Armenia’s Eurobonds: New Debt Or New Opportunity?

26.08.2013 | 09:36 Home / News / Articles /

Until the end of the year Armenia is planning to issue government bonds in foreign currency or Eurobonds for the first time.

According to Prime Minister Tigran Sargsyan, in case of successful placement of the bonds it is being planned to repay Armenia’s $500 mln debt to Russia this year. The volume of the Eurobonds’ issue will also be $500 mln with 10 year maturity. Meanwhile, considering Armenia’s ratings given by international rating agencies (Ba2 by Moody's and BB- by Fitch), Armenian Eurobonds will hardly be attractive from investors’ standpoint. spoke to an experienced investment expert, former Bloomberg analyst and currently investment advisor at Capital Investments CJSC Gary Muradyan on how timely and reasonable this issue for Armenia actually is.   

- How timely and reasonable Eurobonds' issue for Armenia actually is?

- I think the time has come to issue Eurobonds, which will be beneficial for Armenia. As you probably know global interest rates are currently very low because of the quantitative easing policies in the US and other developed nations around the world.

For example the 10 year US Treasury yield right now is 2.7%, which is very low by historical standards. If we go back a few years it would have yielded around 5% or even more, which is a benchmark for other bonds.

So right now it will be first of all cheaper for Armenia and similar sovereigns for that matter to issue Eurobonds as opposed to some other time. If they wait awhile they’ll probably face higher interest rates because global interest rates currently are at the bottom and they are expected to rise. As you may know the US Federal Reserve Chairman Ben Bernanke has already announced that they intend to stop their asset purchases of $85 bln in treasuries and mortgage securities every month. And this has significant implications on the bond markets because once they discontinue or reduce their asset purchases , the interest rates are going to go up again. Since that announcement already the treasury yield for 10 year bonds has  jumped almost 1 percentage point and that translates to other securities in the global markets.

For Armenia issuing Eurobonds now will result in a lower rate than if it waits to do it later. That’s why I believe Armenian Government intends to do it before the end of the year.

- What do you think, this decision to issue Eurobonds has to do more with favorable global environment for issuing new debt or there is an urgent need in Armenia to attract additional finance?

- Armenian policy in terms of financing is multilateral. They attract financing through IMF, Russia, World Bank and other different sources, trying to diversify their finances. Meanwhile there is a budget deficit and they need to satisfy it. Obviously there is a need for more debt, however the fact that now is quite a favorable environment for getting that financing by issuing Eurobonds, has most likely been an important consideration  in their decision-making.

As you know they are going to issue 10 year bonds which is rather long term. They could probably issue a bond with a shorter maturity, say 5 years, which would carry lower interest rate. Issuing a 10 year bond, however would allow them to take advantage of currently lower rates and fix it for a longer time. Issuing a bond of shorter maturity they may run into a risk of refinancing later at a higher rate than what they can get now. This suggests that there is definitely a consideration of current market environment for issuing the bonds.

- Some experts say that Armenia’s decision to issue Eurobonds is more political than economical, because they want to get rid of Russian debt by issuing Eurobonds of the same amount.

- I am not sure what the politics are behind the Russian debt. It appears that Russian debt was issued in 2009 for 15 years. I don’t know what the negotiations are between Russian and Armenian governments, is Russia really trying to get that loan repaid or these are just rumors by people who are trying to politicize this issue.

In this respect Eurobonds separate the affiliation between the financing source and  government spending. Private international lenders may provide loans below market rates, but this financing usually comes with pre-conditions. In case of publicly issued debt such as Eurobonds these pre-conditions do not exist so government is more independent in its decisions.

- What about potential demand for Armenia’s Eurobonds? Wouldn’t it be considered as a junk taking Armenia's let's say «not so good» ratings given by Fitch and Moodys'?

- Taking into account Armenia’s credit rating the bonds  would be considered non-investment grade and the issue would be considered speculative. So they will come with higher interest rates than investment grade bonds like for example the yield on a Russian Eurobond of similar maturity.

Armenia has a similar rating to Georgia (Ba3 by Moody's), which  issued a 10-year Eurobond in the first half of 2011. Currently these bonds listed in Frankfurt  yield 6,3% , however at placing these were priced at 7,1%. But the rates were different back then, they were a bit higher. So, I cannot tell you for sure if that will be the rate for Armenian Eurobonds, but I think those will not be too far from the yield on Georgian Eurobonds.

- How would Armenia’s private sector benefit from this issue?

- First of all this is a major step for Armenia to increase its presence in international investment community and become part of global capital markets. This in turn could have positive implications for Armenian companies seeking financing in international markets. For example, sovereign Armenian Eurobonds could serve as a benchmark for international investors to properly value other investments in Armenia.

The indirect positive impact of Eurobonds would be that it will encourage more transparency within the Armenian government because normally investors monitor the risks in the country, which reflects on the yield of the bond. So in order for Armenia  to attract cheaper  capital from international  markets going forward, it has to be more transparent and implement effective economic policies. This sort of makes the government more accountable and visible in what it does, which indirectly affects  business environment in Armenia.

- Can we state that Eurobonds bear less default risk than other debts Armenia attracts from the international market?

- Not really, default risk depends on many factors including government’s current financial position, economic health, vulnerability to external shocks etc. Considering Armenia’s current fiscal position, if they manage the debt properly, retiring the debts that are maturing and maintaining proper debt balance, default risk should be low, but if they increase their debts to unsustainable levels, then obviously default  risk will be high.

Eurobonds require price and currency stability. The reason is governments’ revenues are in drams, whereas, interest and maturity payments of Eurobonds will be in foreign currency. To mitigate these risks, the government should implement sound tax  reforms for reigning in fiscal deficits and develop Armenia’s export sector, which receives its revenues in foreign currency.

Gary Muradyan was interviewed by Ruben Harutyunyan

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