contributed to external debt rising close to 80 percent by 2008.
  - As output collapsed, debt ballooned to over 100 percent, while the economy’s net financial position (NFP) fell to nearly -100 percent of GDP.
  - Croatia’s total indebtedness (on a consolidated basis) reached 217 percent of GDP by 2014.
  - After the GFC, six years of recession; growth resumed end-2014 led mostly by strong tourism, private consumption, and EU accession effects.
  - NFP improved to -61.9 percent of GDP in 2017.

### B. Sectoral Balance Sheets

#### Deposit Taking Institutions (Banks)
- Balance sheet growth and composition:
  - Assets and liabilities expanded close to 100 percent of GDP over two decades; growth more subdued after the GFC.
  - Loans constitute about 58 percent of assets, with households accounting for 47.1 percent of total (end-July 2018).
  - Deposits account for 89 percent of total liabilities as of 2017.
  - Loan-to-deposit ratio of consolidated monetary financial institutions declined from its peak of 104 percent in 2011 to 76 percent in 2017.
  - Banks’ holdings of securities increased fivefold from 2001 and by 52 percent since 2010.
- Resilience and losses:
  - Banks’ profitability held up except in 2015, when mandated conversion of Swiss franc household loans into euros cost banks about 2 percent of GDP.
  - Foreign assets declined from 14.6 percent of GDP in 2011 to close to 10 percent in 2017.
- Shifts in exposures:
  - Claims on central government and social security funds (net) by deposit institutions increased from about 7 to 20 percent of total banks’ outstanding credit over 2001–17 and since 2010 by 35 percent.
  - Bank own borrowing in FX declined from a peak of 28.4 percent of total liabilities to foreign financial institutions in 2006 to 7 percent in 2017.
  - Banks currently have no net external debt.
  - Sector’s net FX position improved from -34.3 percent of GDP in 2010 to below -11.6 percent in 2017.
  - As a share of total bank lending, FX lending peaked at about 73 percent even after the crisis, declining to 56 percent by end-September 2018.
- Policy and regulatory notes:
  - Domestic deposits were denominated or indexed to FX, limiting direct FX mismatch but creating indirect FX risk from unhedged borrowers.
  - New lending to households increasingly in kuna and with fixed interest rates.

#### Non-Financial Corporations
- Balance sheet and indebtedness:
  - NFP worsened over 2009–10 by some 20 percentage points to -130 percent of GDP; improved by some 10 percent by 2017.
  - Consolidated corporate debt-to-GDP decreased to below 65 percent of GDP in the first half of 2017 from a peak of 83 percent in 2010.
- Composition shifts:
  - Between 2010 and 2017, equity and investment fund shares grew; loan obligations declined.
  - Corporate paper value grew almost 70 percent during the period.
  - Share of loans and debt securities dropped from about 48 to 40 percent of total liabilities.
  - FX debt remains high; new borrowing equally divided between short- and long-term and mostly in domestic currency.
- Non-performing loans and profitability:
  - NPLs reached a high of 35 percent of total loans post-crisis; declined and stood at 22 percent as at end-2017; total NPL ratio in low double digits.
  - Corporate profitability relatively poor pre-GFC and improved only marginally.
  - Based on firm-level data as of 2014, estimated debt overhang is about a third of corporate debt; concentrated in about 2000 large companies (out of 36,000), particularly in construction.

#### Households
- Financial position and indebtedness:
  - Sector’s net worth, including pension assets, is close to 90 percent of GDP at end-2017.
  - Liabilities (debt to banks) as percent of GDP doubled since 2001 and averaged around 40 percent through 2010–17.
  - Assets are mostly in the form of euroized deposits.
- Currency and rate structure of loans:
  - Share of FX loans declined to below 48.6 percent as of April 2018 (from above 70 percent in previous years).
  - Over one third of loans are at a fixed interest rate, one third tied to the National Reference Rate (NRR), and approximately 18 percent tied to the EURIBOR.
  - A little less than one half of housing loans tied to the NRR, almost 30 percent tied to the EURIBOR, and approximately 14 percent carry a fixed rate.

#### Public Sector
- Fiscal and balance-sheet developments:
  - Government’s NFP about -35 percent of GDP in 2017; financial assets about 55 percent of GDP covering a bit over half of liabilities.
  - Over 95 percent of liabilities are bonds and loans; bond issuance quadrupled between 2001–17.
  - Debt hovered around 40 percent of GDP before the GFC and increased to over 85 percent by 2015.
  - Deficits averaged 6.7 percent of GDP over 2009–11; fiscal position improved from a deficit of 7.8 percent of GDP in 2011 to a surplus of 0.9 percent in 2017.
- Debt structure and risk management:
  - Share of external debt in central government debt declined from 64 percent of GDP in 2000 to 36 percent in 2017.
  - Long-term debt constitutes 70 percent of domestic debt and 50 percent of external debt.
  - Share of fixed-rate bonds is more than 85 percent.
  - Government guarantees declined from 5.5 percent of GDP at their peak in 2002 to below 3 percent by end-2017.

#### Central Bank (Croatian National Bank, CNB)
- Balance sheet and reserves:
  - Central bank’s assets amounted to more than 35 percent of GDP in 2017; assets are mostly FX deposits and securities (high-quality external sovereign bonds or deposit claims on other national central banks in the Euro system).
  - Historically, CNB maintained a small negative NFP.
  - Reserves quadrupled between 2002–2017; slight drop in 2016 partly due to abolishment of requirement to maintain part of banks’ required reserves in FX with CNB.
  - Official reserves exceeded the metric starting in 2017 and there is a comfortable margin relative to the benchmark of 100 percent of short-term debt.
  - Metric excludes banks’ obligation to maintain liquid FX assets (minimum 17 percent of FX liabilities), which serve as an additional buffer but are not fully available to, or controlled by, the CNB.
  - Reserve accumulation driven by strong current account surpluses and EU funds inflows.

### C. Cross-Sectoral Assessment and Risks
- Balance-sheet approach (BSA) purpose and caveats:
  - BSA analyzes the economy as a system of interlinked sectoral balance sheets to highlight mismatches that may exacerbate vulnerability to shocks.
  - Caveat: consolidated and aggregated sectoral positions can mask important differences in individual entities (e.g., Agrokor); BSA is useful for net exposures and transmission across sectors but less useful for analyzing credit risk.

*Source: Croatia: Assessing Progress in Reducing Financial Imbalances (January 23, 2019).*

### 20.      Standard macroeconomic

### 20. Standard macroeconomic

### External vulnerabilities and key indicators
- NIIP improved from -93 percent of GDP in 2010 to -67 percent of GDP in 2017, largely reflecting a large decline in intercompany loans.
- Gross external debt declined to 82.5 percent of GDP by end-2017.
- Factors contributing to decline in external debt: repayments of cross-border loans, lower foreign parent bank funding, a growing current account surplus, large EU funds, and positive GDP growth.
- Selected external vulnerability indicators (Percent of GDP, unless otherwise indicated):
  - External debt: 2010 — 103.9; 2017 — 82.5
  - External debt in percent of exports of goods and nonfactor services: 2010 — 275.8; 2017 — 159.5
  - Gross official reserves (billions of euro): 2010 — 10.7; 2017 — 15.7
  - Percent of short-term debt by remaining maturity: 2010 — 84.5; 2017 — 156.2
  - Months of next year's imports of goods and nonfactor services: 2010 — 7.0; 2017 — 7.9
  - Foreign assets: 2010 — 53; 2017 — 70
    - Of which: Currency and deposits: 2010 — 13; 2017 — 15
    - Reserve assets: 2010 — 24; 2017 — 34
  - Foreign liabilities: 2010 — 146; 2017 — 136
    - Of which: Foreign direct investment in Croatia: 2010 — 53; 2017 — 62
    - Public and private sector bond issuance: 2010 — 14; 2017 — 21
    - Loans: 2010 — 64; 2017 — 39
  - General government (liabilities): 2010 — 13; 2017 — 14
  - Banks (liabilities): 2010 — 81
  - Other sectors (liabilities): 2010 — 43; 2017 — 23
  - Net international investment position: 2010 — -93; 2017 — -66

### Balance sheet cross-sectoral exposures (2010–17)
- Little improvement in reduction of important cross-sectoral dependencies and liabilities to the rest of the world over 2010–17.
- Sectoral balance sheet highlights:
  - Corporate sector (NFPS) retains a large negative FX exposure to the outside world and a moderate exposure to the banking system.
  - Banks are substantively exposed to sovereign FX and domestic debt.
  - The government remains a sizable net debtor in FX to the rest of the world.
  - Households are net creditors to banks.
- Accounts payable (net) of NFPS increased from 1 percent to 8 percent over 2001–17, but remained constant as a percent of total liabilities at about 12 percent.

### Risks and stress test findings
- Main vulnerabilities and associated risks:
  - Sudden tightening in global financial conditions could put pressure on public finances and borrowers with variable rate loans. Mitigating factor: 75 percent of gross external debt of largest debtors (government and NFPS), and all of securities, are long-term, which somewhat reduces refinancing risks. Household holders of variable rate loans, especially at the longer end of maturity, are much more exposed to the risk.
  - Elevated currency risk due to a high degree of euroization. Corporate balance sheet FX mismatches are the highest in the region.
    - At end-2017, about 60 percent of bank (net) loans were exposed to currency-induced credit risk (CICR) (CNB 2018).
    - The share of loans not hedged against CICR, or loans to borrowers with mismatched currency position, was 85 percent.
    - Maturity mismatch risk amplifies currency risk as increase in kuna lending is supported by household kuna deposits at shorter maturities.
  - Banks’ exposure to general government (GG) could raise some concerns, including crowding out; however, exposure is mostly through government securities, minimizing the risk. Crowding out concerns have been mitigated by low demand for credit from the private sector due to continued deleveraging.
  - Growth-Investment nexus: decline in GDP growth will negatively affect balance sheets through presumed decline in revenues and available cash for debt servicing. Debt overhang on corporate investment can feed back into low growth or deceleration in growth. Evidence: Damijan (EBRD 2016) and Martinis and Ljubaj (CNB 2017c).
  - Agrokor case highlighted prevalence of intra-company payment delays; part of high Accounts Payable could become non-performing.

- FX stress test estimates (Box 1):
  - IMF external debt sustainability analysis: under an (unlikely) assumption of 30 percent kuna depreciation in 2018, external debt would increase from 82.5 to 109 percent of GDP in the subsequent year.
  - CNB extreme adverse scenario: 10 percent kuna depreciation against the euro within two years is considered the key risk to financial stability (CNB 2017a).
  - Sectoral balance sheet stress-test implication presented for a shock of 20 percent depreciation:
    - NFPS’s debt net position to the rest of the world worsens by 11 percentage points to -106 percent (post-shock value reported as -106 percent).

### Takeaways and policy recommendations
- Overall assessment:
  - Despite recent improvements, both public and private balance sheets remain vulnerable. Cross-border financial exposures have declined as borrowing slowed and relied more on domestic sources, but the economy remains exposed to several risks.
  - To reduce fiscal vulnerabilities, consolidation should proceed as advised in the 2018 Article IV Country Report.

- Reserve policy and external position:
  - Maintaining an adequate level of reserves is important given large balance sheet exposures to currency risks.
  - Reserve accumulation is mostly tourism driven; increasing the volume of merchandise exports would reduce dependence on tourism. To achieve this, advance structural reforms to improve business environment and labor force participation, including a competitive wage policy to attract more FDI into tradable sectors.

- Financial sector monitoring and public education:
  - Continue close monitoring and education about currency and interest rate risks.
  - Banks should enhance internal monitoring of mismatched foreign exchange positions and variable interest rate exposures, especially as they induce risks on the household level.
  - CNB should continue concerted efforts through regular publications/directives and special information materials to increase customer awareness about these risks.

- Corporate sector vulnerabilities and governance:
  - Address remaining gaps in corporate governance, including the role of supervisory boards, accounting and auditing standards, and insolvency and creditor rights (lessons from the Agrokor case).
  - High Accounts Payable (net) may point to deficiencies in payment culture; risk of these becoming non-performing.
  - Overleveraged state-owned companies require special attention: strengthen governance, procurement rules, and establish clear performance targets and evaluation tools to instill financial discipline and derive efficiency gains.

- Deleveraging, insolvency, and debt restructuring:
  - Encourage further deleveraging through specific policy options and strategies.
  - Recent improvements to bankruptcy legislation for large corporates should help facilitate orderly restructuring, but room remains to improve efficiency (e.g., facilitate out-of-court settlements, provide more flexibility for personal or corporate bankruptcy).
  - Reduce time for insolvency proceedings and hire experienced judges and insolvency administrators to improve insolvency processes (IMF 2010).
  - Continue efforts to ease and simplify debt write-off processes, and encourage banks to carry out loan restructuring while respecting owners’ rights, minimizing moral hazard and potential fiscal costs.

*Source: IMF staff analysis and national authorities as presented in the chapter "20. Standard macroeconomic."*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1hrvea2019002.pdf_