Банкеръ Weekly



Bulgaria's external debt is at its lowest level since 1996. After the Eurobond issue was launched in end-2001, the country's foreign liabilities were around USD8.8BN and forex reserves stood at USD3.4BN. For comparison, five years ago Bulgaria's foreign debt totalled USD9.4BN and forex reserves amounted to USD600MN. In 2001 the country paid to foreign creditors USD600MN more than the loans it received.By end-January 2002 the Government should repay USD180MN of its external liabilities. Almost USD131.2MN of this amount will go to the holders of Bulgarian Brady bonds who will get their due interest on January 28, and the owners of interest arrears bonds (IABs) will get USD16.1MN of these securities' principal. Presently, IABs are the only Bulgarian Bradies, on which the country does not pay redemption installments.On July 28, 2002 the Government should remit the first of the agreed 21 redemption installments, each of USD73.3MN, under the front loaded interest reduction bonds (FLIRBs).According to the Bulgarian National Bank's (BNB) and Finance Ministry's estimates, USD593.4MN will be necessary for the servicing of the country's foreign debt in 2002 - USD593.4MN for repayment of prinicpal and USD399.9MN for interest payments.The most serious tension for Bulgaria's forex reserves (which were around USD3.6BN in mid-January 2002) will be till the end of July. Within these seven months the payments to foreign creditors will exceed USD739.2MN - about 75% of all annual payments under the country's foreign debt. The largest amounts will go to the holders of Brady bonds.They will get a total of USD321.3MN - USD225.8MN in interest and USD95.5 in principal. The Finance Ministry is apt to intervene on the market of Bulgarian Brady bonds, buying small packages of them - mainly collateralised discount bonds (DISCs). From mid-September 2001 till the end of the year the Ministry of Finance carried out several transactions on international markets for the purchase of Bradies, borrowing a credit of BGL144MN from BULBANK. These deals caused much noise and accusations that they were carried out at unadvantageous terms for the State, and passed through Morgan Stanley Dean Witter - the investment bank in which Finance Minister Milen Velchev's brother works. Without confirming that the Government was buying Bradies, the Deputy Finance Minister Krassimir Kater explained the situation in the following way in October: The accounts show that if DISCs are bought, the net price to be paid is USD52 per USD100 par value. This price if advantageous for repurchase deals. However, the market situation has already changed. In mid-January 2002 the DISCs were traded between USD86.5 and USD87.7 per USD100 par. Thus, a repurchase went up to USD60 per USD100 par, which renders it less advantageous to Bulgaria. Moreover, the Government does not have excess financial resources for such deals. In mid-January there was some USD1.2BN on its accounts in the BNB. These funds are sufficient for servicing the foreign debt (at least as projected by the BNB and the Finance Ministry), but they do not allow purchase of Bulgarian Brady bonds.The creditor countries from the Paris Club will get a total of USD107.1MN by end-July, 2002, USD97.3MN of it in principal. From the beginning of August till the end of 2002 the Government will remit them another USD48.7MN. However, all these payments may shrink tangibly if the Bulgarian Government reaches an agreement with some of the creditor states for servicing the country's liabilities under debt-for-equity swaps. In mid-January the Finance Ministry reported its first success by closing an agreement with Belgium for settling EUR12 liabilities under a debt-for-equity swap. The agreement stipulates a possibility for a buyer of a Bulgarian enterprise to pay to Belgium, which on its part, will deduct the amount from Bulgaria's debt.It will be a great success for the Bulgarian Government if it agrees with Germany a debt-for-equity swap, as the Federal Republic is our biggest creditor within the Paris Club. Probing for such an agreement was made when Mouravei Radev was finance minister. The Germans, however, refused to close such an agreement, arguing that they would set a precedent if they accepted such a repayment scheme. Now there is precedent, but it has been created by Belgium. This provides the Bulgarian Government with serious motives for new negotiations with Germany.In 2002 the Government should also pay USD252.9MN to the International Monetary Fund (IMF) and around USD108.8MN to the World Bank. These are the two institutions from which the country's budget gets most of the credits and Bulgaria's financial health depends to a large extent on their benevolence. Therefore, the agreements with them are of crucial importance to the stability of the country and of each government. If the Cabinet of Premier Simeon Saxe-Coburg-Gotha succeeds to reach an agreement with the IMF in February, the international financial institution will extend USD150MN to Bulgaria by the end of 2002. Another USD300MN has been promised to the country from the World Bank, but the loans from it are bound with the signing of an agreement with the IMF. This scheme includes also the EU and G-24 countries, from which Bulgaria borrows USD150MN annually. The loans from all these creditors are long-term. They are repayable in 5 to 8 years at a very low interest rate - between 3 and 5 per cent. Therefore, financing from them is more preferable than seeking funds on international markets through Eurobond issues, the interest on which is twice higher.The total amount (USD600MN) of credits promised by the IMF, the World Bank, G-24 and the EU, covers the expenditures projected by the Bulgarian Government for servicing foreign debt principal payments in 2002. For this reason a week ago the Deputy Finance Minister Krassimir Katev announced that the Cabinet may not have to launch a new Eurobond issue. According to him, there is no point in borrowing credits at 7-7.5% interest when thr State can ensure the necessary financing at much lower interest rates.We have agreed with the IMF that we could launch a new Eurobond issue of up to EUR340MN. But this won't be necessary if our forecasts for the current account deficit prove true, Mr. Katev explained.It is namely this deficit, formed by the foreign trade balance and the ratio between revenues and expenditures of leisure industry and transport (the sector of services), that is of crucial importance to Bulgaria's stability. That is why the size of the current account deficit (as a percentage of the GDP) is negotiated with the IMF and is a subject of special attention on its part.According to BNB's preliminary data, the current account deficit stood at at USD1.06BN in 2001, and it should not exceed USD800MN in 2002. This is the amount of forex, which goes out of Bulgaria each year, together with the money for servicing the country's external debt (payment of the principal and interest). The exact amount is entirely dependent on the situation on foreign financial markets and stock exchanges.After the terrorist attacks in the US on September 11, 2001 the six-month London interbank offered rate (LIBOR) slumped down from 3.5% to 1.97 per cent. As more than 70% of Bulgaria's foreign debt payments are interdependent on LIBOR, the country saved USD200MN-plus due to its decrease. Instead of the planned USD1.25BN for servicing external liabilities, Bulgaria paid around USD1.05BN.The situation on the world markets was neither fatal for our country, notwithstanding the recession in the US and the war in Afghanistan.Despite all catastrophical predicitions about petrol prices, the September quotations of USD30 per barrel quickly went down to USD20/barrel. This was advantageous to the Bulgarian Government, because fuels form about a quarter of the country's imports and influence considerably the balance of payments. Had petrol prices not declined, Bulgaria's trade deficit wouldn't be USD1.05BN, but at least USD1.2BN. This, on its part, would had led to an increase in the current account deficit and result in greater forex expenditures and a decrease in the country's forex reserves. Luckily, this did not happen. Therefore, the Government has good reason to cry: Long live the international situation! It was advantageous for Bulgaria in the beginning of 2002 as well. The six-month LIBOR went down to 1.9 per cent. According to some financiers, in the end of January the US economy will again report unsatisfactory results, which will give the Federal Reserve grounds to reduce interest rates again. Resultingly, LIBOR is expected to go down further, to 1.6% probably. The record low LIBOR reduces also the expenditures for payment of Bulgaria's foreign debt interest (USD399.9MN).The price of petrol is advantageous to our country, too. It is currently USD18 per barrel and is unlikely to go up significantly by the end of 2002, unless Russia reduces its production of petrol or if the US strikes some of the top petrol producers in the world, such as Iran, Iraq, or Lybia.However, the situation might worsen drastically if petrol prices increase, and data about the world economy show that it's coming out of the recession. A row of optimistic information will cause an immediate rise of interest rates. Most financiers hope this won't happen before end-July when Bulgaria will have already paid most of its foreign liabilities. In order to avoid the risk of LIBOR's increase, however, the Finance Ministry is considering the opportunity to close several forward deals on the international markets, by which it will practically fix the interest rate for Bulgaria's future payments at low levels.

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