Reforms and growth earn cheap credit

SLOVAKIA'S economic awakening continues to pay dividends, this time in the form of cheaper international credit. In late March the country took another step towards joining the European Monetary Union by floating a 15-year €1 billion Eurobond at four percent interest.

SLOVAKIA'S economic awakening continues to pay dividends, this time in the form of cheaper international credit. In late March the country took another step towards joining the European Monetary Union by floating a 15-year €1 billion Eurobond at four percent interest.

"Thanks to the positive development of the economy and the state budget, Slovakia managed to borrow funds for a price that no other new EU member has managed to get so far," Finance Ministry spokesman Mikuláš Gera told The Slovak Spectator.

The bond was issued under Slovakia's new €2 billion Euro Medium Term Note (EMTN) program, which enables the country to annually place up to €2 billion in Eurobonds on European stock markets.

"The EMTN program gives us more flexibility in issuing bonds. While the preparation of a regular bond float might take six to eight weeks, with this program it is possible to get the funds within two weeks. At the same time we save funds on expenses for legal documentation," Daniel Bytčánek, director of the Debt and Liquidity Management Agency, which prepared the bond issue, told The Slovak Spectator.

The four percent interest rate was based on Slovakia's international ratings, which have continued to rise in the wake of six percent annual GDP growth and conservative fiscal policy.

"Investors are upbeat about Slovakia's excellent macro-economic results and they have faith in the overall positive development of the country. The relative shortage of Slovak bonds on the financial market also played a positive role in setting the value of the bond," Bytčánek explained.

The low debt financing costs form a sharp comparison with eight years ago, when the outgoing Vladimír Mečiar government was paying over 30 percent on state bonds and T-bills amid spiralling macro-economic imbalances.

Gera said the Eurobond issue was "in line with our state debt servicing strategies and preparations for adoption of the euro."

According to Bytčánek, Slovakia chose the month of March for the bond issue because of favourable conditions on financial markets. He said that Slovakia was unlikely to use up its €2 billion credit limit for 2006 due to the positive development of public finances and the good performance of the state treasury.

Comparable bonds issued recently by Greece and Italy were assigned higher interest rates than Slovakia's latest issue.

The Eurobond attracted investors from Germany (55 percent), Austria (10 percent), Italy (9 percent), the Netherlands, Ireland and France (6 percent each), the Benelux, Great Britain and others.

The buyers were central and commercial banks, investment funds, and insurers.

On March 21, Standard & Poor's assigned an A long-term senior unsecured debt rating to the Eurobond, which matures in March 2021. At the same time the agency assigned a long-term rating of A and a short-term rating of A-1.

"Slovakia's ratings are supported by its rapid progress in public sector reform, strong growth prospects, and its prospect of entry to the Eurozone by 2009," said Standard & Poor's credit analyst Kai Stukenbrock.

"The ratings remain constrained by the country's only moderate wealth and its inefficient social security system," he added.

Fitch Ratings assigned an 'A' rating with a stable outlook to Slovakia's upcoming €2 billion bond issue on March 17.

"Slovakia's ratings continue to be supported by ongoing real convergence with Western European living standards, low external financing risks, moderate general government debt and the public sector's net external creditor position," said David Heslam, the associate director in Fitch's sovereign team.

Fitch was mostly impressed by GDP growth of 6 percent in 2005, which was driven by an upturn in investments and the improving business environment.

"Continued strong rates of investment and solid export growth are likely to contribute to growth of 6-7 percent over the next couple of years. External financing risks have lessened and net equity FDI inflows comfortably cover the current account deficit," Fitch said.

Standard & Poor's said that Slovakia is making strong progress in its efforts to join the Eurozone by 2009.

"This [the Eurobond] will alleviate external financing pressures resulting from the economy's moderate external indebtedness, and will support further improvements in the country's ratings. With autonomy over monetary and exchange rate policy gone, however, the imperative for prudent fiscal policy will be stronger," Standard & Poor's said in a press release.

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