The Ministry of Finance has been eagerly issuing government bonds since the start of the year, taking advantage of favourable international and domestic factors. Two auctions of five-year bonds in January and one in February have already given the government 600 million levs. Another was scheduled for late February when the ministry planned to sell 200 million levs of ten-year government bonds. Even though the auctions have only about two weeks in between, investors have been enthusiastic and prices are improving. Yields have been steadily going into negative territory, signalling that confidence in the country's ability to pay off its debt is growing and debt is getting cheaper for Bulgaria.
There are a few factors that play into this trend. To start with, Bulgaria is currently taking advantage of the extremely favourable conditions on global debt markets. Even eurozone countries that went through serious financial turbulence in recent years are now selling government securities at a brisk pace. In January, Spain saw huge investor interest in its auction of ten-year bonds, receiving record-breaking orders of 53 billion euro. Italy auctioned 7 billion euro of thirty-year debt, with demand reaching 47 billion euro. Bonds of Belgium, Cyprus and Ireland also enjoyed record high demand.
The first auction for 2020 took place on January 13 and the proceeds from the issue entered the ministry's accounts by January 15. The timing suggests that the bonds were issued to partially cover payment on maturing government securities. According to the calendar for forthcoming payments, an issue of 165 million euro worth of government bonds issued in 2013 was to be repaid on January 16, which is a pretty solid sum for Bulgarian standards. The next payment was 400 million euro at the beginning of February. In total, in 2020 Bulgaria will have to repay just over 1 billion levs of principal and over 150 million levs of interest.
Last year, the government issued bonds worth 1 billion levs, selling them on the domestic market and relying mainly on the longer-term maturities segment (10- and 20-year bonds). Part of the proceeds was intended to finance the purchase of new F-16 fighter jets. Until then, the government had not been on the debt market for a year and a half, which means that the current issuance of medium-term government securities was the first in over two years. The limit for issuing new debt during 2020 is set at 2.2 billion levs in the state budget. The Ministry of Finance states that its issuance policy strategy will be to rely more on the internal market and increase its share.
It's cheaper for banks
"The allocation of the approved amount of government securities by investor type shows a leading participation by banks, which acquire 64% of the issue volume, followed by insurance companies with 26.5% and pension funds with 9.5%," said the Ministry of Finance following its second auction of five-year bonds worth 200 million levs. Banks are looking for places to put their excess reserves. They could deposit them with the Bulgarian National Bank but they would have to pay a 0.7% negative interest rate because of the negative interest rate policy of the European Central Bank (ECB). Against this backdrop, the cheaper government securities are more attractive.
As a whole, investors are betting on the ECB, under the command of Christine Lagarde, to continue its negative interest rate policy and secondary market purchases of 20 billion euro per month. In Germany and other euro area countries yields are deeply into negative territory. Which is why financial institutions and investors are looking at the periphery where positive interest rates can still be found.
Bulgaria's grade abroad
Bulgaria's transparency in terms of government spending leaves much to be desired but it seems that the consistent fiscal policies of the authorities, resulting in small budget deficits or even surpluses, are paying off. For example, yields on five-year bonds have gone down from an average of 1% in January 2016 to 0.095% in 2019 and were at negative 0.11% in February of this year, according to the platform Investing.com. In comparison, Romania pays 3.391% yield on its five-year bonds, whereas Germany pays -0.623%.
Bulgaria's progress towards the euro area and the associated improvement in its credit rating contribute to the success of the auctions. In March 2019 Fitch revised the outlook to positive from stable, S&P revised Bulgaria's outlook to positive from stable in June 2018. S&P revised Bulgaria's L/T rating to BBB from BBB- in Dec 2019.
"All else being equal, Fitch would be likely to upgrade Bulgaria's Long-Term Foreign-Currency IDR by one notch on admission to ERM II and one further notch when formally joining the euro area," said Fitch Ratings in their February report on Bulgaria, which confirmed the country's credit rating of BBB with a positive outlook.