As a transition country, Croatia is confronted with fundamental changes in the segment of capital transactions. These changes are the result of the country’s market orientation, of its position in the globalization (integration) processes, but especially of its needs. The limiting framework of a more significant development of the capital market is set by the reached level of development of the Croatian economy, by the underdevelopment of the entire financial market, by, until recently, inadequate legal regulation and, partially, by the specific tradition and conservatism in this segment. The present situation in the segment of capital transactions indicates the comprehensiveness of the changes regarding the development of the capital market, but at the same time the extreme sensitivity of this market to changes of the economic activity in the country, as well as in its surrounding, and high sensibility relating to the political decision about the initiation of negotiations with the European Union concerning the membership of Croatia in this association.financial system, capital market, transition, the European Union

Branimir Markovic

Branko Matic

English

Research Papers in Economics

THE PROCESS OF TRANSITION AND THE CAPITAL MARKET ... 343
THE PROCESS OF TRANSITION AND THE CAPITAL 
MARKET IN THE REPUBLIC OF CROATIA
Branimir Markovi}, Professor
Branko Mati}, Professor
Faculty of Economics in Osijek
Summary
As a transition country, Croatia is confronted with fundamental changes in the 
segment of capital transactions. These changes are the result of the country’s market 
orientation, of its position in the globalization (integration) processes, but especially 
of its needs.
The  limiting  framework  of  a  more  signiﬁ  cant  development  of  the  capital 
market is set by the reached level of development of the Croatian economy, by the 
underdevelopment of  the entire ﬁ  nancial market, by, until recently, inadequate legal 
regulation and, partially, by the speciﬁ  c tradition and conservatism in this segment.
The  present  situation  in  the  segment  of  capital  transactions  indicates  the 
comprehensiveness of the changes regarding the development of the capital market, 
but at the same time the extreme sensitivity of this market to changes of the economic 
activity in the country, as well as in its surrounding, and high sensibility relating to 
the political decision about the initiation of negotiations with the European Union 
concerning the membership of Croatia in this association.
Key words: ﬁ  nancial system, capital market, transition, the European Union
1. Introduction 
The  changes  in  the  ﬁ  nancial  sector,  especially  in  the  segment  of  capital 
transactions, in the Republic of Croatia are very explicit. The frameworks for these 
changes are set by: the condition of the economy, the level of the market openness, 
the size of the Croatian market, the development of other segments of the ﬁ  nancial 
system, by legal regulation, but also by political requirements relating to the beginning 
of aaccession negotiations between the Republic of Croatia and the European Union 
(EU)1. Precisely this fact indicates the extreme importance of stability, but also of 
membership in such an association. The reasons for this are the standards that apply 
to all member states, resulting in the safety for investors.
1  The Republic of Croatia has been a candidate for membership in the EU since 18th June 2004.Branimir Markovi} • Branko Mati} 344
2. Capital Market in the Republic of Croatia
Croatian capital market, as a part of the ﬁ  nancial system, is determined by the 
types and number of ﬁ  nancial instruments used to trade on the market, by institutional 
frameworks and by legal regulation. In spite of its speciﬁ  c characteristics, capital 
market can not be considered as separate and isolated. The reason for this lies in 
the fact that all ﬁ  nancial markets are connected through binding factors – credit, 
the existence of speculation and arbitration, as well as perfection and efﬁ  ciency of 
the market (Novak, 1999:19); these circumstances must therefore necessarily be 
accepted.
2.1. Financial Instruments on the Capital Market in the Republic of Croatia
In business operations in which ﬁ  nancial instruments have the date of expiry 
longer than one year, we speak of long term ﬁ  nancial instruments, and these are trade 
objects on the capital market. In the Republic of Croatia, practically all “classical” 
ﬁ  nancial institutions: deposit, contracting (insurance companies and pension funds) 
and investment institutions can participate on the capital market (Novak, 1999:38).
Long term ﬁ  nancial property can usually be classiﬁ  ed into two categories:
  equity securities
  debt securities
2.1.1. Equity Securities Market
Equity securities market in the Republic of Croatia consists of the purchase 
and sales of securities through the stock exchange. In Croatia there are two stock 
exchanges – the Zagreb Stock Exchange and the Varaždin Stock Exchange.
At the end of 2004, the Zagreb Stock Exchange had 183 shares of stock and 153 
of those were actively traded with. On this stock exchange, transactions were made 
on three markets: on the ofﬁ  cial market, on the public limited companies market, and 
on the parallel market.
In terms of the turnover volume on this stock exchange, most dominant were 
the shares of a business conglomerate largely dealing in the production of tobacco 
products, shares of food processing, pharmaceutical and tourist industry, and shares 
of insurance companies and banks.
Market capitalization of stock2 in 2004 was 30.4% of the estimated of the gross 
domestic product (GDP) for that year.
2    Market capitalization of stock consists of the close price of each share multiplied by the number of 
issued shares and corrected by the share’s solvency.THE PROCESS OF TRANSITION AND THE CAPITAL MARKET ... 345
Trading on the Varaždin Stock Exchange includes transactions in ﬁ  ve market 
segments: in the First Quotation, in the Second Quotation, in the Public Companies 
Quotation, in the Business Investment Funds Quotation and in the Free Market 
Quotation. 
The Varaždin  Stock  Exchange  is  speciﬁ  c  for  its  trading  in  the  segment  of 
rights3 of the Ministry of Finances and of the former Ministry of Public Works, 
Reconstruction and Building.
The size and solvency of the Croatian stock market is similar to the trends on the 
stock markets of most new EU member countries that have joined the Union in 2004 
– Table 1. (Croatian National Bank, Annual Report for 2004   working version: 65 68).
Table 1. Comparison of Capital Market Indicators
December 2004 Bratislava Budapest Ljubljana Prague Warsaw Zagreb
Average daily transactions, shares 
(Mill. EUR)
Average daily transactions, bonds 
(Mill. EUR)
Turnover*/GDP***, annual level (%)
Turnover*/GDP***, annual level (%)
Turnover velocity****
Market capitalization* (Mill. EUR), 
end of the month
Market capitalization** (Mill. EUR), 
end of the month 
Market capitalization*/GDP***, end 
of the month (%)
Market capitalization**/GDP***, 
end of the month (%)
Changes in the Index of shares since 
the beginning of the year (%)
Changes in the Index of shares since 
the beginning of the month (%)
0.4
59.7
0.3
42.2
2.1
3,615
9,339
12.5
32.4
83.9
8.2
40.8
10.0
14.6
3.6
48.8
22,070
33,820
29.9
45.8
57.2
3.9
5.7
2.8
6.2
3.0
21,1
7,115
4,616
29.3
19.0
24.7
1.4
69.4
72.2
23.1
24.1
54.6
32,029
18,941
42.3
25.0
56.6
2.1
149.0
6.4
22.0
0.9
78.3
52,541
n.a.
28.1
n.a.
27.9
4.8
2.3
21.0
2.4
22.0
7.4
8,048
3,202
31.9
12.7
32.1
 2.2
* shares; ** bonds; *** 2003
**** analyzing the monthly turnover of shares *100/market capitalization of share
Source: Reports from the BSSE, BSE, PSE, LJSE, WSE, Zagreb Stock Exchange and FIBV 
Statistics (www.ﬁ  bv.org)   
3    These rights are in fact securities by which their holders acquire the right to get shares from the 
portfolio of the Croatian Privatization fund.Branimir Markovi} • Branko Mati} 346
2.1.2. Debt Securities Market
Debt securities market in Croatia gives an excellent illustration of the connection 
between the ﬁ  scal policy and the market itself. Thus the state, following the directives 
of the ﬁ  scal policy, incurs debts on the home capital market by issuing bonds. Also, 
for the ﬁ  rst time in Croatia, local government and self government in two towns 
(Koprivnica and Zadar) have issued bonds for the purpose of securing new funding 
sources.
On the Croatian debt securities market there are state, corporate and municipal 
bonds, as well as the bonds of the State Agency for Insurance of Savings Deposits 
and Bank Rehabilitation and the bonds of the Croatian Bank for Reconstruction and 
Development – Table 2.
Table 2. Bond Issues on the Home Market at the End of February of 2005
Symbol Issuer Date of 
Issue
Expiration
Cur-
rency
Face value 
of the issue
Nominal
Interest 
rate
Close 
price*
Current 
yield
Feb. 28 
2005
DAB 05CA
RHMF O O8CA
RHMF O 125A
RHMF O 085A
RHMF O 142A
RHMF O 077A
RHMF O 198A
GDKC O 116A
GDZD O 119A
HBOR O 112A
BLSC O 091A
HYBA O 086A
BNAI O 22CA
PODR O 072A
AGRK O 074A
PLVA O 115A
ATGR O 077A
Savings Deposits 
Insurance Agency
Republic of Croatia
Republic of Croatia
Republic of Croatia
Republic of Croatia 
Republic of Croatia 
Republic of Croatia   
The Town of 
Koprivnica
The Town  of 
Zadar
Croatian Bank for 
Reconstruction and 
Development
Belišće Co.
Hypo Alpe.Adria 
Bank
Bina Istra Co.
Podravka Co.
Agrokor Co.
Pliva Co.
Atlantic Grupe Ltd.
19/12/2000
14/12/2001
23/05/2002
28/05/2003
10/02/2004
07/07/2004
29/11/2004
29/06/2004
01/09/2004
11/02/2004
14/01/2005
06/06/2003
15/12/2002
20/02/2004
03/04/2002
12/05/2004
15/07/2004
19/12/2005
14/12/2008
23/05/2012
26/05/2008
10/02/2014
07/07/2007
29/11/2019
29/06/2011
01/09/2011
11/02/2011
14/01/2009
06/06/2008
15/12/2002
20/02/2007
03/04/2007
12/05/2011
15/07/2007
EUR
EUR
EUR
HRK
EUR
EUR
EUR
HRK
EUR
EUR
EUR
HRK
EUR
EUR
EUR
EUR
EUR
225,000,000
200,000,000
500,000,000
1,000,000,000
650,000,000
400,000,000
200,000,000
60,000,000
18,500,000
300,000,000
8,000,000
150,000,000
210,000,000
27,000,000
230,000,000
75,000,000
15,000,000
8.375%
6.875%
6.875%
6.125%
5.500%
3.875%
5.375%
6.500%
5.500%
4.875%
5.500%
6.500%
8.000%
5.000%
11.000%
5.750%
5.750%
104,80
111.35
115.80
100.90
108.00
101.55
105.45
 
 
 
 
100.90
 
 
108.10
99.65
 
7.991%
6.174%
5.937%
6.070%
5.093%
3.816%
5.097%
 
 
 
 
6.442%
 
 
10.176%
5.770%
 
* in regular exchange
Source: Zagreb Stock Exchange, Monthly Report for February 2005THE PROCESS OF TRANSITION AND THE CAPITAL MARKET ... 347
The coupon interest rate ranges between 3.875 and 11%. Most of the bonds are 
denominated in Euros.
From the point of view of solvency, government bonds are on the top of the list, 
whereas corporate bonds are the least solvent.
Total market capitalization on the home market by the end of 2004 amounted to 
14.9 % of the estimated GDP. 
In the same period 12 Croatian state bonds have been admitted on foreign capital 
markets and their total nominal value was 4.94 billion Euros. 
All  bonds  are  denominated  in  Euros,  except  one  which  is  denominated  in 
Japanese Yens (Croatian National Bank, Annual Report 2004 – working version: 
69 74).
2.2. Financial Institutions in the Segment of Capital Business
On the Croatian capital market there are brokerage houses (26); stock exchanges 
(2); banks authorized to deal with securities (16); pension companies (4); voluntary 
pension funds (6); closed voluntary pension funds (9) and pension insurance company 
(1).
3. Pension Insurance
Croatia as a transition state has been confronted with the necessity of coordination 
of a larger part of its ﬁ  nancial system with the achievements of the free market and 
with the standards in the European Union, regarding its commitment to becoming a 
member of this association.
A special segment within this process of adjustment is the reform of the pension 
insurance which was until 2002 based on generational solidarity. 
Pension insurance resulting from the pension reform in Croatia is turning into 
an exceptionally rapidly growing capital market. This appearance fact will have 
important inﬂ  uence on the trends in the entire ﬁ  nancial sector; therefore special 
attention will have to be paid to this segment in the future.
4. Limitations in Capital Transactions
Following the Agreement about Stabilization and Accession, which Croatia has 
signed with the EU (it entered into force in 2005), and its particular provisions, i.e. 
based on the coordination of Croatian legislature with the Acquis Communautaire of 
the EU, it became possible to gradually liberalize some capital business transactions. Branimir Markovi} • Branko Mati} 348
When it joins the EU, Croatia will have to completely repeal all limitations relating 
to capital transactions.
5. Conclusion
As a state in transition, Croatia is facing the necessity of implementation of a 
series of reforms of its economic and ﬁ  nancial system.
Globalization  and  integration  processes  additionally  emphasize  this 
requirement.
Inheritance, tradition as well as, to some extent, habits condition certain behavior 
and expectations hamper the development of the capital market.
The reached level of development of the capital market in Croatia is the result 
and the consequence of the openness of Croatian economy, but it is also, partly, the 
result of actual needs connected with the efﬁ  ciency of this segment of the ﬁ  nancial 
system. 
Legal regulation of this area, which is to a great extent harmonized with the 
Acquis Communautaire of the EU, can and should additionally provide new breaks 
through, both in the development of the capital market and on the institutional plan.
The changes to date in the segment of capital transactions in Croatia indicate 
a marked sensitivity of the capital market. Positive development of the relations 
between Croatia and the EU invigorates this market, and prolongation of the settled 
activities results in negative changes in capital transactions.
It can therefore be realistically expected that the opening of negotiations about 
the membership in the EU will result in signiﬁ  cant improvement in the development 
of the capital market in Croatia.
6. Literature
1.   Novak, Branko (1999) Financijska tržišta i institucije, Osijek, Ekonomski fakultet 
u Osijeku (Financial Markets and Institutions, Osijek, Faculty of Economics in 
Osijek)
2.   Hrvatska narodna banka, godišnje izvješće 2004 – radna verzija (Croatian National 
Ba  nk, Annual Report for 2004 – working version) 

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