Preserving economic and financial stability in an emerging market country during the pandemic crisis: Croatia’s experience

^*  The author would like to thank Saša Ljepović, Linardo Martinčević and Igor Ljubaj for providing useful comments during the preparation of this paper. The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of the Croatian National Bank. The author would also like to thank two anonymous referees whose comments have contributed to the final version of the paper.

¹ Indeed, by the end of 2020, Spain and Italy had seen their government debt-to-GDP ratios increase by more than 20 percentage points, reaching the very high levels of 120 and 156 percent of GDP, respectively.

² Addressing the worldwide shortage of U.S. dollar liquidity was not only important to other countries but it was also in the interest of the United States itself. When foreign financial institutions lose the ability to borrow in U.S. dollars in wholesale markets, their only remaining option to obtain dollar liquidity is to sell their dollar-denominated assets, such as U.S. Treasuries, which can create downward pressure on their prices. Therefore, by acting as the global lender of last resort in times of financial turmoil, the Federal Reserve indirectly supports the stability of the U.S. financial system.

³ By contrast, in 2008, the Federal Reserve committed substantial resources to facilitate the takeover of the failing investment bank Bear Stearns by JP Morgan and to support the recapitalization of the large insurance company AIG, which was on the brink of bankruptcy due to heavy losses on its credit default swap contracts (Mishkin, 2011).

⁴ The program was later gradually scaled up to 1,850 billion euro.

⁵ In contrast, under the earlier program – the Public Sector Purchase Program, which ran from 2015 to 2018 – the Eurosystem could buy only up to 33% of a member state's total outstanding debt.

⁶ The total amount of liquidity released through foreign exchange interventions in late 2008 and early 2009 was 0.9 billion euros. However, it should be borne in mind that at the height of the global financial crisis, the Croatian National Bank used other instruments in addition to foreign exchange interventions to provide the financial system with much-needed foreign currency liquidity (Galac, 2010). In particular, the central bank abolished the marginal reserve requirement, reduced the minimum required foreign currency claims, and reduced and adjusted the general reserve requirement, thus releasing additional 3.6 billion euros into the banking system.

⁷ According to the Croatian Employment Service, the total fiscal cost of job preservation measures implemented from the outbreak of the pandemic until October 2021 amounted to 11.8 billion kuna, or 2.9% percent of 2019 GDP.

⁸ The positive impact of moratoriums on liquidity was, of course, much less than 14.9 percent of GDP because that figure reflects the total value of loans under moratoriums rather than the value of monthly loan instalments that were delayed due to moratoriums.

⁹ The Croatian National Bank was praised in the past for successfully alleviating the impact of the 2008-09 global financial crisis on the Croatian economy (IMF, 2009).

¹⁰ The share of debt with a maturity longer than 10 years in total government debt increased from 40% at the end of 2015 to 50% at the end of 2019.

¹¹ The drop in tourism revenues, although very sharp, was less pronounced than in some other Mediterranean EU member states, such as Greece, Spain, Malta and Cyprus, which recorded a drop in net income from tourism in excess of 75 percent. The relatively solid performance of the Croatian tourism sector in 2020 can be explained by some of its specific characteristics, which are in normal circumstances regarded as structural weaknesses (CNB, 2020b). One of these characteristics is Croatia's relatively low reliance on guests arriving by air. As the pandemic affected air transport much more than road transport, Croatia managed to perform better than countries where foreign guests arrive primarily by air. Another specific characteristic that proved beneficial in 2020 is the high seasonality of Croatian tourism: as almost three quarters of total nights spent are usually realized in the summer months, Croatia was – compared to countries where the tourist season lasts longer – relatively less affected by the restrictions on international travel that were in force in the spring and autumn of 2020.