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Montenegro, Issuing Long-term bonds on domestic market could bring success

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The Ministry of Finance is considering the possibility of issuing long-term bonds on the domestic market, which could be purchased by citizens and businesses, the department informed Vijesti.

The reasons for considering this idea are that this year the Government must return EUR 475 million of old loans that are due for collection and interest on those amounts, that domestic and foreign banks offer loans to the Government at effective interest rates that exceed ten percent, while at the same time citizens and the economy they have deposits in banks of EUR 5.2 billion, and the average interest rate, according to data from the Central Bank (CBCG) for January, on term deposits for over five years is 1.64%.

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The goal of issuing domestic bonds would be for their customers to receive annual returns higher than the banks are currently giving them interest on savings, and in this way the state would borrow at significantly lower interest rates.

In February, Croatia borrowed by issuing domestic bonds for EUR 1.85 billion, while buyers will have a yield of 3.65%. The maturity period is two years, and, as announced by the Government of Croatia at the time, customers will benefit as if they had paid the money over two years with an interest rate of 3.65%, instead of the average interest rate of 0.5% in their banks.

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President of the Management Board of Hipotekarna banka, Esad Zaimović, told Vijesti on this topic that there is room for issuing domestic bonds, because there is an excess of deposits in banks, but that there are also risks, which is why everything should be carefully analyzed and prepared.

The executive director of the Montenegro Stock Exchange, Milena Vučinić, told the Podgorica newspaper that the institution has the technical and personnel potential to implement the procedure, and that it is a good idea that would contribute to greater activity on the capital market.

Tripko Krgović, a member of the Council of the Montenegrin Association of Small Shareholders (CAMA), whose members are very active in the capital market, said that he expects great interest in the purchase of those shares, so that the state would borrow more cheaply, and the buyers would have a higher return than if they kept that money in banks.
– The Ministry of Finance is considering all possibilities and models of borrowing up to the remaining EUR 500 million, how much space is left according to the annual Budget Law and the decision on borrowing, including the possibility of issuing long-term bonds on the domestic market. After the analysis of all financing possibilities, the Ministry will make an official decision on the most profitable way to provide funds, in order to create the conditions for the smooth settlement of all obligations planned in the budget, and above all the repayment of the debt in accordance with the due dates – Minister Aleksandar Damjanović stated.

Zaimović said that deposits in Montenegrin banks are at a record level and that it is true that interest rates on deposits, except for a few banks, are at a very low level.

He said that the reason for the increase in deposits is the arrival of people from Ukraine and Russia, who moved part of their business and capital to Montenegro, and that the logical consequence of all these events is the drop in interest rates on deposits.

– From the current data on excess liquidity in banks, there is certainly room for the state to borrow from citizens and the economy through the issue of bonds, with the fact that one should be careful when assessing the success of such an issue. The failure of the show would also mean that the citizens have no confidence in the institutions of the state, primarily the Government – said Zaimović.

According to him, the interest rate on those bonds would certainly be higher than the rate on bank deposits, but that would certainly not be the only criterion on the basis of which citizens and the economy would decide to invest their capital in those bonds.

– Because of all that, it would be good to do some analysis or research on the tendency of investors to buy such bonds – added Zaimović.

He stated that in the case of the issue, options for trading those securities on the Montenegro Stock Exchange should be considered, as well as other modalities of using and trading those securities, such as the use of bonds as collateral for a loan, payment of taxes and other duties with a discount, etc., in order to securities gained attractiveness and encouraged potential investors to buy them.

Vučinić stated that the Montenegro Stock Exchange successfully completed the primary placement of bonds for the state in 2014 and 2019, so it has experience in performing that work.
– Economic conditions are such that interest rates on loans from citizens and businesses are rising, while interest rates on deposits are still very low. The liquidity of the banking system and citizens’ deposits are extremely high. The economy and citizens deposit money in banks at low interest rates or just keep it without term and the right to income in the form of interest – said Vučinić.

As she added, in the aforementioned situation, the Government should take advantage of the opportunity to borrow on the Montenegrin capital market, in such a way that it will use free funds that are in the form of open-ended deposits with banks and funds that are in “straws”, that is, to makes a decision on borrowing on the domestic market through the issue of bonds.

She stated that the team and members of the stock exchange, brokers and investment advisors have all the legal, technical and professional capacities to carry out the primary placement of government bonds, as well as to perform bond transactions on the secondary market afterwards.

– Brokers and investment advisors already have a large base of their clients. When there is an economic interest for citizens, the economy, and institutional investors, they all start immediately and easily find their way to a broker who provides them with services related to trading financial instruments. It is necessary to take into account the nominal value of the issued bond, as well as the minimum amount for each individual offer, so that the state makes them available to all citizens of legal age – said Vučinić.

She also said that in developed economies the stock market is the main place for collecting capital, so it would be natural for Montenegro to use the Montenegro Stock Exchange much more and directly contribute to the activation and further development of its capital market.

Krgović said that the issue of bonds, with good organization, could be very successful.

– Considering the amount of deposits currently available to citizens and the economy, the issue of government bonds with a satisfactory yield, but also suitable sales channels, could be very successful in a way that would enable the state to borrow more cheaply, and depositors to find an alternative to obscenely low interest rates rates on deposits from Montenegrin banks – said Krgović.

Such a move, as he believes, would certainly affect the dynamics of the capital market, which finally woke up after the entry of the state through the actions of Luka Bar.

– Currently, there are several dividend bonds on the domestic market with yields ranging from three to eight percent, but with a big liquidity problem because it is not easy to place large amounts of money – Krgović said.

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