Erste’s Kovac Won’t Rule Out Another Croatian Kuna Intervention

The Croatian central bank may intervene again to support the sliding kuna as the government’s recent dollar-bond sale boosted expectations for increased liquidity in the currency, an Erste Bank economist said.

The central bank on April 12 sold 214.9 million euros ($280 million) at 7.607781 kuna per euro, after the Croatian currency slipped to 7.62, its weakest since 2004. The government on March 26 sold $1.5 billion of 10-year bonds in international markets and will gradually convert the funds.

“If pressure on the kuna piles up again, I wouldn’t rule out another intervention,” Alen Kovac, the chief economist at Erste Banka d.d., a unit of Austria’s Erste Group Bank AG, said in a phone interview in Zagreb today. “There are no firm limits, but we expect the kuna to fluctuate between 7.60 to 7.65 per euro.”

Croatia, which will join the European Union on July 1, is tapping markets for financing to keep the budget deficit under control and help steer its economy out of recession. Croatia’s gross domestic product contracted for a fifth quarter as consumption, investment and industrial production continued to decline amid Europe’s sovereign debt crisis.

GDP shrank 2 percent last year, after stagnating in 2011 and contracting in the two years before that. Industrial output declined 3.4 percent in January from a year ago, while retail trade in the same month fell 5.3 percent, according to a preliminary report.

Currency Peg

Kuna, which the central bank keeps pegged to the euro, was trading at 7.6130 per euro at 13:42 in Zagreb, according to Bloomberg data. Pressures should ease with the arrival of tourist season, Kovac said.

Croatia reduced its 2013 GDP forecast on Feb. 20 to 0.7 percent growth, from an earlier estimate of 1.8 percent, citing lack of investment and a continuing crisis in the euro zone.

The International Monetary Fund said on Jan. 21 that Croatia’s economy will stagnate this year. It urged the government to remove barriers to investment and employment in order to return to growth.

The European Commission said Feb. 22 that the economy will contract 0.4 percent this year, before returning to “modest growth” in 2014.

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