The current and capital account of the balance of payments ran a deficit of EUR 1.1bn in the first quarter of 2021, which is a decrease of EUR 0.1bn from the same period of the previous year. If the last four quarters are observed, the surplus in the current and capital account in the period up to the end of March 2021 totalled 2.0% of GDP, when compared with 1.8% of GDP in the entire 2020.

Gross external debt stood at 88.1% of GDP at the end of March 2021, up by 6.9 percentage points from the end of 2020, as a result of the increase in debt of all domestic sectors, particularly of the government. In the same period, the ratio of net international investment position to GDP deteriorated from –48.8% of GDP to –49.9% of GDP.

The current and the capital account of the balance of payments ran a deficit of EUR 1.1bn in the first quarter of 2021, which was a slight improvement in the balance from the same period of the previous year (Figure 1a). This improvement was exclusively the result of the growth of surplus in the secondary income and capital transaction accounts, owing to the noticeable growth in net revenues from transactions with the EU budget. However, favourable developments in the use of the funds from the EU budget were largely offset by a marked deterioration in the balance in the primary income account and, to a lesser extent, a decrease in the net exports of services.

The merchandise trade deficit remained unchanged in the first three months of 2021 from the same period of the previous year. Namely, although goods exports (4.6%) grew faster than imports (2.6%), the growth of exports in absolute terms was completely offset by the growth of imports due to the noticeably larger imports base. At the same time, the foreign trade balance in services deteriorated slightly (by EUR 43.5m). The sharp fall in revenues from tourism spending of foreign guests (by 38.6%) was almost completely offset by an even sharper fall in resident tourist consumption expenditures abroad (by 58.4%). Net exports of other services also decreased moderately.

The significant deterioration in the balance in the primary income account in the first quarter of 2021 relative to the same period of the previous year (by EUR 0.2bn) was a result of larger expenditures on direct equity investments due to the increase in profits of foreign-owned banks and enterprises (primarily in oil industry, trade and construction). These unfavourable developments were only partly mitigated by the growth in revenues from compensation of persons temporarily employed abroad. At the same time, total surplus in the secondary income and capital transaction accounts increased perceptibly (by EUR 0.3bn) owing to a further increase in the positive balance in net transactions with the EU budget, mostly due to the growth in current funds paid to the government sector.

Figure 1 Balance of payments

a) Current and capital account	b) Financial account

¹ Sum of the last four quarters.
Note: In the figure showing the financial account, the positive value denotes net capital outflow abroad and the negative value denotes net capital inflow.
Source: CNB.

The financial account of the balance of payments recorded a net capital inflow of EUR 1.2bn in the first quarter of 2021 (Figure 1b). The largest net capital inflow was recorded in the other investment account (EUR 2.0bn) and to a much smaller extent in the portfolio investment account (EUR 0.7bn) and the foreign direct investment account (EUR 0.5bn), while gross international reserves rose considerably (by EUR 2.1bn).

The net inflow in the foreign direct investment account was mostly associated with retained profit of banks and enterprises in foreign ownership, which was much larger than in the same period of 2020. In contrast, new direct equity investments in Croatia decreased from the same period of the previous year, and mostly took place in the real estate and computer programming activities.

The net inflow in the portfolio investment account was the consequence of the increase in government liabilities on the basis of debt securities. Namely, the government issued two tranches of eurobonds in the international capital market worth EUR 2.0bn, with about more than a half of the inflow used for the repayment of ten-year US dollar bond. The increase in government liabilities, though to a much lesser extent, was also attributed to transactions in the secondary securities market. By contrast, the inflow on the liabilities side was partly mitigated by the outflow due to the asset growth triggered by investments of residents in foreign shares and equity holdings.

The strong net capital inflow in the other investment account was a consequence of the impact of several different factors. Thus, central bank liabilities increased noticeably being exclusively the result of the increased volume of repo transactions, which have a neutral impact on the overall financial account balance because they simultaneously raise international reserves by the same amount.^[1] The central bank assets decreased as a result of a decline in banks’ funds within the TARGET2 system^[2]. In addition, long-term loan liabilities of the government also rose, among other, as a consequence of borrowing through the European instrument for temporary Support to mitigate Unemployment Risks in an Emergency (SURE) and government borrowing from the International Bank for Reconstruction and Development (IBRD). Net liabilities of credit institutions and other domestic sectors also increased, although to a much lesser extent. By contrast, the net inflow of other investment was mitigated by the perceptible increase in government claims due to the larger difference between the funds distributed to end users and the funds received from the EU budget.

The strong rise in gross international reserves was predominantly the result of the increase in the purchase of foreign exchange from the government and growth in the government foreign currency deposits with the CNB due to the larger inflow of foreign exchange to the government from EU funds and foreign borrowing. The mentioned larger volume of repo transactions also contributed to the growth of gross reserves. As a result, gross international reserves stood at EUR 21.1bn at the end of March 2021, growing by 11.5% from the end of the previous year.

Table 1 Balance of payments

¹ Excluding the change in the gross international reserves and foreign liabilities of the CNB. The investment of a portion of international reserves in reverse repo agreements results in a simultaneous change in CNB assets (recorded in the reserve assets account) and liabilities (recorded in the other investment account) and thus has a neutral impact both on changes in the central bank’s net foreign position and the overall financial account balance.
Note: The positive value of financial transactions denotes net capital outflow abroad and the negative value denotes net capital inflow.
Source: CNB.

The stock of gross external debt in the first quarter of 2021 increased by EUR 3.3bn (Figure 2a) due to the rise in debt of all domestic sectors. The largest increase was seen in general government debt (by EUR 1.9bn) as a result of the mentioned borrowing in the international capital market, through SURE and from IBRD as well as transactions in the secondary market. Growth in the debt of the central bank (by EUR 0.8bn) was exclusively the result of the described increase in the volume of repo transactions. Credit institutions also increased their debt (by EUR 0.4bn) as well as other domestic sectors, including liabilities to affiliated creditors (by EUR 0.3bn), which mainly refers to private non-financial corporations. Accordingly, total gross external debt stood at EUR 43.4bn at the end of March 2021, i.e. at 88.1% of GDP, which was 6.9 percentage points more than at the end of 2020 (Figure 2b).

Figure 2 Gross external debt

a) Change in gross external debt	b) Stock of gross external debt

Note: Changes in gross external debt are a result of net transactions of domestic sectors and exchange rate and other adjustments.
Source: CNB.

The sharp increase in external debt liabilities of domestic sectors was largely offset by the increase in foreign assets, primarily of gross international reserves and government claims based on the difference between the funds distributed to end users and the funds received from the EU budget. Thus, net external debt increased by EUR 0.8bn in the first three months of 2021 and stood at EUR 8.3bn at the end of March, i.e. at 16.8% of GDP, which was 1.7 percentage points more than at the end of 2020.

The growth in net external debt resulted in the deterioration in net international investment position from EUR –24.1bn at the end of 2020 to EUR –24.6bn at the end of March 2021. The net foreign position of the government deteriorated the most, which was mitigated by the improvement in the position of the central bank (Figure 3a). The relative indicator of the net international investment position deteriorated from –48.8% of GDP at the end of 2020 to –49.9% of GDP at the end of March 2021 (Figure 3b). The movements in the financial account and the consequent deterioration in the net international investment position mostly mirrored the seasonal developments characteristic for the first quarter.

Figure 3 International investment position (net)

a) Position by sector	b) Relative indicator by type of investment

Notes: The international investment position (net) equals the difference between domestic sectors' foreign assets and liabilities at the end of a period. The negative value of the net international investment position indicates that foreign liabilities of Croatian residents are greater than their foreign assets. Included are assets and liabilities based on debt instruments, equity investments, financial derivatives, and other instruments. Figure 3b includes financial derivatives and other liabilities in the net debt investment position.
Source: CNB.

Data revision

Data on the balance of payments, gross external debt and the international investment position are revised for the previous periods. For more details see External statistics revision

Detailed balance of payments data
Detailed gross external debt data
Detailed data on the international investment position

1. The investment of a portion of international reserves in reverse repo agreements results in a simultaneous change in CNB assets (recorded in the reserve assets account) and liabilities (recorded in the other investment account) and thus has a neutral impact both on changes in the central bank's net foreign position and the overall financial account balance. ↑

2. Banks’ funds within the TARGET2 system account for central bank’s foreign assets, but they are not part of international reserves. ↑