1. UK – CROATIA Trade & Investment Forum 2013 London, October 24 th Boris Vujčić e-mail: boris.vujcic@hnb.hr

2. Domestic demand remains a drag on growth while exports are recovering * 2013, 2014 values - CNB estimate/projection Data from 2010 are provisional Source: CBS. Net domestic demand continues to weight down on growth...... while exports are steadily recovering Source: CBS

3. ...is domestic demand at the turning point? Source: CNB Consumer confidence and retail trade Net financial wealth of households Source: CBS, Ipsos Puls

4. Current Account Has Improved on Lower Import Demand  Sharp improvement in the trade balance driven by stable exports and falling imports  Exports projected to rise gradually, with further upside potential from structural reforms aimed at enhancing cost competitiveness  High import substitution potential in energy and agriculture  FDI is expected to grow following accession, whilst deleveraging will further improve the net external position Current Account Balance (as % of GDP)) Source: CBS Merchandise Trade (EUR bn) Source: CNB Breakdown of imports (H1 2013): OtherAgricultureEnergy

5. Exchange rate performance …(average monthly exchange rate) Source: CNB. Euroization Stability Against the Euro: Long-Term ER Policy of the Central Bank Source: CNB.

6. Reserves, Broad and Base Money (EUR bn) Money Supply Fully Covered by FX Reserves Source: CNB.  FX reserves remain sufficient to cover base money (146%) and money supply (151%) as at August 2013, underpinning the strong commitment towards the stable exchange rate policy  At the June of 2013, FX reserves were sufficient to cover around 8 months of imports goods and services and 82% of ST debt by remaining maturity

7. Monetary Policy Easing Resulting in Structural Liquidity Surplus 7  Favorable Kuna liquidity was reflected in low levels on overnight money market interest rates Reserve Requirements and Minimum f/c Liquidity Liquidity Surplus and Overnight Interest Rates Source: CNB

8. Corporate Lending Recovering, while Household Sector Continuous Deleveraging 8 * excluding shipyards' credit liabilities which Ministry of Finance took over in 2012 and a transaction of one bank which, in an effort to reduce the amount of partly recoverable and fully irrecoverable placements, transferred a total of HRK 5.6bn in its claims on companies to a company indirectly owned by a parent bank. Source: CNB

9. CPI Inflation Has Averaged 2.8% Over the Last Decade 9  The “quasi currency board” monetary policy regime anchors inflation expectations  Inflation decelerated in 2013 against a background of weak domestic demand, a drop in imported inflation and a favourable base effect  Stable outlook with inflation of 1.8% and 2.0% forecast for the next two years CPI Inflation Components (EOP Year-on- Year Change, %) HICP Inflation: Peer Comparison (%) Source: CBS Source: Eurostat

10. Structural reforms/improving business climate are the key to restart growth in a sustainable way!  Law on promotion of investments –From the start of 2013, the Law enables up to 10 years of 0% corporate tax depending on the employment, plus one-off subsidies for newly employed ranging from 3000-9000 euros  Law on strategic investments –Investments over 30 mil euros, streamlines procedures needed for the investment, reduces role of local authorities, which were the main obstacle  Ongoing restructuring and privatization process of shipyards  Restructuring of public companies (Croatian Railways, Croatian Motorways and Rijeka Zagreb Motorway, Croatian Airlines...) –Consolidation of the railway companies, privatization of cargo business, outsourcing of non-core businesses, layoff 1.500 workers –Consolidation of maintenance of Croatian Motorways and Rijeka Zagreb Motorway, layoff 600 workers, reduction of costs  Privatizations (insurance company, postal bank, part of the railways, state owned real estate/hotels at the coast, energy production...)

11. Labor market reforms increasing flexibility Regulation of regular contracts, including additional provision for collective dismissals *Higher index indicates more rigid labor market Source: OECD 2008, 2013 *Higher index indicates more rigid labor market Source: OECD 2008, 2013 Regulation of temporary contracts

12. Croatian financial system is bank-centered Sources: CNB; HANFA

13.  Non-performing loans ratio still growing (albeit at slower pace)  However, relatively strong operating income and high capital adequacy provided sufficient buffer after the crisis  Significant systemic liquidity  The aggregate capital adequacy ratio of 20.8% in 2Q13 is well above the regulatory requirement of 12%, providing a considerable capital buffer despite deterioration in asset quality after 2008  The banking system remained profitable during the financial crisis NPLs Have Risen, But Capital Adequacy very high 13 Non Performing Loans (As % of Total Loans) Well-Capitalised Banking Sector Source: CNB

14. CAR high and leverage low 14 Source: IMF, FSI, (bank assets) weighted averages Note: CEE countries: Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovak Republic, Slovenia Bank capital to un’weighted assets Bank (regulatory) capital adequacy ratio (CAR)

15. Bank Performance Indicators 15 Source: IMF, FSI, (bank assets) weighted averages Note: CEE countries: Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovak Republic, Slovenia Bank Return on Assets Bank Return on Assets excluding value adjustment costs

16. Capital ratios are sensitive to NPL coverage 16 Source: IMF, FSI Capital ratios, End 2012

17. Deleveraging of banks’ in CEE Loan to deposit ratio Sources: CNB; national central banks 17 Change in banks' external debt between March 2013 and September 2008

18. Thank You! 18