Earthquakes, floods, and fiscal resilience: Evidence from Croatia and Slovenia

Abstract

This paper studies how severe natural disasters affect public debt sustainability in two small open euro-area economies, Croatia and Slovenia, using the IMF's Natural Disaster Debt Dynamics Tool (ND-DDT). Croatia is calibrated to the 2020 Zagreb earthquake, and Slovenia to the 2023 floods. We compare baseline debt projections with four complementary disaster configurations: two empirical-distribution specifications (one-off and recurrent), one local projection, and one 95th-percentile quantile regression. We further conduct a four-channel robustness exercise allowing the disaster shock to affect inflation and the effective interest rate, in addition to real GDP growth and the primary balance. In the absence of an extreme natural event, we estimate that Croatian public debt declines from 63 per cent of GDP in 2024 to 52.7 per cent by 2034, while Slovenian debt rises from 66.6 to 74.7 per cent over the same horizon. However, a severe disaster shifts both trajectories upward and increases their persistence, raising the Croatian debt-to-GDP ratio to between 64.5 and 70.4 per cent of GDP, while the Slovenian ratio reaches between 83 and 95 per cent across scenarios. A counterfactual exercise confirms that pre-disaster fiscal space, adaptive capacity, and risk-transfer arrangements attenuate but do not eliminate the post-disaster debt burden. Our findings highlight that fiscal resilience must be built before the shock occurs.