New economy: Citizens are protesting, and the government is in debt to the country for billions of euros

It's Serbia at the time of major protests i blockade in the country decided to expand the issue of government securities more than three times and borrow on the market through ten-and-a-half-year dinar bonds. The reason for this, according to the Public Debt Administration, was the great interest of investors, which was shown at the first auction in January, when the state borrowed RSD 111,3 billion. A few days ago, the government borrowed another 25,15 billion dinars, but did not fulfill the space it left for itself until the expansion of 180 billion euros. But if the bankers are to be judged, there will be space in the coming months, because we are expecting more shows, writes Aleksandra Nenadović in The new economy.

According to the original plan, Serbia had a planned sales volume of 20 and 30 billion dinars at auctions in January and March. However, already in January, it issued 120 billion dinars of bonds, of which it sold 111,3 billion, and then added another 68,7 billion before the March auction. Then it managed to sell 25,15 billion. Thus, the expansion of the volume of the issue to 180 billion dinars happened at a time when the country has been in political turmoil for three months with many blockades and strikes.

This is not all of the debt that awaits us this year, as Erste Group analysts announce "refinancing activities that should remain relatively well diversified, including the issue of Eurobonds (up to two billion euros), domestic issues (up to 2,1 billion euros) and loans from commercial sources (up to 3,1 billion euros)".

To be clear, auctions and bond issues are the sale of securities by which the government borrows. At the end of borrowing, the one who issued the debt must return the entire borrowed amount, besides paying the coupon rates (interest) in the meantime.

Borrowing in dinars

Spurred to some extent by investors' appetite for receiving an investment credit rating from an agency, the Ministry of Finance made another perhaps confusing decision - to borrow in dinars, at a time when interest rates for borrowing in euros are much lower.

"I assume that it has a little to do with expectations, in relation to the National Bank of Serbia (NBS) and the Ministry of Finance, that they would withdraw part of the dinar from the market and stop inflation a little, and one of the mechanisms is to withdraw it (dinars) a little for a while so that it does not go to the other side for consumption, and that the state then directs it, I hope, into good projects," says Vladimir Vasić, a financial consultant, adding that he can only assume that this is the reason.

Inflation in Serbia is persistent, and the NBS has not lowered interest rates since September of last year, citing price growth as a problem, along with geopolitics. In February, price growth was at 4,5 percent, at the upper end of the central bank's target, but has been around that level for a long time.

Brokers who follow developments in the securities markets tell Nova Ekonomija that there can be three "culprits" for the expansion of the issue at an inconvenient political moment.

"The reasons behind the expansion can be numerous, such as - increased need for financing (higher expenditures than planned), refinancing of existing debt and if the state expects some economic uncertainty and wants to take advantage of the opportunity to borrow before the crisis," says Mihailo Đurđević, investment analyst at Senzal Capital.

Great pressures on the budget

Higher expenditures than planned are also numerous in Serbia at the moment. Pressures on the budget come from the demands of students in the blockade for an increase in school fees, but also from farmers. Financial pressures can also be sanctions against NIS, the problem with Kostolac, the import of electricity due to the poor performance of EPS. All these factors are new to the budget. The existing debts are also high and most of the repayment goes to the interest paid on the debts, so the renewal of debts is a practical solution. The crisis in the country has been going on for more than two months in the form of blockades and protests by students and citizens. This crisis only deepened during that period.

Some economists also pointed out that borrowing in dinars is currently not as favorable as borrowing in euros, because interest rates in Europe are lower than those in Serbia.

"Each issue makes sense if you can achieve at least 0,5 percent more favorable terms than in previous borrowings. Euribor is slowly falling, regardless of the fact that it directly affects our offer and demand for dinars, then it makes sense - and I would do it if at that moment I can replace the more expensive debt with the one that is more favorable at that moment," says Vasić and adds that we did not manage to save on interest costs let's use the money well "so that it doesn't go to consumption".

What does the fact that at a time of widespread unrest in Serbia, the Ministry of Finance decides to expand the issue it planned and borrow more than three times more than they originally wanted, tell investors?

Vasić says that when you see the clouds coming, you will reduce your appetite a little, and that this is a natural reaction of investors. He also explains that the state, for its part, is looking for a moment when it will issue debt precisely for this reason.

Anticipated calming of the situation after the resolution of the political crisis

Erste Group believes that the first auction in January was successful because the participation of foreigners in dinar papers jumped from 15,8 percent in December 2024 to 18,3 percent in January 2025, which is an increase of about 200 million euros.

"However, due to global and local geopolitical tensions, as well as the movement of benchmarks, yields have risen in the meantime. Confirmation of investors' reluctance to increase their exposure came at the auction in March when the Ministry of Finance managed to issue only half of the planned amount," the banking group said. They believe that the situation will calm down after the political uncertainty is resolved.

Milko Štimac, a consultant for the organization of the capital market, says that investors are carefully monitoring the situation, especially those who invest in government bonds. As he explains, it is easy to buy bonds of Germany or some other country because even if protests or any other political events happen, you know that the government will be stable and will respond to its obligations.

"With countries that have come out of transition, where the institutions of the political, social and economic system have not been consolidated, you have to be very careful. At this moment, it is no wonder that the interest of investors has died down. But the expansion of the volume speaks volumes for investors, because if you first offer them 50 billion, then I would rather not buy.

Public debt is currently at 44,2 percent of gross domestic product, according to a January report. However, the International Monetary Fund, which is currently in an advisory arrangement with Serbia, does not believe that even if the growth of the economy is corrected slightly, it will significantly affect the public debt.

"The IMF is in the middle of making a new round of forecasts. New forecasts for countries, including Serbia, will be published on or around April 22. At the moment, we do not expect that possible minor adjustments to the growth forecast will affect the downward trajectory of public debt in Serbia," said Lev Ratnovski, the permanent representative of the IMF for Serbia.

Source: New Economy