EU accession is considered an important step for the country amid expectations that it will help spur growth and accelerate the convergence process. However as our chief negotiator with the EU, Vladimir Drobnjak, said at the entry celebration: "Sitting at the same table and participating in decision-making and bringing all decisions by consensus is priceless, for everything else, there’s MasterCard".
We are all aware of the fact that there is no such thing as a free lunch and with the Croatian deficit reaching almost 5% in 2014, we are facing action over an excessive budget deficit. This, together with a lack of decisive structural reforms, especially within parts of the public sector, slow privatization, and uncertainty created by continuous changes in the regulatory environment dependent on the political cycle, will limit the potential benefits of EU accession and of the expected recovery of EU economies.
The most visible advantage of EU membership is the fact that Croatia will now have access to several times more funds than it had as a membership candidate. For the Croatian economy, which has been in recession or stagnating since 2009, the EU’s cohesion and structural funds will be the main source of investment for growth and employment. Therefore Croatia will need to identify strategic sectors where EU funding will have the biggest possible impact on growth stimulation.
Croatian accession to the European Union has created another stimulus for countries in the region to strive for it as well. In such an environment, geopolitical risk declined in the region, while regional political and economic links are under the strong impact of EU guidance and the negotiation process.
Under the accession treaty, Croatia should accept the common currency, the Euro, as soon as it meets the necessary requirements. This will certainly not be on the agenda for a while, at least until it is clear how the eurozone will overcome the present crisis. Among the requirements for eurozone membership is that Croatia should reach at least the average level of competitiveness of eurozone countries, while simultaneously its budget deficit should not exceed 3% of GDP and its public debt 60% of GDP.
The EU has placed an enormous challenge in front of us when we talk about harmonisation of the Croatian capital market with EU legislation, especially in times when even developed and mature markets are struggling to comply with numerous regulations such as AIFMD, FATCA, UCITS V, and EMIR. A few days after EU accession, the Croatian Financial Services Supervisory Agency (HANFA) decided to introduce the obligation to report OTC transactions. OTC reporting is obligatory for financial instruments currently listed on the regulated market in Croatia: equities, bonds, and commercial papers. Because of the great resentment of foreign investors due to their inability to enforce this obligation, amendments to the Capital Market Act which regulates the OTC reporting requirement are entering the final phase along with a strong lobbying effort by the Association of Custodians for this requirement to be abolished.
The Central Clearing and Depository Company (CCDC), which has been performing the role of CCP in contractual settlement since the beginning of its operations, is committed to fulfilling the requirements in line with EMIR in order to continue to provide CCP service. Request to the local regulator, HANFA, will be sent by the end of the year and approval from ESMA needs to be received by the end of September 2014. On the contrary, trade for trade settlement will be the only option available for settlement on the Croatian market. In that respect you can rely on UniCredit’s continuous support in providing up to date developments and offering all available options on the market.
After a prolonged period without privatisation incentives, the Croatian government paved the way for new investments in the banking and insurance sector by announcing the privatisation of sole state owned bank, Hrvatska Postanska Banka, and the biggest insurer on the market, Croatia osiguranje. Unfortunately this decision will not directly enlarge liquidity of the Croatian capital market as according to available information, privatised securities of those companies will not be listed on the Zagreb Stock Exchange (ZSE).
Liquidity is still the main issue of the Croatian capital market and although ZSE is striving to attract both companies and investors by offering remote access, extending working hours, and introducing new indices, the current trend is still negative. On the other side, requirements such as personal identification number, complicated relief in source and tax reclaim procedure, and segregation of some types of securities annul their effort. In that respect, UniCredit is considering taking on the role of a market player which can make a difference and influence capital market environment.
We would like to emphasize that we are aware of the significance of all changes happening on the market and as the largest financial group on the market we are fully dedicated and actively involved in their implementation. We hope that our effort is recognisable and will be valued not only by our clients but also by all investors on the market. One of the ways you can point out the fields that we need to focus on or express your appreciation for all our efforts is to fill out the Global Custodian survey. It will provide us with valuable feedback which we will use to improve our services and further strengthen our resolve.
Valerija Bezak
Head of Global Securities Services Croatia