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Saturday, April 13, 2024
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Montenegro dives into dollar bonds

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The Ministry of Finance initiated the presentation of a proposal for the issuance of government bonds to potential investors yesterday. The aim is to secure funds for repaying old debts, addressing the fiscal deficit for the current year. The success of the bond issuance, expected to occur this week, hinges on whether investor offers align with the state’s expectations, according to sources familiar with the matter.

The government’s decision to issue bonds, representing state indebtedness, involves determining the maturity date for debt repayment and the interest rate offered by buyers at the auction. Notably, this issuance will be in dollars instead of euros, a choice made by the Ministry of Finance to potentially secure a lower interest rate compared to previous euro-denominated issuances.

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To facilitate the bond issuance, the Ministry of Finance enlisted the assistance of international banking groups, including “Bof A Securities,” “Citigroup,” “Erste Group,” and “Societe Generale.” These institutions presented potential investors with a preliminary prospectus for Montenegro, and estimates suggest the state might hedge this debt in dollars, mitigating credit risk by fixing the exchange rate on the day of the bond sale.

The budget for 2024 permits borrowing up to €1.15 billion, with €650 million allocated for addressing the current year’s funding gap and an additional €500 million for debt refinancing and creating a fiscal reserve for 2025. The Ministry of Finance emphasized that borrowed funds will be exclusively used for debt repayment, financing the capital budget, and establishing a fiscal reserve for the following year, adhering to the golden rule of financing current liabilities with current revenues.

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Experts anticipate that the stability of the financial market and favorable conditions may lead to lower interest rates, impacting future borrowing on both international and domestic markets. While the Ministry of Finance aims to collect the necessary funds through the bond issuance, no new budget expenditures, except for the capital budget, will be financed by debt.

The total planned debt repayment for the year is €656.7 million, with the largest installment of nearly €100 million due in April. The urgency to secure additional funds arises from the need to meet imminent debt obligations. The last issuance of government bonds occurred at the end of 2020, and a criminal case related to this issuance is still ongoing, involving allegations of abuse of office.

In a significant development, Montenegro is set to issue bonds in US dollars for the first time on the international financial market, potentially attracting new investors. The Director of the Financial Markets Sector at Hipotekarna Bank, Gojko Maksimović, anticipates an issuance of $500 to $700 million with a seven-year maturity. While the dollar issuance may draw new investors, Maksimović notes potential challenges, such as the duration of currency SWAP arrangements to hedge against currency risk. The Ministry of Finance’s intentions and the conditions of the SWAP arrangement will be clearer after the bond issuance.

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