Almost without public attention, the Croatian National Bank (HNB) increased its foreign exchange reserves by about two billion euros in mid-June, bringing them to approximately 17.8 billion euros.
The recent increase in international reserves, as explained by the HNB in response to a query from Lider, was primarily the result of the purchase of foreign currency from the state in June, which was mostly related to the inflow of foreign currency based on the foreign issuance of government bonds in the international market in the same month. In June, the HNB purchased almost one and a half billion euros from the state, thus creating 11.2 billion kuna needed to finance domestic fiscal needs. In addition to the purchase of foreign currency from the state, the increase in reserves was also contributed by a slightly higher level of contracted repo transactions with international reserves, noted our central bank.
This data is explained by Goran Šaravanja, an economic analyst at Imelum. In other words, after issuing two billion euros worth of eurobonds with a maturity of eleven years, the Ministry of Finance sold a larger portion of that money to the Croatian National Bank and purchased kuna from it to fulfill its budgetary obligations.
– This maintained exchange rate stability because purchasing such a large amount of kuna on the market would have caused pronounced appreciation pressures on the kuna. This is, in fact, another example of quality cooperation between the Ministry of Finance and the central bank – emphasizes Šaravanja.
Due to the coronavirus crisis and increased demand for foreign currency, which lasted for three consecutive months, foreign exchange reserves were depleting because the HNB released about two and a half billion euros into the foreign exchange market in March this year to preserve the exchange rate and prevent panic, which reduced reserves from 18.6 billion euros, which they were at the beginning of the year, to 15.7 billion euros, which they were at the end of May, or 15.2 percent less than in the same month last year.
However, the HNB emphasizes that, despite the reduction in international reserves resulting from the central bank’s interventions due to strengthening depreciation pressures on the domestic currency during March, the adequacy of Croatian reserves for further maintaining exchange rate stability is not in question, thanks to sufficient accumulation before the outbreak of the pandemic. Thus, at the end of 2019, foreign exchange reserves covered 7.9 months of goods and services imports achieved in the previous year and more than 40 percent of total liquid assets. They also covered more than the entire debt maturing in the next year and were within the recommended range of 100 to 150 percent of the IMF’s criteria for the adequacy of international reserves. Additionally, in April, an agreement was reached with the European Central Bank to establish a currency swap line, which is also available to us.
– Currency swaps play an important role when financing markets in one currency deteriorate because banks outside that currency area find it difficult to finance their assets indexed to that currency as they do not have direct access to the foreign central bank that issues that currency – explains Zrinka Živković Matijević, chief analyst at Raiffeisen Bank, adding that the HNB, thanks to the swap agreement with the ECB, can provide banks with the necessary liquidity in euros without using international reserves.
