The current and capital account of the balance of payments ran a deficit of EUR 0.3bn in the second quarter of 2020, which is a considerable worsening compared to the balanced balance recorded in the same period of the previous year. If the last four quarters are observed, the surplus in the current and capital account of the balance of payments stood at 5.6% of GDP in the period up to end-June 2020, an increase of 0.8 percentage points from the entire 2019.

The financial account of the balance of payments saw a net capital outflow of EUR 0.2bn, a decrease of EUR 0.4bn from the same period of the previous year. The net capital outflow resulted in a small improvement in net international investment position. However, the sharp fall in the nominal GDP led to the worsening of the relative indicator, which stood at –51.0% of GDP at the end of June.

The current and capital account of the balance of payments ran a deficit of EUR 0.3bn in the second quarter of 2020, which is a considerable worsening compared to the balanced balance recorded in the same period of the previous year. This is due to a sharp fall in net services exports, particularly revenues from tourism as a result of the spring lockdown introduced following the outbreak of the coronavirus pandemic, which brought tourist activity almost to a complete halt. By contrast, a pronounced narrowing of the foreign trade deficit and, to a much lesser degree, improvement in the primary income account, led to an improvement in the balance. However, due to very favourable developments in the first quarter and the fall in the nominal GDP in the second quarter, if the last four quarters are observed, the surplus in the current and capital account of the balance of payments in the period up to end-June 2020 stood at 5.6% of GDP, which is an increase of 0.8 percentage points from the entire 2019.

The coronavirus pandemic followed by the epidemiological measures in the country and abroad had an unfavourable impact on international trade. Goods exports thus fell considerably in the second quarter (17.5%) from the same period of the previous year. Goods imports shrank even more (27.0%), resulting, due to a much bigger import base, in a sharp fall in the foreign trade deficit (EUR 1.1bn). At the same time, the surplus in the international trade in services fell even stronger (EUR 1.9bn), mainly as a result of a fall in revenues from tourism (84.0%).

The improvement in the primary income account from the same period of the previous year (EUR 0.4bn) was due to smaller expenditures on direct equity investments, i.e. a fall in the profit of banks and enterprises in foreign ownership (primarily in the manufacture of pharmaceutical products, accommodation and trade activities). As regards the structure of expenditures on direct equity investment, dividends fell strongly, largely due to the ban on dividend payments of domestic banks, while total reinvested earnings rose.

The total surplus in the secondary income and capital transaction accounts rose slightly in the second quarter of 2020 from the same period of the previous year (EUR 43m). This was mostly due to a growth in net revenues from transactions with the EU budget, mostly fuelled by current funds. By contrast, net revenues from personal transfers fell.

Figure 1 Balance of payments

a) Current and capital account	b) Financial account

¹ The 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 outflow of EUR 0.2bn in the second quarter of 2020, which is a decrease of EUR 0.4bn from the same period of the previous year. Broken down by individual accounts, a considerable net inflow was recorded in the portfolio investment account and, to a much lesser degree, in the foreign direct investment account. By contrast, the other investment account recorded a sharp net outflow of capital, while gross international reserves rose.

The net inflow of capital in the portfolio investment account (EUR 1.5bn) was due to government borrowing in the international market associated with the issue of a new bond worth EUR 2.0bn, partly intended to cover the July repayment of the USD 1.25bn worth bond issued in 2010 and partly to finance the measures to mitigate the negative impacts of the pandemic. The net inflow of capital in the foreign direct investment account (EUR 0.2bn) was due to debt instruments and reinvested earnings of banks and enterprises in foreign ownership. By contrast, there were no direct equity investments in Croatia.

The net capital outflow in the other investment account (EUR 1.1bn) was the result of a simultaneous fall in foreign liabilities of the domestic sector and, to a much lesser degree, rise in foreign assets. The fall in foreign liabilities was particularly due to the deleveraging of other domestic sectors (other financial institutions and private and public non-financial corporations) while the rise in foreign assets was due to the growth in the foreign assets of banks. In contrast with other domestic sectors, the general government increased its long-term loan liabilities. The growth in gross international reserves in the second quarter (EUR 0.8bn) was due to the purchase of foreign exchange by the government following the issue of an international bond, which more than offset the fall in reserves resulting from foreign exchange interventions. Despite growth in reserves in the second quarter, their level at the end of June was below that at the end of 2019.

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.
² The sum of the last four quarters.
Note: The positive value of financial transactions denotes net capital outflow abroad and the negative value denotes net capital inflow.
Source: CNB.

The net capital outflow resulting from a reduction in net debt liabilities of the domestic sectors also resulted in a small improvement of EUR 0.1bn in the net international investment position of the Republic of Croatia in the second quarter of 2020, which stood at EUR –26.4bn at the end of June 2020. However, the sharp fall in the nominal GDP in the second quarter led to a deterioration in the relative indicator, which stood at –51.0% of GDP at the end of June, an increase of 2.0 percentage points from the end of the first quarter (Figure 2).

Figure 2 International investment position (net)

Note: The international investment position 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. The figure shows net debt investments including financial derivatives.
Source: CNB.

Data revision

Data on the balance of payments and the international investment position are revised in accordance with the commonly used practice, based on subsequently available data.

Detailed balance of payments data
Detailed data on the international investment position