The Government of Serbia has announced that it will issue its first 10-year dinar bonds on January 23, 2025, after receiving an investment-grade credit rating. The bonds will have a total value of 120 billion dinars and a coupon rate of 5.25 percent.
In an interview with Biznis.rs, Professor Đorđe Đukić, an expert from the Faculty of Economics, emphasized that these bonds are primarily aimed at domestic investors. However, he noted that the coupon rate suggests that the state will not achieve significantly better terms compared to previous public debt issuances when it lacked an investment rating.
Debt issuance for multiple purposes
The government has outlined a broad range of purposes for the funds raised by this bond issue, including financing the budget deficit, refinancing due obligations, and funding investment projects, particularly those that have a positive impact on environmental protection. However, Đukić pointed out that, at its core, the bond issuance will primarily address the financing of Serbia’s projected budget deficit for 2025, estimated at three percent of GDP, as well as funding for projects within the framework of EXPO 2027.
No significant change in borrowing costs
One of the most striking aspects of this new bond issue, according to Đukić, is the cost of borrowing. Despite Serbia’s improved credit rating, the coupon rate for the new bonds is identical to that of the previous 10-year dinar bonds issued in July 2023, which stood at 5.25 percent. Đukić found this curious, as a country with an investment rating would typically be expected to offer bonds at a lower coupon rate, reflecting its improved creditworthiness.
The professor speculated that this lack of improvement in borrowing costs may be due to uncertainty about whether the budget deficit will remain within projected limits, especially considering that public investments often end up being more expensive than initially planned.
Questioning the strategy: Why not borrow in euros?
Đukić also raised concerns about why Serbia is not taking advantage of the trend of falling interest rates in the Eurozone. He pointed out that nominal debt in euros has a much lower cost, with euro-denominated bonds having a fixed coupon rate of just 3.25 percent. Given expectations that the European Central Bank will continue to reduce its reference rate in 2024 to stimulate economic growth, Đukić questioned why Serbia, now with an investment-grade rating, does not take advantage of the opportunity to borrow more cheaply in euros.
Impact of the National Bank’s interest rate policy
Another factor influencing borrowing costs, according to Đukić, is Serbia’s National Bank of Serbia (NBS) reference interest rate, which currently stands at 5.75 percent. The professor does not expect the NBS to reduce the key interest rate, as fiscal pressures and large planned consumption expansion will likely keep it high. This, in turn, could push up inflation, particularly due to rising labor costs and service prices.
Domestic investors to benefit
While there are concerns about the government’s borrowing strategy, there are also some winners in this scenario—domestic buyers of government securities. According to the Public Debt Administration, foreign buyers account for just 16.4 percent of the portfolio of dinar government securities, suggesting that foreign interest in Serbia’s bonds has waned. However, Đukić pointed out that the final verdict on the bond issuance will be determined by the market once the bonds are offered to investors on January 23.
The nominal value of each bond is set at 10,000 dinars, with a maturity date of January 27, 2035.
In summary, while Serbia’s new bond issuance offers an attractive opportunity for domestic investors, experts remain cautious about the cost-effectiveness of this borrowing strategy, particularly given the country’s current fiscal and economic conditions.
