In the next four years, Latvia will need to borrow three billion euros every year, because it will be necessary to refinance the previous emission of Eurobonds, as well as refinance budget deficit and loans issued to local governments, said the Chief of the State Treasury Kaspars Āboliņš in an interview to LETA.
“The need for borrowing in the coming years is high, because it is necessary to borrow not only to refinance Eurobonds, but also to finance budget deficits and loans to local governments. The total planned volumes of borrowing for the next four years are at least three billion euros annually. Of course, it also depends on what budget deficit will be confirmed in the end, how tax revenues will be fulfilled,” said Āboliņš.
He explained that this money is planned to be raised through various instruments, but mainly it will be bond issues on the international financial markets in euros or US dollars, similar to what the State Treasury did this year.
The next instrument the State Treasury will use will be bond auctions or so-called additional tranches on previously issued bonds through primary dealers or five banks in Latvia, as well as Austria’s Erste Bank.
Āboliņš said the State Treasury will consider the option to borrow from international financial institutions, such as the European Investment Bank. Nevertheless, he turns attention to the fact that the European Investment Bank lends money for a specific purpose. Looking back, those have always been relatively small and mainly used to co-finance EU fund projects.
Bonds issues on international financial markets would amount to around two-thirds or around two billion euros per year, said Āboliņš.
However, everything depends on the situation on financial markets. The remaining amount could be raised through auctions.
As for borrowing from international markets, Āboliņš said that this may mean a loan contract for 200 million euros with an option to use this loan across several years, which is why it is a relatively small part.
At the end of May, the State Treasury issued 1.25 billion dollars worth of bonds, followed by a swap to the euro. When asked why Latvia should have issued bonds in US dollars, Āboliņš explained that the first is a strategic consideration – diversification or expansion of the investor base.
Although the investor base partially overlaps, because the same investor can invest in both euros and US dollars, at the same time Latvia also had enough investors from the US.
“This, in turn, is important for two reasons. The first is that if there are problems with borrowing in any market, then we have alternatives. The second is that if we model any negative scenarios, when we need to significantly increase, for example, investments in defence; additional loans need to be made, then we already have a connection with these investors, they already know the story of Latvia and are much more ready for loans. In addition to this, there are already Latvian bonds in US dollars on the market, the rate of which can be used as a basis for determining the price of future bonds, and then already these transactions are much easier to price,” explained Āboliņš.
He said US investors have an interest in having such bond emissions regularly. The State Treasury plans to return regularly, if possible, even annually, with US dollar bond emissions. But, of course, it is also important to consider the rate at a given moment after a currency swap. For the bond issue by the State Treasury this spring, the effective rate after the foreign exchange swap was even more advantageous than if Latvia had borrowed in euros at the time.
He also said the State Treasury has been considering the option to borrow money in Japanese yen for years. Latvia has a credit rating with Japan’s “R&I” agency intended specifically for Latvia to borrow in yen and reach out to Japanese investors. But for now, the effective rate after a currency swap would be quite disadvantageous. The price would also be too high for the purpose of diversifying the investor base.