Marić: Moody’s Announcement the First Effect of Upcoming Eurozone Membership

Deputy Prime Minister and Minister of Finance Zdravko Marić stated on Saturday that Moody’s announcement regarding the upgrade of Croatia’s credit rating in the event of formal confirmation of entry into the eurozone represents “the first indicator and the first effect of formal membership” in that community.

Namely, the agency Moody’s, one of the three leading global credit rating agencies, announced late Friday that in the event of a formal decision by the Council for Economic and Financial Affairs (Ecofin) on July 12 regarding Croatia’s entry into the eurozone on January 1 of next year, it would raise Croatia’s credit rating by two notches to ‘Baa2’, thus reaching investment grade for the first time.

With this increase, Croatia would for the first time have an investment grade credit rating from all three agencies.

This announcement from Moody’s came outside the regular reporting for this year, and Marić assessed it as extremely positive.

“I think this is very good news, which comes as a kind of ‘cherry on top’ and ‘the dot over the i’ of everything we as a Government have aimed for since the beginning of our mandate, which is the return of Croatia to the safe zone of investment rating,” Marić emphasized in a statement to reporters.

He also assessed that this is “the first indicator and the first effect of formal membership in the eurozone.”

He understands the citizens’ concerns about potential short-term negative effects of entering the eurozone, which primarily relate to price rounding and the impact on inflation.

“However, through this element, it is evident that the benefits are far greater and more significant, as the credit rating has a longer-term effect, given that it reflects in the cost of borrowing,” Marić pointed out.

This is particularly important at a time when reference interest rates have begun to rise, thus increasing the cost of debt and capital, he said.

For now, we do not see a threat of recession, but Croatia is not an island.

He assessed membership in the eurozone as important also because we are in crisis times, during which inflationary pressures are rising, and there are also announcements of potential threats of recession.

He said he appreciates the contribution of analysts who warn of the danger of recession, and the Government is aware of all of this. Therefore, everything is being done to mitigate inflationary pressures, as with the current structure of inflation, they more “hit” the socially vulnerable groups of the population, given that food and energy are often the only items they consume in their consumer baskets.

In addition to alleviating these pressures, Marić emphasized, it is equally important to ensure the supply of food and energy.

The third important thing is to maintain the existing level of economic activity, as its slowdown or entry into the negative zone means recession.

However, the Government does not “see” recession in its estimates for this year, considering the tourist season, the level of construction activity, as well as solid performances in retail, agriculture, and a good part of the manufacturing industry.

“But we must be aware that we are not an isolated island, but part of an open economy,” Marić noted, adding that certain warnings are taken very seriously.

The question is what level of inflation could begin to affect changes in consumer habits, but clearly, when it comes to essential goods such as food and energy, it has not yet been reached, Marić stated in response to a reporter’s question.

“But with additional complications, we can expect that consumer preferences will begin to change. For now, despite the difficulties, a good portion of citizens manages to cope,” he stated.

When it comes to the tourist season, the value of fiscalized invoices is currently about 25 percent higher compared to the record year of 2019. Although it is not easily disaggregated, unfortunately, a significant effect on such results is also due to rising inflation, given that according to May data, prices in the category of hotels and restaurants have increased by about 12 percent year-on-year, Marić said.

Regarding the rise in food prices, he believes that everyone should contribute to “minimizing speculative activities” to the lowest possible extent, which includes traders, as well as producers, buyers, and basic producers of agricultural products.

In the short term, someone may eventually benefit from such speculation, but in the long run, we all lose, Marić conveyed.

He also stated that the Government has provided incentives through the reduction of VAT on food, and he highlighted the highly competitive retail market in Croatia as a positive circumstance, whereby competition among retail chains somewhat alleviates inflationary pressures.

Soon issuance of domestic bonds.

For the second week of July, the issuance of domestic bonds is planned, most likely in two tranches, with shorter and longer maturities, namely four and ten years, given that on July 22, a bond of one billion euros matures, and the goal is to fully refinance it.

A round of discussions with the domestic financial industry has already been conducted on this, yields will certainly be higher than in previous issues, but perhaps Moody’s decision could also influence to somewhat “tighten” those yields and achieve the best possible conditions and greater savings, the Minister of Finance stated.

He added that formal decisions of credit agencies do not necessarily mean that they will reflect “overnight.” However, some global investors have statutory provisions regarding restrictions on investing in securities that are below investment grade. With Moody’s decision, Croatia will no longer have such concerns, Marić stated.

He also responded to a question about a recent meeting with student representatives, who are seeking an increase in the tax limit up to which parents can receive tax relief. Marić assessed the meeting as very constructive, announced that they should meet again next week, did not want to “announce or promise” anything yet, but also indicated that a final decision could be announced as early as next week.

“The idea in these circumstances has its foundations, and we are now looking for a way to implement it. What the amount will be, we will see in the next few days,” Marić stated, adding that the desire, considering the necessary legal changes, is to proceed as simply as possible in terms of implementation, so that it already covers the work of students during this summer.