Where did the corporate bonds come from in a package of measures to help the Serbian economy, presented by Finance Minister Sinisa Mali on Tuesday, and premiered on television two days earlier by Serbian President Aleksandar Vucic?
As with other measures, there are many unknowns regarding the issuance of corporate bonds, but in this case even regarding the intentions of the government. Otherwise, corporate bonds were not even mentioned in a document published on the website of the Ministry of Finance, although the president called them “very important”.
He then said corporate or company bonds were “very important to large and medium-sized enterprises and can raise them dramatically”.
He also cited an example of a manufacturing company that wants to expand production and says “we need to raise production by 50 million euros, but for the state to buy company bonds,” Vucic said, and then added additional confusion by saying that “the ECB is doing it, America is doing it, and it’s kind of money printing.
He then assessed that it would be a way to support large companies to buy in the region, but also to “strengthen the pillars of our economy like EPS, Telecom, Air Serbia”.
No more state aid stories. We had money to invest in Air Serbia, but they did not give us because we would distort competition at European level. We will support Air Serbia by recapitalization or corporate bonds,” explained Vucic.
Then, the finance minister told the television show yesterday that they had not even said they would do it during the crisis, and when asked how much money the state would buy those bonds, he answered that it was necessary to see which companies would offer the bonds, “to see what the yield is and whether it pays off. That’s how developed countries do,” Mali said, pointing out that this is how they are prepared the day after.
In the same show, the president of the Serbian Economists Association estimated that at this moment the only demand for bonds of Serbian companies could be the state.
Economists we spoke to from appearances on television are unsure what this is all about, and despite the statements, they suspect that the state will buy companies’ bonds from the budget, but that the Central Bank will do it, as in the case of the European Central Bank or the US Fed.
Bosko Zivkovic, professor of monetary economics, explains that the European Central Bank purchases government and corporate bonds and thus regulates the amount of money in circulation – a process known as quantitative easing.
“Everywhere in the world, large infrastructure companies are issuing corporate bonds and this is one way of financing. One of the systems could be for the banks to buy those bonds and then buy the bonds from the central bank. In this way, the central bank indirectly injects money into the system through banks,” Zivkovic notes.
Dejan Soskic, a professor at the Faculty of Economics in Belgrade and former governor of the NBS, points out that such options require a deep market for previously issued bonds.
He explains that the point of quantitative easing is besides pumping money and the Central Bank’s influence on interest rate reductions for medium- and long-term risk-bearing bonds.
“When we come to the liquidity trap, when the reference interest rate is zero and we still have no economic activity, we go to unconventional measures. One is quantitative easing and the other is when the Central Bank assumes the powers of fiscal policy and when the Central Bank creates not only money for banks but also for businesses and citizens. This is the so-called ‘helicopter money’, when the Central Bank creates money and distributes it, not when the money is divided from the budget,” Soskic said, adding that this is somewhat reminiscent of the system in the SFRY, and that is why it is almost a taboo subject in our country, but using your own money normally could help the economy.
For Milojko Arsic, a professor at the Faculty of Economics in Belgrade, this is certainly not a good time to promote corporate bonds.
“It’s for good times when the market works. But this will not solve the problem of liquidity in the short term. Failure to do so and the prescribed procedures may result in the offering of so-called junk bonds. Corporate bond repurchase funds do not appear anywhere in the budget, so it is probably thought that the Central Bank redeems them, not the budget. But for that, there should be quality companies with a decade of history in bond issuance, which have barely earned government bond status,” Arsic points out.
He also warns that monetary expansion, that is, increased supply of dinars in a country with a two-currency system, could affect the exchange rate. Arsic also points out that Central Banks of other countries only buy bonds in extraordinary circumstances and not in regular condition.
On the other hand, Arsic also notes that it would be unjustified for the state to buy bonds of state-owned companies because it would be the same as their lending.
Finance Minister Sinisa Mali said regulations were already in place to facilitate and reduce the issuance of corporate bonds.
According to him, the procedure for publishing the prospectus instead of 77 will take 17 days, and the cost of calculating the fees of the Securities Commission, the Central Registry for Securities and Belgrade Stock Exchanges will be reduced from 90,000 to 15,000 euros.
The advantage of bonds over bank loans is that they do not pay annual installments, but interest is paid along with the principal at the end of the repayment period, thus freeing up the cash flow of companies.
Milan Marinkovic, director of Fima invest, says that the bonds determine how the debt will be structured and how much interest will be borne, rather than on loans determined by the bank.
“We worked on the last corporate bond issue in Serbia in 2009. Even then, the procedure was complicated and expensive. Now we have a big fall in interest rates, and besides, there are low fees and commissions, so it is not worthwhile for businesses to pay out bonds. We are a bank-centric market that holds more than 90 percent of financial assets and is a big risk for a small country,” he notes.
So far, there is only one corporate bond on the stock market, one issued by Erste Bank, but it is poorly traded. In addition, there are two municipal bonds, Sabac and Stara Pazova, and everything else is government bonds, Danas reports.
