Republic of Croatia: Selected Issues

This Selected Issues paper explains corporate sector balance sheet vulnerabilities in Croatia. It serves as a background analysis to the systemic risk assessment presented in the staff report and follows established approaches to stress-test the corporate sector. Croatian firms have significantly improved their balance sheets since the prolonged recession after the Global Financial Crisis, helped by deleveraging and narrowing country risk premium as Croatia advanced its euro adoption agenda. The calibration of shocks follows the macro-financial scenarios of the 2023 EU-wide banking sector stress tests by the European Banking Authority. Micro-level simulations confirm the resilience of the corporate sector against adverse shocks to profitability and financing costs. The well-capitalized banking sector overall is also found to have buffers to absorb negative spillovers from the corporate sector. The simulated results suggest that shocks to nonfinancial corporations (NFC) could significantly raise banks’ nonperforming loans. The declining borrowing costs and improving financial strength of NFCs in Croatia point to the need to examine both financing and nonfinancing related obstacles.