Macedonia's interim government mulls new Eurobond issue

Macedonia's interim government mulls new Eurobond issue
By Valentina Dimitrievska in Skopje April 25, 2017

The Macedonian government is mulling plans for a Eurobond issue in the fourth quarter of 2017 to repay maturing debts due next year, according to Raiffeisen Bank International (RBI).

Macedonia is in a deep political crisis, and a new government has not been formed since the December 2016 snap election. If the interim government, controlled by the conservative VMRO-DPMNE is still in place later this year and goes ahead with the issue, it will further inflame tensions with the opposition Social Democratic Union of Macedonia (SDSM). 

Similar controversy erupted last year, when in July Macedonia placed a seven-year €450mn Eurobond to finance the budget gap for 2016 and 2017. The SDSM questioned the legality of the issue and accused the government of borrowing excessively to fund its spending. RBI has also raised concerns about the government's investment plans for this year. 

If the new issue goes ahead, the shortest maturity of the planned Eurobond issue would expire on December 1, 2020.

The Macedonian finance ministry told bne Intellinews on April 25 that the decision on whether and when the ministry will issue a Eurobond depends only on the current conditions and the market price.

“Macedonia is competitive on the international capital market and continuously maintains contacts with investors,” the finance ministry said in a short notice.

However, according to RBI, the Macedonian government is currently holding a non-deal roadshow to update investors about the economic and political situation in the country.

VMRO-DPMNE, which has ruled Macedonia since 2006 and emerged as the winner of the election but without a majority, is calling for a new election. Meanwhile, the SDSM, despite having a majority in the parliament, has so far been blocked from forming a government. Protesters have held rallies almost daily since February 27. 

RBI commented that: “The ongoing political crisis is threatening new early elections. Also, we feel a bit anxious about the government investment plans which could push Macedonia’s public debt from the current 48% of GDP up to 55% of GDP in the medium-term perspective.” 

“This reminds us about a case of another tiny Balkan country, Montenegro, whose overly ambitious investment programme led to substantial deterioration of public finances and external liquidity position,” RBI added.

Currently Macedonia, which is rated BB-/stable by Standard & Poor’s (S&P) and BB/negative by Fitch, is rated one to two notches higher than Montenegro, which is rated B+/negative by S&P and B1/negative by Moody’s.

RBI highlighted that meanwhile negative pressure on Macedonia’s rating may increase especially if the political crisis is accompanied by lavish investment spending and fiscal loosening.

“This prompts us to put our Buy call on Macedonia’s Eurobonds under revision for possible downgrade to Hold as possible policy changes may be credit negative in this case,” according to RBI.

In January, the finance ministry said that Macedonia sees no need to issue a new Eurobond in 2017, but this may happen if the circumstances on the international money market are extremely favourable.

Macedonia's gross external debt rose by 15.3% y/y to €7.25bn at the end of the fourth quarter of 2017, according to central bank data. The external debt slowed down y/y in Q4 after rising for four quarters in a row. Foreign debt has been constantly rising since 2007, but has increased rapidly since the beginning of 2016, mostly due to the €450mn Eurobond issue sold in July.

Macedonia also tapped international markets in November 2015, when it raised €270mn through the sale of a five-year Eurobond at a yield of 5.125%. In July 2014, the country also sold €500mn worth of seven-year Eurobonds.