Last week, the Serbian government adopted a decree regulating the implementation of another package of aid to the economy affected by the Covid 19 pandemic, only that this decree was saved and passed somehow far from the public eye and without the media pomp that followed the previous measures.
This decree regulates the conditions under which the state will recapitalize companies, both state and private, which meet certain conditions, and which have been hit by a pandemic. This may be the explanation of the IMF’s assessment that the budget deficit this year will be “below nine percent of GDP”, although until now it has been dealing with a deficit of about 7.5 percent of GDP.
According to Milojko Arsic, a professor at the Faculty of Economics in Belgrade, the fact that the Fund announced that the deficit will be up to nine percent of GDP indicates that the state will increase spending by the end of the year, because there are no problems with income inflow.
“Those 1.5 percentage points of GDP are around 500-600 million euros, although we do not know whether all that is intended for recapitalizations. Given that the money will be part of the deficit, it seems as if the state does not believe that these funds will be returned, given that capital investments are not recorded as expenditures. On the other hand, maybe they are just precautionary,” Arsic estimates.
Recapitalization by the state
The general conditions under which the decree provides for recapitalization by the state are that the companies were not in difficulty at the end of last year, to prove that without the help of the state the firm would cease operations or face serious difficulties, “which may be indicated by worsening debt and capital of users, significant reduction of operating revenues, etc.”, the text of the regulation states.
Assistance can be given to micro and small enterprises that were in trouble at the end of last year, if they are not in bankruptcy and are not already receiving state aid for restructuring.
The third condition is that it is in the interest of the state to intervene (eg prevention of social difficulties and market failure due to significant loss of employment, exit of an innovative or systemically important company, risk of interruption of important services or goods, etc.).
Finally, the aid is intended for companies that cannot borrow on the market under affordable conditions.
It is interesting that the state aid amounts to more than 250 million euros per company. Then the recipient will have to fulfill three additional conditions, and that is to prove that borrowing on the market and previous measures of the state are not enough, that recapitalization is an appropriate measure to solve the problem and that the amount of aid does not exceed the minimum necessary for the company to survive on the market.
By purchasing bonds or some other securities, the state becomes a partner.
It is envisaged that the state will help either by recapitalization, ie by obtaining an ownership share in the company in exchange for funds, as well as the so-called hybrid instruments, where by purchasing bonds or some other securities, the state becomes a partner without the right to manage, but with a share in the profit.
Although it is called recapitalization, this measure is more like long-term lending, since the state plans to collect an “investment fee”, which will be in the amount of the reference interest rate increased by the margin. Also, the longer the wait with the repayment to the state, the higher the fee, which in many ways resembles interest, which the state wants to stimulate a quick exit from these investments.
The aid recipient can buy the state share at any time, but the state can also sell its share to someone else at any time. It is envisaged that the right of first refusal to the previous owner of the share will be agreed.
Interestingly, if the aid recipient is a state-owned enterprise after two years, its value will be assessed by an independent appraiser and if it is positive, “it is considered that the state has returned the investment regardless of retaining ownership”, so that public and state companies will not have to repay the debt to the state.
Recipients also have some restrictions, such as that they cannot distribute dividends until they repay the debt, and that dividends cannot be distributed until they repay 75 percent of the debt, and there are no bonuses for management and employees.
The state will distribute funds under this decree as of September 3, 2021.
The most important thing is how much money will be allocated.
Economic consultant Bogdan Petrovic reminds that the government announced something similar in the spring, presenting the first aid measures, when the recapitalization of state-owned companies was mentioned.
“I assume that this has been agreed with the IMF, but of course the most important thing is how much money will be allocated and who will get it. A rebalance of this year’s budget is being made now, so we’ll see. I believe that most of those funds will be spent this year, although we do not know how the epidemic will affect the economy next year. If there is a restriction in business, more companies will be in trouble and the state will have to spend more money,” he noted.
According to him, this is nothing new and has been applied by other countries, although it is a question of technical details in the regulation and agreements, as well as their application.
“I assume that the money given to public and state-owned companies will be treated as a one-time expense, that is, they will not even count on their return. It is intended primarily for companies that cannot borrow on the market. I think that most of the money will go to Air Serbia and EPS. This is a kind of subsidy, at least when it comes to state-owned companies,” Petrovic points out. He explains that in this way, Air Serbia will be recapitalized and the share of the state will be increased, while EPS could not be financed by issuing corporate bonds, because as a loser, it would be difficult to get adequate creditworthiness.
A mechanism that enables targeted assistance
Ljubodrag Savic, a professor at the Faculty of Economics in Belgrade, reminds that the United States did something similar when it saved the car industry.
“It is a good mechanism that enables targeted assistance. It’s not a problem when you give money to companies that you know will survive. The problem is if the funds are given to companies that do not survive, and then the money is wasted. This can happen due to poor assessment, but also due to abuse. We have experience with the Development Fund, which gave the most favorable loans in the world that did not return,” said Savic, adding that it is important that everything is conducted in accordance with the law and transparently and that the state is careful when allocating money, BiF reports.
