The National Bank of Serbia (NBS) confirmed that, immediately after the issue, it bought Telekom Serbia’s corporate bonds, but not how much it set aside for that transaction, revealing only that it currently has “close to a third” of its bonds in its portfolio. Economists, however, warn that the NBS should be careful, because the mass buyout could lead to a significant reduction in foreign exchange reserves, and they say that there is a danger of finding low-quality and uncollectible bonds in its portfolio.
Today, the public learned from the NBS several important information regarding the corporate bonds of “Telekom Serbia”, among which the one that is particularly interesting is that the central bank bought “close to a third” of the entire issue immediately after the broadcast.
Buyers immediately “forward” part of the bonds to the central bank
We did not receive an answer to the question why the NBS did not inform the public about this move at the same time as it sent a detailed announcement on the bond issue, but we received clarification on how the banks-buyers immediately “forwarded” part of the bonds to the central bank. The NBS does not initiate a transaction of purchase or sale of these securities, but after the issue of corporate bonds, if the banks, which have invested in the primary market in these bonds, want to use one part of them for monetary operations with the NBS (purchase transactions, use as a means of financial security in repo transactions and / or for withdrawal of short-term or overnight loans), the NBS decides on the offer of banks,” the National Bank of Serbia replied.
The “redemption mechanism” could produce serious consequences in the monetary sphere
“In principle, it is not good for the central bank to buy securities that have not been checked on the market long enough. In developed markets, such redemption is reserved for securities that have been listed on the stock exchange for a long time and that have been issued according to the standard procedure. In the case of “Telekom”, the bonds were issued according to a shortened procedure, and it is not good if the NBS bought them immediately after the issue,” says Milojko Arsic, a professor at the Faculty of Economics in Belgrade, for Nova.rs.
According to him, the “mechanism” of redemption could produce serious consequences in the monetary sphere, especially when it comes to the amount of foreign exchange reserves of Serbia.
“The nature of the purchase is such that the NBS essentially issues dinars in the value of the purchased bonds, which means that in that way the dinar liquidity increases. This increase in dinar liquidity will probably be superfluous, so the NBS, in order to prevent pressure on the exchange rate, will withdraw most of the ‘newly created’ dinars through the sale of foreign exchange on the foreign exchange market, which means that the purchase of corporate bonds is actually financed from NBS foreign exchange reserves,” explains Arsic.
“The 500 million euros that the NBS is allowed to spend on the purchase of bonds will not endanger monetary stability in itself, because foreign exchange reserves are currently quite high. If, however, this practice becomes widespread, and other companies, such as EPS or Srbijagas issue bonds and the NBS buys them, and even if we have a relatively high deficit in world trade and reduce the inflow of foreign direct investment, then it could that there will be a big drop in foreign exchange reserves in the next year,” warns Arsic.
Our interlocutor estimates that, when it comes to the purchase of corporate bonds of the NBS, we are facing numerous unknowns.
When can the NBS redeem corporate bonds?
We remind you that there are prescribed restrictions that the NBS must adhere to when it comes to buying corporate bonds. It is crucial that the NBS has a total of about 500 million euros at its disposal, which it can use this year to buy those securities that can be issued by state and private companies.
At the same time, the NBS can buy a maximum of 70 percent of the broadcast of one broadcaster, for a maximum of 91 million euros. The NBS may only buy bonds of companies that have a credit rating of A (excellent) or B (very good) with the Business Registers Agency.
“We don’t know whether the NBS will buy bonds of all broadcasters or only some, with what dynamics they will buy them, we don’t know which companies plan to issue corporate bonds under the shortened procedure, and according to the rules that are part of the package to help the economy due to the coronavirus epidemic,” Arsic told us.
Is bond redemption doomed to failure?
Professor of the Faculty of Economics in Belgrade and former governor Dejan Soskic warns that the whole system of rules on which the possibility for the NBS to buy dinar securities of domestic companies is based is based on problematic solutions.
Soskic draws special attention to what the practice could bring to our “market”, where not only is not developed trade in corporate bonds, but the company’s creditworthiness is not determined by a specialized institution, but by the Business Registers Agency.
All this together can lead to the NBS creating new money in the financial system (printing money), buying illiquid and possible low-quality bonds of a domestic private company, paying them perhaps well above the real market price (which we do not know because the liquid secondary bond market companies in Serbia do not exist), relying on the possible wrong creditworthiness issued by the state Agency, which is not a rating agency, which is not the main job and which is not responsible for it.
This puts the NBS in a position to have illiquid, uncollectible long-term bonds of domestic private companies of uncertain value in its portfolio, which, possibly, it cannot sell to anyone without a large or complete loss,” warns Soskic, BiF reports.
