Financial Crime World

Croatia’s Financial Markets Remain Volatile Amidst Global Uncertainties

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The Croatian financial markets have continued to experience significant volatility in recent months, with the country’s stock price index plummeting and its bond market showing signs of strain.

Stock Market Volatility

According to data released by Bloomberg and J.P. Morgan, the Croatia Stock Market Index (CRO Index) has fallen sharply since January 2007, dropping by over 40% as of March 2008. The index, which measures the performance of the country’s main stock exchange, has been affected by liquidity disturbances caused by renewed tensions in the global financial markets.

Bond Market Woes

In addition to its stock market woes, Croatia’s bond market has also shown signs of strain. The Emerging Market Bond Index (EMBI) for Croatia has risen sharply since mid-2007, indicating a widening credit spread and concerns about the country’s external vulnerabilities. This is despite efforts by the Croatian government to improve the country’s fiscal position.

Residential Real Estate Market

The country’s residential real estate market has also been affected, with prices falling sharply over the past year. According to data from the Croatian National Bank, the residential real estate price index has fallen by over 10% since June 2007.

Rising Debt Levels

Rising household debt levels are a major concern for Croatia’s financial stability. As of September 2007, household debt stood at over 40% of GDP, one of the highest in central and eastern Europe. The share of bank lending to households has also risen significantly, with around 40% of loans being used for housing.

  • Rising debt burden increases vulnerability of banks to deterioration in debt servicing capacity
  • High proportion of FX-linked loans exposes banks to indirect FX risk

Corporate Debt Levels

The debt burden of non-financial corporations is also growing rapidly, with the total debt burden reaching 59% of GDP as of end-2006. The majority of this debt is owed to banks, with around 54% of loans being FX-linked.

  • Despite concerns, current corporate financial performance indicators are broadly satisfactory
  • Returns on equity steadily increasing over past few years
  • Ratio of non-performing loans (NPLs) to total corporate loans falling

Government Efforts

The Croatian government has taken steps to address some of these concerns, including introducing stricter regulations on bank lending and improving its fiscal position. However, the country’s financial markets remain volatile, and policymakers will need to continue to monitor the situation closely to ensure stability.

Figures

Figure 1: Croatia Stock Price Index (annual change)

Source: Bloomberg

Figure 2: Residential Real Estate Price Index (annual change; for 2007 annual change for June)

Source: Croatian National Bank

Figure 3: Emerging Market Bond Index (EMBI) and credit default swap spreads

Source: J.P. Morgan