Serbia between high interest rates, “friendly” loans and the sale of EPS

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“The question is whether we can enter the financial market at all or we will have to ask our friends, as I did before, to give us a one-year contract until this passes.

And it will not pass in three or four years – I am talking about the consequences “, sent a somewhat apocalyptic warning to Aleksandar Vučić, the President of Serbia, visiting Pink on Sunday night.

He also said that “we need a rollover (roll over), we need to take a billion at a lower price in order to return the billion we took at seven percent.” It seems that those billions of seven percent are deeply engraved in the memory of the president, since those Eurobonds have already been fully repaid, and according to the latest monthly report of the Public Debt Administration, the oldest Eurobonds were issued in June 2019 with a coupon rate of 1.5 percent and a yield of 1.6 percent. The first to mature are seven-year bonds issued in 2020 with a yield of 3.375 percent.

Vučić also illustrated the worsening conditions on the capital market by issuing ten-year Croatian bonds, “which has all the advantages in the West, has a credit rating and entered the financial market, and instead of 0.8, they borrowed 2.97 percent.” “Those are significantly better conditions than we can borrow,” said Vucic.

However, the situation on the capital market is definitely deteriorating, but apparently the main reason for that is high inflation, and not directly the war in Ukraine.

The latest issues of government securities show that investors are becoming more cautious and demanding higher interest rates.

At the beginning of April, an auction of two-year dinar bonds was held, and although it is planned to collect five billion dinars, only 1.6 billion dinars were sold, with a yield of 2.95 percent, one point more expensive than a year ago.

On April 16, Serbia also tried to raise money by issuing 25-year bonds in euros. The volume of the auction was 150 million euros, and the state offered a coupon of 2.3 percent. The demand for only 19.4 million euros arrived at the auction, and with an acceptable yield of 2.5 percent, the bond was sold for only 6.9 million euros.

Experts see the reasons for the growth of interest rates in the big difference between inflation and reference interest rates, which means that investors actually lose money when they receive interest rates lower than inflation.

Dejan Soskic, a professor at the Faculty of Economics in Belgrade, points out that so many negative interest rates are unsustainable.

“Further growth of interest rates must be expected, but the worsening of borrowing conditions must be seen in the light of real interest rates, which are obtained when inflation is deducted from the nominal interest rate.” “Serbia still has a relatively stable macroeconomic situation and inflation does not deviate from the European one,” explains Soskic.

According to him, it is always better to borrow on the market than bilaterally, with another country, as, for example, we borrowed from the UAE.

“For a start, we should have pursued a more responsible fiscal policy last year and this year, so we would not have to borrow so much. When we borrow from other countries, it is often not according to market conditions and there are some conditions. It is better to borrow on the market, without conditions, “he said.

Branislav Jorgić, the owner of Jorgić broker, thinks similarly, reminding that by borrowing from other countries we are building roads, but although it seems that loans are more favorable, we have to hire their companies without tenders, so in the end it will be more expensive than regular borrowing.

“As for borrowing on the domestic capital market, a certain amount of bonds can be sold, but at least one percentage point higher interest rate must be given than before. “If we are borrowing on the international market, we should borrow with a fixed interest rate in euros as well, given inflation and the expected growth of interest rates,” Jorgić said.

He, in turn, proposes another source of funds to cover the due debt, which would reduce the state’s indebtedness.

“The state could sell a part of shares in large state-owned companies on the stock exchange and collect funds from its citizens and funds to repay debts.” For example, it could sell about 30 percent of Telekom Srbija shares and thus collect several hundred million euros, while retaining majority ownership and nothing would change in management rights. Or the state could sell a package of EPS shares, which has big problems in management and capital, and get the money, without borrowing in a situation where interest rates are going up, “says Jorgić.

Inflation and the growth of interest rates of the American Fed also influence the more expensive borrowing of growing economies. According to the assessment of the investment bank Lazard, at the end of 2021, the withdrawal of money from growing markets began, and since the beginning of the year, investors have withdrawn 14 billion dollars, and as much as 13 billion from bonds of these countries in hard currency, Danas writes.