Finance minister of the year 2002: Veltchev takes his debt skills back home


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When investment bankers decide it is time to leave their industry, many take extended leave or choose to retire altogether. Milen Veltchev went straight to being Bulgaria’s finance minister.

Until last year Milen Veltchev was vice-president in emerging markets at Merrill Lynch in London; since July 2001 he has been finance minister of Bulgaria. Indeed he mentions in his CV that he is the only Merrill Lynch banker to have become a finance minister apart from Donald Regan, who became US Treasury secretary under Ronald Reagan in 1981 and championed the president's tax cuts.

Veltchev concedes that adapting to the new role has been testing. His only other government job was seven years ago when he was a diplomat in Bulgaria's foreign affairs ministry before joining Merrill. "A big personal challenge has just been to make the transition from investment banker to politician, to become a member of the cabinet, to learn to work with the often unwieldy bureaucracy and to put it to work in the right direction," he says.

His list of achievements in the past year is pretty long. After extensive negotiations, he secured a SDR240 million ($317 million) standby loan agreement package for Bulgaria last November from the IMF, which approved the second tranche of this loan this July.

He has restructured and reduced Bulgaria's overall debt levels and is making progress in encouraging businesses by reducing their tax burden while maintaining a low fiscal deficit. He is also accelerating privatization.

The country has obtained credit rating upgrades from all three main ratings agencies in the past year and economic growth is on target. "For someone who came into the job with no experience last July, he has done well," says an analyst.

His most important achievement is the $1.32 billion Brady bond exchange that he orchestrated in March. The new $510 million and e835 million Eurobonds decreased Bulgaria's overall levels of debt by a nominal $80 million, cut debt servicing costs over the next few years by around $407 million and extended the debt's maturity, simultaneously reducing dollar exposure.

As a former emerging-markets banker, working on a string of debut sovereign Eurobonds, Veltchev clearly knew what he was doing. He acknowledges that his time at Merrill Lynch was useful in shaping his debt management strategy of reducing overall levels of indebtedness and floating dollar exposure. "I had been doing for six years exactly what the bankers on this deal did," he says.

A Bulgarian Brady bond exchange had been a Veltchev crusade for a while. "I actually marketed the very same transaction for five years to the previous government. I know exactly what needed to be done and had a clear goal," he says. He's convinced the strategy paid off. "Our predecessors managed to reduce our overall level of debt significantly but in the last 12 months alone we have managed to cut our overall level of debt from 75% of GDP to around 50%."

Economists and analysts say that Bulgaria's finance minister is well respected in particular for his debt strategy. "The markets have continued to look at Veltchev as the guy from the City of London," says Marco Annunziata, senior economist in Deutsche Bank's emerging-markets research team. "He has shown his comparative advantage as someone who comes from the financial markets because he has focused on debt management."

Yet Veltchev's success as a finance minister is not confined to this narrow area. He thinks one of his biggest achievements has been his part in the successful privatization of Bulgaria's fourth-largest bank, Biochim, which was sold to Bank Austria for e82.5 million in August. He is chairman of the state-owned Bank Consolidation Company, which makes all the most important decisions on bank privatization. He got directly involved two or three times in the negotiation process when it seemed to be hitting a wall.

"I was very relieved and happy to see the deal's completion and I think it was justifiably billed as Bulgaria's most successful privatization during these transition years," he says. "I think the fact that it raised three times what was offered for it only a year ago and was sold for a multiple of net assets that has never been achieved in Bulgaria before testifies to its success."

He is not without critics. Opponents have attacked him over his past career in banking, accusing him of conflicts of interests. This came to a head when Morgan Stanley and JPMorgan were appointed to run Bulgaria's debut Eurobond last November and it emerged that Veltchev's brother and the deputy finance minister's wife both worked at Morgan Stanley. The finance ministry stoutly defended its decision, saying Morgan Stanley and JPMorgan had the biggest market share for emerging-market sovereign debt at the time, and offered the most compelling solution and competitive fees.

The Brady bond exchange also faced a stiff challenge, this time from the opposition UDF party, which temporarily managed to hold up the deal through the courts. "He was coming in as an outsider, which was bound to attract some slings and arrows from the local politicians," an analyst says.

Veltchev also maintained an unpopular tight fiscal policy, which had been put in place by the previous government in the aftermath of the 1997 financial crisis.

"Keeping a strict conservative fiscal policy in a relatively poor country with an economy that has to grow fast to catch up with EU levels is a big challenge," he says. "This is especially true coming in right after an election year when any government tends to overspend just a little. It makes it that much more difficult to rein in spending for the rest of the year."

Setting new targets

Far from becoming complacent about Bulgaria's economic achievements so far, Veltchev has set himself ambitious targets for the rest of his term. He has forecast a budget deficit of 0.7% of GDP next year and a zero budget deficit by 2005. He feels reasonably comfortable about being able to achieve this. "Of course it is conditional on some external events," he says. "Our projected economic growth of 5% for 2004 is predicated on considerable foreign direct investment, which has been a bit slow to materialize so far, mainly because of the continued sluggishness in growth globally. But as long as that picks up in soon, I think we should be on target."

Part of this target is to net $500 million in privatization revenues from just three sales - those of Biochim, state-owned tobacco company Bulgartabak and state telecom carrier BTC. Despite the success of the Biochim privatization, there is still some way to go before the other two transactions materialize.

Veltchev thinks the Bulgartabak deal will probably be finalized by the end of September but the sale of BTC is further down the road. "I'm still optimistic that it will still occur, although as with any telecom company we have to realize how difficult the negotiations on the share purchase agreement can be. But I trust it will be completed this year and if that is the case, we will certainly exceed our target of $500 million."

By the end of the year or early in 2003 Veltchev is also hoping for more ratings upgrades to follow from sustaining Bulgaria's successful relationship with the IMF, keeping a tight fiscal policy and continuing to reduce debt levels. "We are definitely aiming to reduce the debt to GDP level as it's still somewhat high by regional standards. We are about to start to come into compliance with the Maastricht criteria and we will continue to cut it, mostly by increasing the nominal value of GDP while keeping the nominal value of debt roughly the same."

His achievements in the past year have already been enough to mark him out for special credit. Although central and eastern European economies might not have been hit as hard as other emerging markets, it is eye-catching for a transition economy to have a fiscal deficit of under 1% of GDP for the second year running when others in the region are hitting up to 5%. He counts this, the Brady bond exchange and the Biochim sale as his most important achievements. Add to the successfully negotiated IMF funding and credit rating upgrades and his contribution to Bulgaria's recent successes becomes even more apparent.

Veltchev reflects for a while about what have been the personal reasons for his success. He thinks part of it results from his having won a World Bank scholarship to study at Massachusetts Institute of Technology, where he received an MBA in financial engineering. And, of course, he does not forget to credit his career at Merrill Lynch. "On a personal level," he says, "I suppose having been to a prestigious university as a student and going through the experience of investment banking has really helped me."

It is refreshing to hear a politician attributing part of his success to his student years, but then he is the youngest finance minister Bulgaria has had since the 19th century. His student days are not so far behind him. With more than half his professional career left to run, we are likely to hear a lot more from Veltchev.