What the experts warned about, and what could have been expected in the midst of the global crisis, that borrowing on the international market will become more expensive and it came true.
Yesterday, the Republic of Serbia in London issued seven-year Eurobonds worth two billion euros with an annual interest rate (coupon) of 3.125 percent and a yield of 3.375 percent.
Just over six months ago, on November 5, 2019, the state reopened the issue of ten-year Eurobonds worth 550 million euros and received an interest rate of only 1.5 percent and a yield of only 1.25 percent. During March and April, the yield on these bonds on the secondary market rose to 2.7 percent.
Previous seven-year Eurobonds issued in mid-2018 went at an interest rate of 2.5 percent. This example shows how much a crisis costs.
Money on the international market, although both the American Fed and the European Central Bank are relentlessly pumping money, is twice as expensive for countries like Serbia than before the pandemic.
As stated in the announcement of the National Bank of Serbia, at the beginning of the auction, investors asked for half a percent more, but the demand, which reached as much as seven billion euros, dropped the yield to 3.375 percent.
“Serbia is the only country in Europe that entered the international capital market during the Covid-19 virus pandemic, without the help of the European Central Bank in placing securities,” the NBS states.
Nikola Altiparmakov, a member of the Fiscal Council, points out that in principle this can be called a good result in the context of the crisis and the fact that all countries, especially those outside the EU, will borrow more than before.
“The interest rate is higher than during last year’s issue of Eurobonds, but that was inevitable for Serbia and other countries,” Altiparmakov noted.
The original budget for 2020 plans to borrow about five billion euros, including deficit financing and refinancing of loans maturing this year. In the recently adopted budget rebalance, the state moved the borrowing limit to 7.5 billion euros for this year.
The plan of the Ministry of Finance is to obtain more than half by borrowing on the domestic market – 3.8 billion euros, on the international market by issuing Eurobonds up to three billion euros, while about 650 million euros, at least according to the budget, is intended to be borrowed from institutional creditors banks, Council of Europe Development Banks, Asian Infrastructure Banks…
Altiparmakov points out that the state will have to obtain most of the missing money on the market.
“Due to insufficient information in the general public, there was speculation regarding a possible IMF loan and European Union funds, which set aside around three billion euros for the Western Balkans.” IMF standard loans refer to loans from the central bank’s reserves and are not comparable to the financing that goes to the budget. EU funds are intended for the budget, but the decision of the European Commission explicitly states that they are intended for countries with balance of payments problems, and Serbia is not.
“Besides that, those 700 million euros are only 10 percent of the missing funds that Serbia must borrow this year,” Altiparmakov notes.
Since the beginning of March, the state has already issued bonds for more than three billion euros. 1.2 billion euros worth of bonds with a maturity of one to 12 years were sold on the domestic market. In addition, it was issued in three auctions and 90 million euros with maturities of two, five and 12 years.
Milojko Arsic warns that excessive borrowing on the domestic market could lead to the so-called the squeezing effect in which banks turn to state financing at the expense of lending to the economy.
He also thinks that it might have been better if the state first sought cheaper funds from international financial institutions, and then later borrowed the rest on the market.
“Maybe the plan is to try on the market first, and then to take money from the IMF or the EU after the elections, since their loans would be accompanied by policy conditioning. In principle, the IMF provides loans for foreign exchange reserves, but in emergency situations also for the budget, as it was in 2009. In any case, Eurobonds are better than everything being procured on the domestic market due to the possible crowding out of the private sector,” notes Arsic, adding that in any case it is necessary to borrow on the market due to this year’s big deficit and maturity of previous loans.
Indeed, in the last month, there are very few countries on the global international market that have decided to issue bonds, and their borrowing conditions show how important it is to be a member of the EU, and even more important, a member of the Eurozone.
For example, on April 25, EU member Hungary borrowed two billion euros, just like Serbia. Six-year Eurobonds will cost them 1.125 percent per year, and twelve-year 1.625 percent, twice as cheap as us. Lithuania has also borrowed two billion euros these days.
Ten-year bonds will cost 0.75 percent, and five-year bonds 0.25 percent per year. Lithuania is a member of the eurozone and can count on the purchase of bonds by the European Central Bank.
In addition, Hungary has an investment rating of BBB, and Lithuania an even better A +. At the end of April, Israel also borrowed as much as five billion dollars for an incredible 40 years.
The annual interest rate is 3.8 percent. On the other hand, when a bad economy borrows, it looks like in the case of Ukraine. They issued three-month bonds on the domestic market in hryvnia. For a short-term debt of about 344 million euros, Ukrainians will pay an interest rate of 11.26 percent annually.
Arsic points out that these interest rates achieved on the market are a consequence of the growth of risk due to the crisis on the one hand and the monetary expansion of the American Fed and the ECB, on the other hand.
“The interest rate we received is not a surprise for a country like ours. And how much EU membership means is shown by Hungary, which has a higher public debt, a higher fiscal deficit, it is not exactly a favorite in the Union, but it borrows cheaper,” Arsić notes, Danas reports.
