Croatia Joining Eurozone Brings One Important Benefit

Lauren Simmonds

As Ana Blaskovic/Poslovni Dnevnik writes on the 29th of September, 2020, with Croatia’s entry into the Eurozone, currency and credit risks will be significantly reduced, and pension fund assets will become significantly more liquid. This is the message taken from the third ”Financial Brunch” of the Association of Pension Fund Management Companies and Pension Insurance Companies (UMFO) on the subject of the euro.

”The assets of mandatory pension funds are slowly outgrowing the domestic capital market, especially in terms of limiting currency exposure. The assets of mandatory pension funds have grown by 216 percent since 2010, while GDP has cumulatively grown by 11 percent,” illustrated the head of asset management at Raiffeisen Pension Company Ivan Grbac.

“In 2021 alone, we’ll be above the market capitalisation of traded shares on the Zagreb Stock Exchange,” he said, adding that the activities of pension funds have contributed to the development of the domestic bond market, which was one of their tasks. The next phase is the introduction of the common European currency. Croatia’s entry into the Eurozone, a society of 19 EU countries with the euro as their official currencies, is a broader story than the mere reduction of currency risk, although it is certainly one of the biggest advantages.

From the perspective of asset management managers in pension funds, joining the Eurozone also means significantly more liquid assets. “The introduction of the euro doesn’t mean that pension funds will reduce investment in Croatia, but it opens the door for the surplus, ie the growth of pension fund assets above the growth of domestic capital and markets to be invested in foreign markets, which achieves diversification,” said Grbac. Only the time of entry into the Eurozone, he says, is important, because the date of entry into the exchange rate mechanism was very favourable.

“If we have to assess whether the credit risk decreases or increases with joining the Eurozone, I think the answer has already been offered by Fitch, who wrote in the last revision of their rating that joining the Eurozone would increase Croatia’s rating by two levels,” he concluded. Pension fund investments will be tomorrow’s pensions for today’s workers who save in the second pillar (and even smaller part in the third pillar). This means that the long-term liabilities of the funds (for the payment of pensions) will be settled in euros, of course, if Croatia introduces the currency within the planned deadlines, which is theoretically as early as 2023.

“As for the internationalisation of the portfolio, that’s largely already underway, and that has been especially the case over the last two years,” said Gordan Sumanovic, a member of the Management Board of the Raiffeisen Pension Company. Economist Velimir Sonje pointed out that everything is clear about the currency risk in the long run, because this variable will be eliminated, but he raises the question of what it means to enter the exchange rate mechanism. Considering that the central parity (set at 7.5345 kuna for 1 euro with a standard fluctuation band of ± 15 percent, op.a.) may change after Croatia’s ERMII entry and before the actual introduction of the euro, although he warns that this has so far only happened in Slovakia.

Sonje believes that in the medium term, Croatia will be under enormous pressure in the direction of strengthening the kuna due to billions of euros that could begin to flow into the financial system from next year on and last until the introduction of the euro itself. “Regarding credit risk in the medium and long term, the introduction of the euro is positive in terms of reducing credit risk and convergence of risk premiums. Occasional oscillations are possible in the short term,” explained Sonje.

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