Yesterday, Croatia has sent a letter of intent for entering the ERM II. By this Croatia has made a first formal move for the introduction of the euro as the official currency.

In addition to the letter of intent, that was signed by the Minister of Finance and the Governer of the Croatian National Bank, Croatia has also submitted an action plan detailing the reforms it will implement before entering ERM II.

With a successful participation in the exchange rate mechanism for at least two years, Croatia should formally meet the exchange rate stability convergence criteria. Croatia has been in line for some time with the remaining criteria – price stability, public finance sustainability and interest rate convergence.

As a reminder, Croatia was under Excessive Deficit Procedure (EDP) that went out in June 2017. Economic recovery, export growth, decrease in unemployment, a decrease of external debt and fiscal adjustment have all reduced the vulnerability of the Croatian economy and allowed it to apply for ERM II.

Action plan reforms Croatia intends to implement are following: i) further strengthening the supervision of the banking system; ii) strengthening the framework for measures targeted at borrowers; iii) strengthening the framework for the prevention of money laundering; (iv) improving the system for collecting, processing and publishing statistical data; v) improving public sector governance; and vi) reducing the administrative and financial burden on the economy.

Croatia intends to implement all the measures stated in the letter of intent and the action plan by mid-2020, after which EU institutions will assess whether measures are adequately implemented.  After receiving a positive assessment, Croatia will begin participating in the exchange rate mechanism.

We see this as positive for the liquidity of the Croatian equity market on the mid-term and supportive for share prices and credit risk of the Croatian companies.