Return on foreign investments in Croatia and peer countries

This paper analyses income related to foreign investments and its effect on the current account and international investment position. The foreign investment income balance depends primarily on the amount of accumulated foreign financial assets owned by residents and the amount of their foreign liabilities. However, rates of return on various types of investments, which depend on economic conditions on the domestic and international markets, also play an important role. Their importance became particularly pronounced in the aftermath of the global financial crisis, which led to significant changes in the structure of international capital flows and financing conditions. While the crisis brought about an improvement in global financing conditions, at the same time it triggered large scale deleveraging across countries, leaving equity investments, which generally carry higher rates of return, relatively more important. For this reason, the lower interest rate environment was only partly reflected on foreign investment income balances of countries that are more reliant on equity investment. With the continued economic recovery on the global level, the rates of return on both equity and debt investments could grow further, having an even greater negative effect on the foreign investment income balance of countries highly dependent on foreign capital. This could also be the case for most CEE countries and particularly Croatia, given their already highly negative international investment position and high financing needs.