Spajić: Paid the first installment for the highway, currency protection reduced interest

Montenegro paid off the first installment of the loan for the priority section of the highway to the Chinese Exim Bank and, thanks to the recent hedging arrangement, achieved savings of almost four million euros (3,91 million euros), announced the Minister of Finance and Social Welfare, Milojko Spajić.

The Ministry explained that today is the deadline for the start of repayment of the Chinese loan for the unfinished section of the highway from Podgorica to Kolašin, and that the government department has already paid the due installment.

Spajić told the Mina-business agency that the hedging arrangement prevented the growth of debt due to currency exposure to the dollar and added that the savings in interest amounted to 3,83 million euros, and the rest in the principal amount to 0,08 million euros (79.276 euros).

"Montenegro paid 27,79 million in euros based on the principal and interest, and the bank from the hedging arrangement paid the state 37,44 million dollars also on the basis of the principal and interest, which we redirected to the Chinese bank. If hedging had not been done, those 27,79, 31,71 million would amount to 6,9 million euros. Also, only the interest would be 3,06 million euros, not the XNUMX million we paid," Spajić told the Mina-business agency.

He added that the expected annual savings is around eight million euros, because two installments are paid - in July and January.

The negotiating team of the Ministry of Finance and Social Welfare, led by Spajić, completed the entire process that includes the cross-currency swap, which is actually the basic instrument for hedging the public debt against currency risk. This means that the state's obligations to Exim Bank loans expressed in US dollars have been converted into euros. It is about the amount of about 818 million dollars.

"We are talking about the entire amount of funds withdrawn from the Chinese loan until July of this year," Spajić explained, adding that they had acted responsibly and that the remainder of up to 944 million dollars will be covered before the next installment, in January next year, after the withdrawal of all those funds.

Spajić reminded that the loan from 2014 for the priority section of the highway from Podgorica to Kolašin was contracted in dollars, at an interest rate of two percent, and that Montenegro is now paying the debt in euros, at an average interest rate of 0,88 percent. .

"Through the hedging arrangement, we have ensured that the Montenegrin public debt is freed from currency risk, which was a noose around the country's neck in all previous years. Everything was done according to the Budget Law for this year," Spajić announced.

He said that in that arrangement, at the end of the whole process until the payment of the first installment, the most acceptable conditions were two European banks, from France and Germany, and two from the United States of America (USA), out of a total of seven renowned banks with which negotiations were held.

"It is a huge success for Montenegro with a credit rating of B, which we expect to improve compared to everything done for the benefit of state finances in a short time. It is also a positive signal that renowned partners around the world closely monitor and believe in what is legally "The new government is working according to sound economic principles. We also sent an important message to everyone - that we actively and responsibly manage the public debt," Spajić said.

He added that countries in the region with good public debt management mechanisms, such as Serbia and Croatia, have already used the same arrangement to protect themselves from currency risk.

Spajić also explained that, apart from the Budget Law and with the consent of the Government, everything was done according to the international standards of the International Association for Transactions with Swaps and Financial Derivatives (ISDA).

He specified that the hedging is for 14 years, and that there is a possibility of reconsidering the conditions for two years.

"Therefore, the hedging is for 14 years, which is how long the repayment of the loan for the first section of the highway lasts, with the possibility to review the conditions for two years, as well as the banks that are part of the arrangement. Our goal is to provide a much more stable economy in two years, a much better credit rating of the country and more options, among other things, for an even lower interest rate of 0,88 percent," Spajić said.

He explained that it is important that the debt is not left exposed to currency risk and sudden changes in the dollar/euro exchange rate.

"You know that international institutions also warned in their reports about the increase in costs for the highway due to exchange rate differences and the failure of the governments of the time to take measures to prevent it. That's why I point to estimates that over 109 million euros were "wasted" in the meantime, by which our debt in euros was increased completely unnecessarily," Spajić said.

When asked which banks participated in the hedging arrangement, he replied that he had previously announced that the names of all the banks would be announced immediately after the entire process was completed, and that the conditions had been met.

"At the end of this whole important process, hedging was done with four of the seven banks, global leaders in providing protection against market risks, with which we have an agreed legal framework. The negotiation team chose four banks that had the most acceptable conditions for the Ministry of Finance and the Government. They are ranked on the basis of capacity, volume/size of exposure and favorable interest rate in euros. These are European banks - Societe Generale from France and German Deutsche Bank, as well as two American ones - Merrill Lynch International and Goldman Sachs International. All these banks were registered for a hedging arrangement even before my arrival at the head of the Department of Finance and Social Welfare, and then intensive negotiations were held to reach the best conditions. We approached such an important process in a fiscally responsible manner and led to the conclusion of the ISDA agreement, which is also the legal basis for the realization of the hedging transaction," said Spajić.

When asked whether Goldman Sachs had a privileged position because Spajić was once employed there, he replied that all banks had equal treatment and that there was no conflict or privilege for any of them.

"The negotiation team, of which I am the head, was guided exclusively by the state's interest in negotiations and selection. I serve the interests of the state of Montenegro. I can tell you that the most favorable interest rate was achieved with Goldman Sachs, so there is no room for talk of any "out-of-market" deal", Spajić said, adding that he had not been at Goldman for almost five years, not even before assuming the ministerial position. .

Speaking about whether and how much the hedging arrangement was a cost for the state, Spajić explained that the cross swap does not entail additional costs, but rather they are included through the interest that reflects the cost of the bank's exposure to Montenegro.

He announced that the state used the legal advice of the previously hired renowned law firm White and Case to conclude the ISDA agreement and realize the transaction, which amounted to 30 euros.

Spajić pointed out that it is particularly important that the exposure to currency risk is eliminated, because the Montenegrin economy is euroized.

"This is an intermediate step to the refinancing of the highway loan, about which we have continued negotiations with European partners and I am sure that due to the achieved hedging conditions, we are in an even better position. We are more relieved now that the debt is protected from the risk of a sudden change in the dollar/euro exchange rate. We expect the country's rating to grow and that we will have a chance for even better conditions", said Spajić.

He said that time was gained and that there are mechanisms to get out of hedging, if the situation on the market or the credit rating of the country changes, which is why it was agreed to review the conditions.

Spajić also announced that he used the moment before the first installment with the Chinese Exim Bank for the unfinished highway was due, as well as before, considering the good forecasts of the recovery of the American economy compared to the European one, the tendency of the dollar to grow potentially does not continue.

He also stated that the former government was warned for years that it had to provide protection against the currency risk for the Chinese loan in dollars from 2014 and that the procedures had started a long time ago, but the process took too long, which cost Montenegro, because before could also go towards refinancing the loan.