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Croatia prepares to join the eurozone – Industry roundup: 27-28 December

Croatia anticipates economic boost as it joins the eurozone

Croatia is anticipating an economic boost as it prepares to adopt the euro, according to the Financial Times.

Situated between central and eastern Europe, the country officially entered the European Union in 2013 and has established itself as a top tourist destination over the past decade. Croatia is joining the Schengen Zone and adopting the euro. It will become the 20th member of the eurozone from 1 January 2023 and a fixed conversion rate has been set for its currency, the kuna (HRK), with €1 set at HRK 7.5345.

The kuna was introduced in May 1994, initially using the German mark as its main reference. Since the creation of the euro, the Croatian National Bank’s policy has been to keep the HRK’s exchange rate against the single currency within a relatively limited range.

The HRK will be replaced by the euro on New Year's Day, and more than 500 million withdrawn banknotes and about 5,200 tons of coins will be sent to machines for cutting and melting. In common with other countries it is now joining in the eurozone, the number of cash transactions in Croatia has fallen in recent years and half of all transactions are now made by card

Croatia’s parliament in Zagreb passed its first-ever budget in the single European currency in late November. “The introduction of the euro will strengthen our economy, it will be an anchor of stability, will make us more resistant and protected from external shocks and crises and will contribute to the improvement of investment climate,” said Finance Minister Marko Primorac, announcing the spending plans.

However, current projections are that Croatia’s economy will grow by no more than 0.7% in 2023 against an expected 5.7% this year, with the government targeting a reduction in public debt to 67.9% of GDP from 70.2% this year.

Inflation, which is projected at 10.4% this year, is forecast to drop back to 5.7% in 2023.

Government revenue is expected to be €24.9 billion in the new budget; up 9% from 2022. This additional money is set to be raised through direct and indirect taxation. Spending is set at €26.7 billion -- a €2.1 billion rise from this year -- due to an increase in government social and development programmes.

Economists quoted by the FT say that the switch from the HRK should bring benefits as Croatia relies on the single currency area for more than half its external trade, two-thirds of foreign direct investment and roughly 70% of its tourists. It will also be a symbolic boost for European unity just as Russia is trying to disrupt the bloc’s opposition to its war in Ukraine.

European Central Bank (ECB) president Christine Lagarde called the addition “a vote of confidence for the euro area” and said Croatia would benefit from the “shield of the euro”.

CEBR joins forecasters of world recession in 2023

The world faces moving into a recession next year as higher borrowing costs aimed at tackling inflation cause several major economies to contract, according to the Centre for Economics and Business Research (CEBR).

The UK-based economics consultancy reports in its annual World Economic League Table (WELT) that the global economy surpassed the US$100 trillion level for the first time in 2022. However, growth worldwide is expected to stall in 2023 as policymakers continue their fight against soaring prices.

Kay Daniel Neufeld, director and head of forecasting at CEBR, said: “It’s likely that the world economy will face recession next year as a result of the rises in interest rates in response to higher inflation.”

Last year, CEBR’s report was more upbeat and anticipated a post-pandemic recovery as the vaccination campaign against Covid-19 was underway globally. It expects that there will be normal levels of economic activity despite the Omicron wave and easing lockdown restrictions.

The report mentioned that Russia’s invasion of Ukraine in February led to massive economic, food, and fuel crises, eventually rising in price globally. 

CEBR’s report notes: “Inflation has become the main economic story of the past year and even though we are starting to see price growth decelerating in some economies, volatility in global energy markets and entrenched core inflation suggest that it will remain front and centre in 2023 as well.

“The battle against inflation is not won yet. We expect central bankers to stick to their guns in 2023 despite the economic costs. The cost of bringing inflation down to more comfortable levels is a poorer growth outlook for a number of years to come.”

With China having seemingly abandoned its zero-Covid policy and the spread of cases again impacting on economic growth, the country is now not expected to overtake the US as the world's largest economy until 2036 at the earliest, which is six years later than CEBR’s previous prediction.

The report has better news for India, which is predicted to become the world’s third US$10 trillion economy in 2035 and the world’s third largest three years earlier, by 2032.

HSBC files trademark applications for crypto-related products and services

HSBC has filed two crypto-related trademark applications for its name and logo with the United States Patent and Trademark Office (USPTO). Mike Kondoudis, a USPTO-licensed trademark attorney, noted in a tweet that HSBC’s trademark applications indicate the bank’s plans for a several digital products and services, including those related to the exchange and transfer of virtual currencies.

The trademark applications also detail several metaverse-related products and services, such as “facilitating secure payment transactions by electronic means in the metaverse,” “providing banking services in the metaverse,” and “providing processing of virtual credit card, virtual debit card, virtual prepaid card, and virtual payment card transactions in the metaverse.” HSBC also included several non-fungible token (NFT) services, such as “downloadable digital files authenticated by NFTs.”

HSBC joined the metaverse last March by partnering with blockchain virtual gaming platform The Sandbox, although the group’s CEO, Noel Quinn has since said in September that crypto is not part of the bank’s future.

HSBC nonetheless joins a growing number of corporations and financial services institutions have filed trademark applications covering a wide range of digital currency and metaverse products and services. In October Visa, Paypal, and Western Union filed crypto-related trademark applications and last month, JPMorgan Chase was granted a wallet trademark covering various virtual currency and payment services.

Japan’s inflation at a 41-year high of 3.7%

Japan reported last week that its core consumer price inflation rate edged up to 3.7% in November, its highest level since 1981 when the second Middle East energy crisis hit oil output and energy prices rose.

Although Japan’s inflation rate still appears relatively modest when compared against those of other major economies, the recent increase comes after years of deflationary pressures. When Haruhiko Kuroda became governor of the Bank of Japan (BOJ) in 2013, he pledged that he would rid the world’s third-largest economy of the deflationary pressures that had weighed on economic growth since 1990. His goal was to pump in enough money to create a 2% inflation rate that would raise wages and spending power.

As part of this policy, the BOJ maintained an ultra-loose monetary policy to boost the economy. Even when the US Federal Reserve began raising interest rates to combat inflation and other central banks around the world followed its lead, Japan’s central bank resisted.

However, a week ago the BOJ surprised markets by raising the cap on the interest rate on its 10-year government bonds from 0.25% to 0.5%. As a result, the Japanese currency spiked against the US dollar, hitting 151 yen (JPY) against USD for the first time since 1990.

While further policy tweaks by the BOJ are possible, particularly as a new governor takes over in 2023, a more fundamental shift is regarded as unlikely. The BOJ expects core inflation to fall back next year once government limits on gas and electricity charges are introduced.

Prime Minister Fumio Kishida’s cabinet has also approved a record budget totalling JPY114.4 trillion (US$862 billion) for the next fiscal year from April as Japan significantly increased its defence spending to counter China’s military rise. As part of an ambitious five-year plan to expand its military capabilities, the government will increase its defence spending by 26% from a year earlier to JPY6.82 trillion in fiscal 2023.

Dutch governor Knot signals more Europe interest rate hikes in 2023

Head of the Dutch Central Bank (DNB), Klaas Knot, has said with five policy meetings between now and July 2023, the European Central Bank (ECB) would achieve "quite a decent pace of tightening" through further half percentage point interest rate rises before Europe’s borrowing costs eventually peaked by the summer.

Known as one of the ECB governing council’s more hawkish rate setters and also its longest-serving member, Knot told the Financial Times that the ECB still has a long road ahead in the fight against high inflation, but policy making could be made more difficult by the slowing economy. At its 15 December meeting the ECB raised interest rates for the fourth consecutive time, increasing the main interest rate by 0.5 percentage points to 2.5%, with the deposit rate set at 2%.

However, the tighter ECB policy is only just reaching a midway point, Knot told the paper. “The risk of us doing too little is still the bigger risk,” he said. “We are just at the beginning of the second half.” The “main challenge” was for policymakers to determine when they have done enough.

The ECB is now contending with record high annual inflation, with the Netherlands outpacing the eurozone average for most of the year. Last month the country’s annual inflation rate eased to 9.9% from 14.3% in October and a peak of 17.1% in September. The Dutch economy is predicted to be nearing a brief recession, with only a minimal amount of growth predicted for 2023

The DNB’s leader believes the ECB could have taken more action even in late 2021, and not only after the war in Ukraine started, however he thought the ECB made up for it with larger rate hikes before shifting down to the half-percent increases seen more recently.

Palau “partnering with Ripple to launch national stablecoin”

Palau, the Western Pacific archipelago of more than 500 islands, has partnered with crypto technology company Ripple to develop a national stablecoin for the country, according to several reports.

The country’s president, Surangel Whipps Jr, virtually participated in an online panel debate on the future of blockchain. He talked about the country’s digital residency policy and national stablecoin project, stating that Palau’s national stablecoin would launch soon in partnership with Ripple and facilitate easy and secure digital payments.

Palau has no established central bank and uses the US dollar as its official currency. The goal of the national stablecoin project is to launch a USD-backed stablecoin, which Whipps said this would be a “step toward our own central bank digital currency (CBDC).”

Referring to the stablecoin project, the president said: “We feel that this is important, and it will help make Fiat on ramping easier. Our digital residents will also have banking access and through Binance Pay options will make offering easier too. We really believe that they don’t compete, but they actually are symbiotic, and they can help each other and strengthen the crypto ecosystem.”

He added that the government had decided to diversify its economy following the challenges of the pandemic and nearly a year ago passed the Digital Residency Act to facilitate diversity by allowing individuals to get a digital identity from Palau via a virtual process.

While it has been gaining momentum since its launch, Whipps said that the country is looking for ways to increase adoption by extending the digital residency scope. “We’re also looking at exploring other features that we could offer like registration of e-corporations so that digital residents can conduct business globally through Palau’s convenient R&S portal,” he added. “We’re hoping that they will be able to manage their identity, contacts, and e-corporations on this portal.”

The president also said leading crypto executives like Binance’s Changpeng Zhao (CZ) and Ethereum’s (ETH) Vitalik Buterin had shown interest in the country’s digital identity program. CZ had visited Palau personally to discuss collaboration options, while Buterin met with the president virtually to discuss further expanding the country’s ID ecosystem.

ECB sets capital requirements for Monte dei Paschi

The European Central Bank has set the minimum capital requirements for Italy’s Banca Monte dei Paschi di Siena (MPS) for next year and also removed a ban on the distribution of dividends, the Siena-based lender said in a statement.

The ECB told Monte dei Paschi, which traces its history back to 1472, that it must maintain a Common Equity Tier 1 (CET 1) ratio - a measure of financial strength - of at least 8.8%, the statement added.

The bank's CET 1 ratio stood at 15.7% at the end of September, it said, adding that the figure took into account its subsequently-concluded multi-billion capital raise.

MPS raised €2.5 billion (US$2.6 billion) in cash in November, braving volatile markets with a new share issue. More than a third of the proceeds were earmarked to help fund staff exits and boost profits thanks to lower costs.

After a failed re-privatisation attempt last year, MPS is working to improve its appeal for a potential buyer under new CEO Luigi Lovaglio that would enable the state to cut its 64% stake in a merger deal with a stronger rival.

Boom predicted for rare earth metals market

The rare earth metals market is valued at US$5.6 billion as of 2023, reports researcher Future Market Insights (FMI), and is projected to grow at a CAGR of 10.1% over the next 10 years to reach a valuation of US$14.6 billion by 2033.

The surging demand for rare earth metals can be ascribed to the increase in the sales of consumer electronics, such as smartphones or laptops. These metals are used in the speakers of these devices. Apart from that, the key players in the electronics sector are betting on the high-temperature resistance offered by these metals, which allows them to function with higher efficiency.

Growth in the sales of electric vehicles is also expected to surge the demand for rare earth metals during the years ahead says FMI. as they assist in miniaturising the size of the circuit, which makes electric vehicles work using lesser components.

Rapid urbanisation worldwide is also likely to surge the market growth of rare earth metals. as they are used in the construction industry as well. Apart from this, rare earth metals are also used in the process of digitisation, which is happening at a rapid rate in developing countries.

Even the healthcare sector has seen a surge in the application of rare earth metals. These are specifically used for manufacturing magnetic resonance imaging (MRI) machines, insulin pumps and pacemakers, etc. Apart from that, these are also used as high-strength aluminium alloys, metal halide lamps, and other items.

Further impetus comes from companies looking to work on the idea of sustainability, which has seen them developing plans to cut down emissions. These firms have started adopting renewable sources of energy. The implementation of rare earth metals supports the functioning of renewable energy systems, which is expected to further surge their market growth.

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