May 17 (SeeNews) - The structural vulnerabilities of Croatia's economy have increased due to the crisis in the country's largest private company Agrokor, the central bank says.
The still uncertain outcome of the restructuring process in Agrokor poses a risk to solvency and liquidity in the non-financial sector, which could spill over and increase the vulnerability of the banking sector, analysts of the Croatian National Bank warn in the bank's latest annual Financial Stability publication.
The analysts say that the restructuring process could also have positive effects, by reducing cash outflows paid by Croatian entities.
"In addition, the optional transformation of debt into equity holdings could lead to a reduction in external debt, while restructuring and the opening of Agrokor companies to emerging markets could boost profitability and exports in the medium term, and lead to the possible growth of FDI in production capacities", the analysts explain.
They, however, warn that the prerequisite to such a scenario is the successful completion of the only recently initiated restructuring process.
With regard to banks, the central bank says that according to the results of the stress test, Croatian banks are able to withstand unlikely but possible shocks in the event of significant write-offs in the Agrokor Group.
The analysts conclude that if the restructuring process in Agrokor is performed properly, taking into account the multiplier effects within the supplier chain and the market risk assessment, Croatia's GDP should continue its solid growth from last year to reach 2.8% in 2017 and 3.0% in 2018.
The outbreak of a crisis in the imaginative stress scenario, however, would cause stagnation of economic activity already in 2017 (by 0.3%), while the economy would contract by 2.5% in the following year, but this is highly unlikely, according to the analysts.
In such a scenario, interest expenses are expected to jump under the influence of panic reactions and sudden risk reevaluations, while exchange rate volatility could reach historical extremes.
However, in general the intensity of such a simulated stress test exceeds examples observed over the last decade, the central bank analysts note.
The EBRD raised its forecast for Croatia's 2017 economic growth to 2.9% earlier this month from 2.0% projected in November. The lender, however, warned that short-term outlook may be negatively affected by potential spill-overs from financial troubles in Agrokor, whose debt is close to 15% of GDP.