Monday, 13 September 2021

Switching to Euro Will Help Croatia Enjoy Better Credit Rating

ZAGREB, 13 Sept 2021 - Finance Minister Zdravko Marić said on Monday that the introduction of the euro as the sole legal tender would impact Croatia's credit rating, and quoted the Fitch agency's presumption that the country's admission to the euro area would raise its credit rating by two notches.

Addressing a meeting of the National Council for the introduction of the Euro as Official Currency in Croatia, which was also attended by the EC Vice President Valdis Dombrovskis, Minister Marić recalled that the 2020 COVID-19 pandemic triggered off a rise in the budget gap, and last year the general government deficit amounted to 7.4% of the country's GDP.

This year, it is estimated at 3.8%.

According to the latest estimates, the budget deficit in 2022 will fall to 2.6% of GDP and to 1.9% in 2023, while in 2024 it is projected to be 1.5% of GDP.

Marić recalled that as a consequence of the higher budget deficit, the public debt also rose in 2020 when it reached 88% of GDP.

This year, the public debt is likely to fall by two percentage points to 86.6%, and in 2022, it is expected to be reduced by a further three percentage points.

Marić expects the public debt to be 76.8% of GDP at the end of 2024.

He announced a shift of the focus to inflation, noting that inflation trends were now present worldwide.

Croatian National Bank (HNB) Governor, Boris Vujčić, said that Croatia's admission to the European Exchange Rate Mechanism (ERM) II had brought the country under the Single Supervisory Mechanism (SSM) and it also joined the Single Resolution Mechanism (SRM).

Concerning the HNB, we are already in the bank union to a large extent. Our experience from participation in the SSM and SRM is good, we have adjusted ourselves to that, Vujčić said.

Commenting on fears of higher prices being triggered off by the euro changeover, the governor pledged the protection of consumers and good communication.

"We are preparing the code of ethics which will be offered to businesses and services to sign, whereby they undertake fair performance during the euro changeover, he explained.

We will introduce monitoring and we will use the best practices of countries that have already converted their national currencies to the euro, he said.

For more, follow our business section.

Monday, 26 July 2021

Croatian National Bank Answers Important Question About Eurozone Entry

July the 26th, 2021 - The Croatian National Bank has revealed just how long we'll be able to make payments in both Croatian kuna and in euros as the country prepares to join the Eurozone at the beginning of 2023, as is currently planned.

As Poslovni Dnevnik writes, according to previous announcements, Croatia should enter the Eurozone and as such finally adopt the on January the 1st, 2023, and before the euro officially becomes the country's official currency in replacement of the kuna, many preparations will have to be made.

When it comes to just who will be in charge of the technical realisation of some important things about the introduction of the euro and how the euro will work at the very beginning, the Croatian National Bank confirmed for that the new euro coins of the Republic of Croatia will be made at the Croatian Monetary Institute.

"The production of euro circulation coins with the Croatian national symbols will begin at the earliest six months before the day of the introduction of the euro, ie after the EU Council Decision that Croatia will introduce the euro," the Croatian National Bank explained.

With the day of the introduction of the euro as the national currency of the Republic of Croatia approaching, a sufficient amount of euro coins will be prepared for circulation to meet the needs of all people and business entities, the national bank added. What everyone is interested in at the moment, however, is just how long it will be possible to use both kuna and euro in parallel before the kuna is phased out and placed in this history books entirely.

"During the first two weeks from the day of the introduction of the euro, kuna and euros will remain in circulation at the same time, and traders should return the rest of the money to customers which have paid in kuna exclusively in euros," the Croatian National Bank explainsed After that period, the euro will be the only legal tender allowed in the country, they added.

"In order to ensure a smooth transition to the new currency, in a short transition period, the kuna and the euro will have the status of legal tender at the same time. In other words, people will be able to pay in both currencies in the first two weeks starting from the day the euro is introduced in stores. After two weeks from the day of the introduction of the euro, the euro will be the only legal tender in the Republic of Croatia,'' they stated from the Croatian National Bank.

Money, meaning Croatian kuna, can be exchanged for euros free of charge for the first six months of the euro being in use in the country. However, if someone does forget to exchange any kuna cash they have into euros after that deadline, it will still be possible. Namely, in the first six months from the day of the introduction of the euro by the bank, Fina and Hrvatska posta d.d. will allow kuna cash to be exchanged for euros in all branches free of charge, and in the next six months they will be entitled to charge a fee for this service.

For more, follow our dedicated lifestyle section.

Wednesday, 14 July 2021

60 Percent of Croatian Households Have Zero Debt, Under Eurozone Average

July the 14th, 2021 - Around 60 percent of Croatian households have no debt to speak of, which is not only surprising but is also below the Eurozone's current average.

As Jadranka Dozan/Poslovni Dnevnik writes, with the continuation of moderate growth rates of total bank loans to the private sector, the latest published data for the month of May confirmed the gradual recovery of household demand for cash loans and a slight slowdown in what was relatively high growth rates of housing loans.

However, this means that for ''cash'', which was the main engine of growth in the volume of loans to Croatia's residents until the outbreak of the pandemic, the annual decline continued to melt, while the growth rate of housing loans slowed to a still high 8.7 percent back in May, which is partly attributed to this year’s first subsidy programme.

The dynamics of credit growth in the household sector, measured by transactions in various loans, accelerated in May to 3.5 percent on an annual basis, from 3.1 percent in April, analysts from Croatian banks note.

In addition to these indicators, which provide a picture of current trends and trends from month to month, the Croatian National Bank gave a somewhat broader picture of the finances of Croatian households and consumption in its annual report for 2020. That report claims that almost 60 percent of Croatian households don't have any debt hanging over their heads. Overall, their level of indebtedness across Croatia is relatively (and quite surprisingly) low and below the Eurozone's current average.

The representation of mortgage debt in Croatia is four times less than the representation of non-mortgage debt on credit lines, overdrafts, credit cards, etc. The gross income of Croatian households, whose median is estimated at 8,400 euros, is also significantly below the Eurozone average, by about a third. Considering the sources that generate income in Croatia, employment income is the most strongly represented.

According to the CNB's survey-based data, 53 percent of Croatian households earn an income from work, approximately one in eight Croatian households (12.7 percent) have income from financial investments, and property rental income is, again also quite surprisingly, the least represented. Survey findings say that only 6.2 percent of Croatian households have this type of income, at least on record.

The CNB also cites some features of the structure of total consumption according to three main categories: for goods and services, for utilities and for food indoors and outdoors.

"According to the assessment of the value of the medial household and the assessment of the arithmetic mean, the consumption of goods and services is about twice as high as the consumption of food, and about three times higher than the consumption of utilities," it states. The median estimates of all three components of spending are lower, they say, than those for the Eurozone, ranging from 60 percent being spent on food at home and outside the home, to 75 percent of estimated spending being for utilities at the Eurozone level.

At the same time, in Croatia, as many as 94 percent of Croatian households have some form of property, while slightly more than four-fifths also have financial assets. However, real assets are very strongly predominant in the total assets of the household sector; with financial assets not even occupying five percent.

While financial assets are dominated by deposits here in Croatia, which account for more than two thirds, the average household in the Eurozone holds 43.7 percent of financial assets in deposits and allocates more to other types of savings and/or investments.

Comparisons with the average of EU member states also show that the inequality in the distribution of net assets among Croatian households is moderate, with a slight increase in financial assets.

However, the CNB warns that it should be borne in mind that the value of non-financial assets is based on the subjective assessment of the respondents, which may differ significantly from the actual market value. The phenomenon of underestimation of both real and financial assets is common, and Croatia is no exception to that.

For more, follow our lifestyle section.

Friday, 25 June 2021

Plenković Expects Croatia To Enter Eurozone In Early 2023

June 25th, 2021 - Croatia expects to join the eurozone in early 2023 and plans to meet all the requirements by then, Prime Minister Andrej Plenković said in Brussels on Friday.

He is attending a two-day EU summit which today will include a eurozone summit.

"That's an opportunity for me to state once again our willingness to meet all the criteria and, after entering the Exchange Rate Mechanism last year, to meet the action plan and create the prerequisites for Croatia to become a member of the eurozone during 2023, hopefully at the beginning," Plenković told reporters.

At the eurozone summit, he said, he will present the timetable Croatia expects regarding accession "given all the achievements in implementing the euro introduction strategy since 2018."

Member states' leaders began the second day of the EU summit by discussing economic recovery from the effects of the pandemic.

Plenković said he expected the Commission to approve Croatia's recovery and resilience plan in July, after which Commission President Ursula von der Leyen would come to Zagreb to personally give the Commission's the green light for the 6.3 billion worth grant plan.

For more about politics in Croatia, follow TCN's dedicated page.

Thursday, 10 June 2021

Numerous Recommendations Before Croatian Eurozone Membership Provided

June the 10th, 2021 - Croatian Eurozone membership depends on numerous factors, and the sorting out of the mess that is the portfolio of state owned companies is just one of the pressing ones.

As Poslovni Dnevnik/Ana Blaskovic writes, although some strides have been made, state-owned companies remain synonymous with political flattery, corruption scandals and, in general, just bad business. However, if Croatian Eurozone membership is to become a reality, and if the country wishes to join the Organisation for Economic Co-operation and Development (OECD), which are two strategic foreign policy goals of the government, Croatia will have to make serious efforts to sort out the mess in the portfolio of state-owned companies.

To this end, in the form of the OECD team, in cooperation with the European Commission and the Croatian authorities, a comprehensive diagnosis was made and the government was provided with a number of recommendations for improving corporate governance.

Three are key to a significant turnaround: centralising state ownership, professionalising governance, and harmonising the legal and regulatory framework through a new law on state-owned companies, the OECD said.

"The owners of these companies are taxpayers. The idea is that they should be accountable to the public as private companies are to their shareholders,'' said Charles Donald of the working group on state-owned companies and OECD privatisation.

"Although these recommendations aren't mandatory, they're the ''acquis'' for joining the OECD," Donald said.

Sanja Bosnjak, State Secretary of the Ministry of Physical Planning, Construction and State Property, assessed the guidelines as a benchmark and made sure to state that Croatia has committed itself to reforms in the state-owned enterprise sector in the action plan for joining the exchange rate mechanism.

"This is a symbolic start to work on reforms in this area that involve the entire administration," she said.

The value of state-owned companies is estimated at a massive 190 billion kuna, making up a whopping 47.2 percent of Croatian GDP in 2019. The (central) state owns 59 of them, of which 39 have special status. 19 are wholly or majority owned by the Centre for Restructuring and Sales (CERP), and two more companies are outside that umbrella. Beyond them is a constellation of 938 local state-owned companies. Most of them operate in the segment of transport, energy, construction, finance, telecoms, manufacturing, tourism and property/real estate.

While with about 260 state-owned companies per million inhabitants, Croatia can ''boast'' of being one of the record holders in the EU, as well as in the rest of Southeastern Europe where a similar phenomenon reigns, the problem is, in typical Croatian fashion - total and utter inefficiency.

The return on capital and revenue growth is lower than it is in the private sector, and with the exception of strategic companies, more than 80 percent of non-strategic ones have failed to reach even the median return on capital of the sector in which they operate, the OECD found.

With fragmented competencies, from ministries, the CERP to various agencies, the OECD recommends the establishment of a single body with adequate mandate and resources to coordinate stakeholders and end the current practice of unclear roles and, more importantly, blurry responsibilities.

The second recommendation for Croatian Eurozone membership is aimed at professionalising management through strengthening the role and powers of the supervisory board. The current election of members of supervisory boards is open to political staffing, varies by company, and the prescribed fees are typically not very attractive to professionals.

The recommendation is to establish professional and independent committees, as well as independent auditors, and to enable supervisory boards to set their own strategies and oversee management. In doing so, the OECD emphasises in particular that government officials and policy-appointed persons cannot by any means ever be considered independent experts.

Finally, a new law is needed that should harmonise the current legal framework and underpin reforms in the state-owned enterprise sector.

In addition, the list of recommendations for Croatian Eurozone membership includes increasing transparency, strengthening internal controls, setting clear financial and non-financial targets, and simplifying the legal framework and corporate structure of companies so that state-owned companies compete evenly with private ones in the same market.

For more on Croatian Eurozone membership and Croatian politics in general, make sure to follow our dedicated politics section.

Wednesday, 5 May 2021

Croatian Public's Opinion on Eurozone More Positive But Skepticism Remains

May the 5th, 2021 - The Croatian public has always had a very suspicious view of the entry of the country into the formerly deeply troubled Eurozone, but it seems that although it's only very slight, that opinion is beginning to alter. Skepticism, however, remains as strong as it was when the country's very EU referendum took place.

As Poslovni Dnevnik/Jadranka Dozan writes, the positive image of the European Union (EU) held by the Croatian public today is slightly better than it was around half a year ago, according to the national report of the Standard Eurobarometer for Croatia, which was published recently by the European Commission (EC).

When compared to the previous Croatian public opinion poll on the EU, the positive perception of surveyed Croatian citizens increased by one percentage point (from 47 to 48 percent), while at the same time the negative perception decreased by two points, from 13 down to 11 percent.

According to the latest Eurobarometer results, Croatian respondents in the latest survey also showed slightly higher support for the country's planned entry into the Eurozone than they did half a year ago. However, although this support has increased by one percentage point, up to 48 percent, and the number of those who oppose Eurozone entry has decreased by the same amount, Croatia still deviates considerably from the EU average. In the rest of the bloc, the single currency is supported by as much as 70 percent of the population of its member states, or three percent more than was recorded just half a year ago.

As the European Commission points out, European respondents, as well as the Croatian public, are at the forefront of the EU's achievements in the free movement of people, goods and services within the territory of the bloc. They consider peace among the EU's member states to be the second most important plus, and solidarity among the EU member states is in the third place.

The aforementioned survey was commissioned by the European Commission's Directorate General for Communication, and the survey in Croatia, on a representative sample of 1,028 citizens over the age of fifteen through direct interviews with respondents in their own homes, was conducted by the Hendal agency from February the 15th to March the 7th this year. The Standard Eurobarometer survey is otherwise conducted twice a year, and of the 94 such surveys conducted so far, the most recent is the 33rd, which also covers Croatia.

For more, follow our politics section.

Monday, 15 March 2021

Plenković: Croatia Expects to Join Eurozone and Schengen in 3 Years

ZAGREB, 15 March, 2021 - Prime Minister Andrej Plenković said in an interview with the Politico news website published on Monday that it was reasonable to expect that Croatia would enter the eurozone and the Schengen area by the second half of 2024.

"The idea is to do both — accession to Schengen and the eurozone — by the end of this government’s term, so the second half of 2024," Plenković said. "It’s tough, but reasonable."

The European Commission said in 2019 that Croatia had fulfilled all the technical requirements for entry into the Schengen passport-free travel zone, and this should now be endorsed by other member states. Romania and Bulgaria have been waiting for this to happen for years.

In mid-2020 Croatia was admitted to the European Exchange Rate Mechanism (ERM II), a key step towards eurozone membership.

Plenković said that because of the coronavirus crisis the eurozone members could be expected to continue suspending their own rules for fiscal discipline, while those on the path to join the euro could not rely on "such easy self-help tricks."

He expressed regret that Croatia had "stepped away from consolidation and sound public finances" to limit the economic damage of the crisis.

Plenković said that his government would pursue two goals: "Using the recovery fund, the EU budget and private investment to generate growth. And the other one: Go back to the framework of 2017-2019, when my government achieved a budget surplus."

The prime minister said he believed Croatia would be able to spend the first euro from the EU recovery fund at the beginning of next year, adding that it was a complicated process. "Unless it’s helicopter money, it’s very difficult and complex. You need a plan, a project, verification, tender, implementation, documentation. If it goes faster, we’ll gladly spend it, but if I’m realistic …"

For more about politics in Croatia, follow TCN's dedicated page.

Thursday, 10 December 2020

Croatian Banks to be More Resilient to Financial Shocks in 2021

December the 10th, 2020 - The new law on the deposit insurance system will significantly strengthen Croatian banks and the Croatian banking system, the State Agency for Deposit Insurance and Bank Rehabilitation (DAB) said.

As Poslovni Dnevnik wrires, as of January the 1st next year, a new law on the deposit insurance system and on the compulsory liquidation of credit institutions will enter into force. It was recently properly harmonised with European directives, which, among other things, will shorten the duration of bankruptcy proceedings of credit institutions and additionally protect citizens and depositors.

Further reform

This new law continues to further reform the banking system of Croatia and the entire European Union, strengthens the ability of banks to withstand financial shocks, which will also include Croatian banks, minimises the cost that taxpayers will bear in the event of problems with banks, and represents a single financial fund that is filled by the payment of credit institutions, not citizens, as was pointed out from the DAB. They also believe that the law will further facilitate the lives of Croatia's residents and offer security when it comes to savings deposits as well as a general increase the stability of the financial system, which is becoming much more resilient to possible financial crises.

The new law, which combines the provisions of the current law on deposit insurance and the law on DAB, seeks to anticipate and regulate situations when a credit institution fails as much as possible, as such a scenario may lead to legal uncertainty regarding the protection of depositors.

In order to protect the financial stability of the system, the new law prescribes the activation of the deposit insurance system when opening a compulsory liquidation procedure against a credit institution.

Additional replenishment

In order to ensure the more efficient use of funds from the deposit insurance system, the new law stipulates that the deposit insurance fund consists of two parts - the basic deposit insurance fund and the additional deposit insurance fund. The purpose of the basic deposit insurance fund, which at any time has 1 percent of insured deposits, is the payment of insured deposits, while the purpose of the additional fund is to replenish the basic fund if its available funds fall below 1 percent of insured deposits.

Furthermore, its task is to support the collection of ex-post premiums, use its funds to take measures to reduce the risk of an insured event, and support the financing of the rehabilitation of credit institutions and the financing of forced liquidation of credit institutions.

Additionally, the new law will harmonise the source of financing according to the acquis communautaire by explicitly stating that the deposit insurance system cannot be financed at the expense of taxpayers, but exclusively at the expense of credit institutions. The entire system is harmonised with European directives and will help to make Croatian banks more resilient to potential future challenges on the country's path to th Eurozone.

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Sunday, 15 November 2020

Croatia Fulfils Almost All Requirements for Eurozone Entry

As Ljubica Gataric/VL/Poslovni Dnevnik writes on the 14th of November, 2020, back in July this year, Croatia joined the European Exchange Rate Mechanism (ERM II) and the Banking Union, which is one of the last formal steps towards Eurozone entry.

The positive response from Frankfurt and Brussels was waited on for about a year, and it came during an extremely difficult period in which the coronavirus pandemic dominated, acting as an important signal that Croatia will not have to fight the consequences of this unprecedented crisis alone.

Three months earlier, the decision was preceded by an agreement between the European and Croatian central banks, according to which Croatia received two billion euros to have at its disposal to keep the national exchange rate stable. The validity of the currency swap was extended until the middle of next year, which effectively accepted the Croatian kuna as part of the European monetary system.

So far, the CNB hasn't used this lever, ie, it didn't have to exchange Croatian kuna for euros with the European Central Bank in order to defend the exchange rate. Despite the fact that such a move ended up not being necessary, this reserve was psychologically extremely important when, due to quarantine measures and the spread of the novel coronavirus, SARS-CoV-2, things went downhill. The CNB's foreign exchange reserves were more than enough to alleviate initial exchange rate pressures and allow for the unhindered financing of the state budget, and after their reduction of approximately 2.5 billion euros, the amount of reserves returned to the levels we had before the coronavirus pandemic struck. If the economy recovered at that speed, there would be less fear and uncertainty about the arrival of the second wave.

The Croatian authorities hope that Eurozone entry will see the kuna replaced by the euro as Croatia's official national currency by the year 2023, and in line with this intention, a budget proposal for next year has been prepared, which envisages reducing the budget deficit below 3 percent and gradually lowering public debt, which has increased significantly this year.

In the coming days, the last strategic document related to Croatian Eurozone entry should be presented to the public - the National Plan for the Exchange of the Croatian Kuna with the Euro, which will provide numerous technical details related to the exchange of currencies.

"Consultations with stakeholders involved in this process have already been carried out, and after its drafting, which is nearing completion, the adoption of this plan will follow at the level of the Croatian Government," said Zvonimir Savic, the Prime Minister's advisor.

CNB Governor Boris Vujcic believes that "on the way to the euro, a dynamic recovery of the economy and the keeping hold of fiscal indicators within the reference framework from next year is crucial."

The national exchange plan should state how the procurement and distribution of cash will be organised, and this should include numerous things, such as where and within what period citizens will be able to exchange kuna cash for euros, how to convert kuna deposits and loans, but also other financial instruments, such as how interest rates will be adjusted, how prices will be recalculated, how the government will protect consumers from incorrect price recalculations and how the Croatian legal framework will be adjusted for the needs of Eurozone entry.

As citizens fear that Croatia's Eurozone entry will negatively effect living standards, a special emphasis will be placed on measures to curb rising prices. A survey related to the introduction of the euro showed that citizens are mostly worried about possible price increases. "We must now work on talking more about the examples of other countries, where the exact opposite happened - the standard of living of citizens has risen after the introduction of the euro," said Vujcic. The central parity for replacement is set at the level of 1 euro = 7.53450 kuna, and the general opinion is that in the following period the exchange rate will be held around that same established parity.

Croatia and Bulgaria are also the first candidates for entry into the banking union before the formal adoption of the single currency, and the ECB recently announced the results of the first ''stress test'' of five Croatian banks, which showed they all meet Eurozone and European Banking Union criteria. Every new member that joins the European Union has legally committed itself to adopting the euro, but there is no deadline within which it must do so, nor is the adoption of a common currency a unilateral decision. Only the United Kingdom successfully secured an opt out.

Of the new EU members, the Czech Republic, Poland, Hungary, Romania, Bulgaria and Croatia still haven't adopted the euro as their currency.

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Wednesday, 30 September 2020

Croatia Joining Eurozone Brings One Important Benefit

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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