UK – CROATIA Trade & Investment Forum 2013 London, October 24 th

1. UK – CROATIATrade & Investment Forum 2013London, October 24th Boris Vujčić e-mail: boris.vujcic@hnb.hr

2. Domestic demand remains a drag on growthwhileexports are recovering ... whileexports are steadilyrecovering Net domesticdemandcontinues to weightdown on growth... * 2013, 2014 values - CNB estimate/projection Data from 2010 are provisional Source: CBS. Source: CBS

3. ...is domesticdemand at theturningpoint? Consumerconfidenceandretailtrade Net financial wealthofhouseholds Source: CNB Source: CBS,Ipsos Puls

4. Breakdown of imports (H1 2013): Other Agriculture Energy Current Account Has Improved on Lower Import Demand Current Account Balance (as % of GDP)) MerchandiseTrade (EUR bn) Source: CNB Source: CBS • Sharp improvement in the trade balance driven by stable exports and falling imports • Exports projected to rise gradually, with further upside potential from structural reforms aimed at enhancing cost competitiveness • High import substitutionpotentialin energy andagriculture • FDI is expected to grow following accession, whilst deleveraging will further improve the net external position

5. Stability Against the Euro:Long-TermERPolicyofthe Central Bank Exchange rate performance …(average monthly exchange rate) Euroization Source: CNB. Source: CNB.

6. Money Supply Fully Covered by FX Reserves Reserves, Broad and Base Money (EUR bn) Source: CNB. • FX reserves remain sufficient to cover base money (146%) and money supply (151%) as at August 2013, underpinning the strong commitment towards the stable exchange rate policy • At the June of 2013, FX reserves were sufficient to cover around 8 months of imports goods and services and 82% of ST debt by remaining maturity

7. MonetaryPolicyEasingResultinginStructuralLiquiditySurplus Reserve Requirements and Minimum f/c Liquidity Liquidity Surplus and Overnight Interest Rates Source: CNB Source: CNB • Favorable Kuna liquidity was reflected in lowlevels on overnightmoneymarketinterestrates 7

8. Corporate Lending Recovering, while Household Sector Continuous Deleveraging Source: CNB Source: CNB * excludingshipyards' credit liabilitieswhichMinistryofFinancetookoverin 2012 and a transaction of one bank which, in an effort to reduce the amount of partly recoverable and fully irrecoverable placements, transferred a total of HRK 5.6bn in its claims on companies to a company indirectly owned by a parent bank. 8

9. CPI InflationHas Averaged 2.8% Over the Last Decade CPI Inflation Components (EOP Year-on-Year Change, %) HICP Inflation: Peer Comparison (%) Source: Eurostat Source: CBS • The “quasi currency board” monetary policy regime anchors inflation expectations • Inflation decelerated in 2013 against a background of weak domestic demand, a drop in imported inflationand a favourable base effect • Stable outlook with inflation of 1.8% and 2.0% forecast for the next two years 9

10. Structuralreforms/improvingbusinessclimate are thekey to restartgrowthin a sustainableway! • Law on promotion of investments • From the start of 2013, theLaw enables up to 10 years of 0% corporate tax depending on the employment,plus one-off subsidies for newly employedrangingfrom 3000-9000 euros • Law on strategic investments • Investmentsover 30 mileuros, streamlinesproceduresneeded for theinvestment, reduces role oflocalauthorities, whichwerethemainobstacle • Ongoing restructuring andprivatization process of shipyards • Restructuring of public companies (Croatian Railways, Croatian Motorways and Rijeka Zagreb Motorway, CroatianAirlines...) • Consolidation of the railway companies, privatization of cargo business, outsourcing of non-core businesses, layoff1.500 workers • Consolidation of maintenance of Croatian Motorways and Rijeka Zagreb Motorway, layoff 600 workers, reduction of costs • Privatizations (insurance company, postal bank, part of the railways, state owned real estate/hotels at the coast, energy production...)

11. Labor market reformsincreasingflexibility Regulation ofregular contracts, including additional provisionfor collectivedismissals Regulation oftemporarycontracts *Higherindexindicates more rigidlabormarket Source:OECD 2008, 2013 *Higherindexindicates more rigidlabormarket Source:OECD 2008, 2013

12. Croatian financial system is bank-centered Sources: CNB; HANFA

13. NPLs Have Risen, But Capital Adequacy very high Well-CapitalisedBankingSector Non Performing Loans (As % of Total Loans) Source: CNB Source: CNB • Non-performing loans ratio still growing (albeit at slower pace) • However, relatively strong operating income and high capital adequacy provided sufficient buffer after the crisis • Significant systemic liquidity • The aggregate capital adequacy ratio of 20.8% in 2Q13 is well above the regulatory requirement of 12%, providing a considerable capital buffer despite deterioration in asset quality after 2008 • The banking system remained profitable during the financial crisis 13

14. CAR high and leverage low Bank capital to un’weighted assets Bank (regulatory) capital adequacy ratio (CAR) Source: IMF, FSI, (bank assets) weighted averages Note: CEE countries: Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovak Republic, Slovenia 14

15. Bank PerformanceIndicators Bank Return on Assets excluding value adjustment costs Bank Return on Assets Source: IMF, FSI, (bank assets) weighted averages Note: CEE countries: Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovak Republic, Slovenia 15

16. Capital ratios are sensitive to NPL coverage Capital ratios, End 2012 Source: IMF, FSI 16

17. Deleveragingofbanks’ in CEE Change in banks' external debt between March 2013 and September 2008 Loan to depositratio Sources: CNB; national central banks 17

18. ThankYou! 18