The Republic of Macedonia took advantage of both the scarcity of debut sovereign issues and the European Commission’s assessment in November that it should be granted EU candidate status to attract big demand for its first Eurobond.
Investors from across Europe, the US and Asia put in bids totalling €593 million for the €150 million issue, with British investors taking the bulk of the deal at 33%, closely followed by German accounts at 31%.
The 10-year bond pays a coupon of 4.625%. “The coupon level is evidence that Macedonia has done most of the structural reforms and is moving steadily towards the EU and Nato,” says Nikola Popovski, Macedonia’s minister of finance.
Strategic move
According to Popovski, Macedonia’s decision to issue the Eurobond was “a strategic move, undertaken in order to conduct a buy-back of existing high-risk and expensive London Club debt.”
This, he says, will allow a high level of budget savings in the future, as well as avoiding interest and foreign-exchange rate risks and extending the maturity of its debt portfolio.
The Eurobond issue temporarily raises Macedonia’s external debt to GDP ratio from a relatively low ratio of 41% to 47%, until the proceeds are used to retire the London Club debt.
One of Macedonia’s biggest challenges is to develop its local bond market. “Macedonia’s debt management strategy envisages that the government should give priority to borrowing from domestic markets,” says Popovski.
Macedonia’s local debt market is underdeveloped, with only around €200 million equivalent of domestic debt, compared to foreign currency denominated debt amounting to around €1.8 billion.
Domestic securities so far have three-, six-, 12- and 24-month denominations, and the ministry plans to extend this further. It is also looking to introduce primary dealers and market makers. Another goal is to reduce the fragmentation of domestic debt by “eliminating central bank bills and introducing treasury bills for monetary purposes”.
International borrowing
A key pillar of its IMF programme is to establish market-based public financing, with a focus on developing secondary market trading, repo transactions and monetary use of T-bills, as well as developing its international borrowing potential.
Within its foreign borrowing, Popovski is keen to see a greater focus on the euro. “To this end the first Eurobond was issued to replace dollar-denominated floating-rate debt with fixed-rate euro debt.”
The IMF approved a three-year $75.8 million standby arrangement with Macedonia in August 2005. “The arrangement supports the ambitious programme of the government, which includes structural reforms aimed at increasing growth and employment and reducing the fiscal imbalance, while securing the past gains in macroeconomic stabilization,” says Popovski. “The programme also supports the process of integration with the EU and it is expected to allow for an orderly exit from long-term financial engagement with the fund. What is also very important is that after making the initial draw-down we do not plan to draw under the arrangement and intend to treat the arrangement as precautionary.”
Standard & Poor’s rates Macedonia BB+ and Fitch at BB with positive outlook.
